Capital Goods & Infrastructure

Transcription

1 Q3FY17 Review Government capex to lead recovery February 23, 2017 Kunal Sheth Sensex v/s BSE Capital Goods Q3FY17 earnings season for the Capital Goods sector was largely mixed bag. Commentary for end markets like Road/Power T&D/Metros/Renewable/ Railways/Defence/Genset continues to be positive for the year ahead. While most corporate continues to be confident of medium term growth prospects, given the various initiatives taken by the government, GST implementation could create near term uncertainty. Being on the cusp of a change, we prefer companies with sustainable competitive advantage and those which can deliver sustained earnings growth over the next few years. Our preferred picks are L&T, Sadbhav Engineering, Bharat Electronic and J Kumar Infra. Sector Update Feb 16 Apr 16 Source: Bloomberg BSE Capital Goods Jun 16 Aug 16 Oct 16 Sensex Dec 16 Feb 17 Confident on medium term outlook: Order inflow for the sector for our coverage universe was down 3.7% YoY to Rs509bn. Order book for the sector was fat YoY to Rs4.1trn, with B2B ratio of 3.1xTTM sales. Companies highlighted that the government is trying to revive investment cycle through stepping up public capex as private capex still remains weak. Commentaries on end markets like Road / PowerT&D / Metros / Renewable / Railways / Defence / Genset were positive for the year ahead. While base business/short cycle business continues to show steady growth, order finalization for large projects is taking time. Most players saw improved order flow from international markets. Commentary of most players highlighted that international markets is showing slow recovery led by improved commodity prices. Stock Performance (%) 1M 6M 12M Sensex BSE Capital Goods Index ABB Ashok Buildcon (0.8) Bharat Electronics (0.9) BHEL Crompton Greaves 5.7 (21.8) 41.6 Engineers India (0.3) KEC Int Cummins India 5.5 (0.2) 0.5 Kalpataru Power KSB Pumps 2.0 (0.3) 18.3 Larsen & Toubro Sadbhav Eng. 2.8 (1.1) 21.6 Siemens 3.8 (6.4) 20.9 Thermax Voltas 5.6 (4.1) 55.2 J.Kumar Infraprojects (4.5) 45.1 (20.9) Execution steadily picking: Sales for the quarter were up 8% YoY to Rs346bn.Sales growth has been in positive for last 3 quarters after several quarters of de growth. While demonetization has some impact on sales, most companies managed to cushion the impact. The companies highlighted that few on ground execution challenges continue to remain. International sales continue to see good growth despite concerns of slowdown in various markets like ME/Europe etc. Sales for consumer related segments (AC, Fans, Appliances, Lighting, Pumps etc.) were up 12% YoY in spite of demonetization. EBITDA for the sector was up 30% YoY to Rs26.9bn (Adj for BHEL). EBIDTA margins improved by 170bps YoY. Companies sounded some caution on increasing commodity and likely pressure on margins. PAT for the sector was up 26% YoY to Rs17.4bn (Adj for BHEL). Outlook and Valuation: Our coverage universe is trading at 25x 18E earnings and 21x FY19E earnings. Though this is at ~10 15% premium to long term average, we believe that with earnings coming out of a weak cycle and with possibility of upgrades, we expect above average valuation to sustain for the sector. Our preferred picks are L&T, Sadbhav Engineering, Bharat Electronic and J Kumar Infra. Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Exhibit 1: Companies PL Coverage Valuation Price (Rs) TP (Rs) Rating Mcap (Rs bn) P/E P/B EV/EBITDA ROE FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19 Larsen & Toubro 1,486 1,630 BUY 1, BHEL Reduce Siemens 1,203 1,343 Acc ABB 1,199 1,412 Acc Cummins India 884 1,039 Acc Bharat Electronics 1,507 1,690 BUY Thermax Acc Engineers India Acc Voltas Acc KEC International BUY Kalpataru Power Acc KSB Pumps Acc Sadbhav Eng BUY Ashoka Buildcon Acc J.Kumar Infra BUY Source: Company Data, Bloomberg, PL Research (All prices as on February 23, 2017) February 23,

3 Public capex leading the way Order inflow for the sector for our coverage universe was down 3.7% YoY to Rs509bn. Order book for the sector was flat YoY to Rs4.1trn, with B2B ratio of 3.1xTTM sales. Commentaries on end markets like Road / PowerT&D / Metros / Renewable / Railways / Defence / Genset were positive for the year ahead. While base business/short cycle business continues to show steady growth, order finalization for large projects is taking time. Most companies very positive on pipeline government infrastructure projects. Even spending from select state also has seen uptick in areas like Water/irrigation/T&D/Roads etc. While most corporate continues to be confident of medium term growth prospects, given the various initiatives taken by the government, GST implementation could create near term uncertainty. Most players saw improved order flow from international markets. Commentary of most players highlighted that international markets is showing slow recovery led by improved commodity prices. Companies also highlighted Africa and South East Asia as as a good medium/long term opportunity. The central government s capital expenditure is budgeted to increase from Rs.2.8 trillion in to Rs.3.1 trillion in This implies a 10.7 % increase. Exhibit 2: Sector Order book (Rs bn) Q3FY15 Q4FY15 Q1FY16 Q4FY14 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 YoY gr. ABB % SIEMENS % GE T&D % BHEL 1,039 1,013 1,012 1,100 1,090 1,111 1,011 1, % LNT 2,258 2,326 2,390 2,440 2,565 2,499 2,460 2,520 2, % THERMAX % VOLTAS (MEP) % KEC % KALPATARU % Total 3,816 3,845 3,919 4,004 4,166 4,140 4,027 4,097 4, % February 23,

4 Exhibit 3: Company ABB Voltas THERMAX L&T BHEL Cummins KEC Snapshot of commentary by various companies Commentary ABB highlighted while base orders remained solid, the company witnessed improved traction in large orders (mainly railways). Utilities remained cautious and mostly continued to spend on up gradation of technology (products like dry type transformers, gas insulated switchgears and substation packages). Renewable/railways/exports/services continue to be key growth drivers in near term. ABB has doubled capacity for solar inventors in Bangalore factory and looking to introduce new product line of higher efficiency. In the domestic market, Voltas has not seen any issue in execution due to demonetization as most of the projects are largely public sector focused. The company had strategically narrowed focus towards public spending and well funded projects to mitigate credit risks associated with the private sector. Voltas has increased order share in areas such as Urban Infrastructure, Rural Electrification (RE) and Water. The company continues to see healthy tender pipeline from water and RE sector. Voltas continues to remain committed to the strategy of selectively booking orders with right margin and risk profile. On the International front, pace of project execution is slow and given the environment, company is focusing on speedy settlement and commercial closure of legacy projects by March 17. Middle East, remains in a state of slow recovery given the volatility in oil prices. While enquiry levels improved in domestic and international markets, order finalization is slow especially in medium and large projects. In domestic market, Oil&Gas sector is seeing improved traction led by Bharat VI tenders (one tender awarded and five in pipeline).sugar sector has also seen healthy improvement. Outlook in cement continues to be weak (apart for few enquiries for Heat recovery projects). Export orders saw project order from Middle East market from Oil sector and South East Asia from Sugar and Food processing sector. Thermax expects South East Asia market to contribute to ~$100Mn in inflow in FY18 Order inflow for quarter was down 9% YoY due to muted capex and delay in orders in domestic markets. The pipeline of orders likely to be awards/finalised in near term remains healthy at (~Rs bn). Growth in International orders led by B&F, Heavy Civil and Hydrocarbon Businesses. BHEL believe market size per annum for next few years could be ~12 15GW (including replacement projects from sub critical to super critical). BHEL highlighted that timeline for implementation on new emission norms could be extended. In the Industry segment, BHEL is seeing good opportunities in Solar/Defence/Railways and Water. It is also looking at new areas like Metro coaches/electric mobility in transportation segment. KKC commented that growth in domestic markets is largely driven by Government investments in infrastructure. While the company saw minor impact of demonetization on the demand for low HP generators, the demand for high HP generator continues to be strong (up 22%YoY).The Demand in HHP is driven by segments like IT/Data centres/realty/hospitality/service industry. Manufacturing sector continues be weak. KKC highlighted that it has gained market across the board in HHP due to superior product and services. In exports markets most end market still continue to remain subdued, while they believe bottom is reached but uncertain on timing of recovery. KKC believes that if commodity uptick sustains, it could see improvement in demand over the course of the year. The company maintained its guidance for domestic sales to grow by 10 12% and slightly upped guidance for export to flat growth YoY( previous flat with a negative bias) for FY17. The Company remains well positioned to maximize emerging opportunities based on its technology, strong local operations, customer connections, service support and a diverse, stable leadership team. In domestic markets while they are seeing a slowdown in orders from Power Grid; the company is seeing strong traction in SEB. KEC highlighted that it is also seeing healthy traction in Railway segments. With improving commodity price outlook in international markets, KEC is focusing on exposure in Middle East and recently bagged order from Jordan. KEC believes Solar/Railways/Sub station segments could be important growth drivers for the company, going ahead. KEC has revised sales guidance downward to 5%( previous 10%) while increased guidance on margin to 9% (previous 8.5%) and order inflows to 15% (previous 10%). KEC expect sales to grow by 10 15% in FY18. February 23,

5 KPTL EIL Ashoka Sadbhav JKIL In domestic market, KPTL continues to see healthy traction from 5/6 SEBs, further 4 5 BOOT/BOOM projects funded by REC/PFC are up from bidding in next few months. While Power grid is seeing some delay, large number of tenders is coming up for bidding in March 17. Railway continues to see strong tender pipeline (already L1 in projects worth Rs5bn). In International market KPTL is seeing strong bidding pipeline from Africa/CIS and South East Asia while Middle East is seeing a slowdown in tenders Medium term opportunities include Maharashtra refinery phase I(site finalization completed),barmer refinery(hpcl), few Brownfield expansion projects and 4 fertilizer plants. The Dangote refinery (Africa) is also looking at 10mt expansion which could lead to additional orders for EIL in FY18. Other Areas outside O&G where EIL is working on include Water & waste water treatment, Data centres and Smart city initial work. ASBL highlighted that traction in Road sector orders continues to be good. While NHAI is facing some issues in land acquisition, it is trying to resolve the same by offering higher compensation. NHAI has awarded 2200Kms (Rs280bn) in H1FY17 and expects to award ~5200kms in FY17. ASBL is looking at order inflow of ~Rs20bn from road sector in Q4FY17 (Rs10bn EPC and Rs10bn HAM). In road sector bidding activity continues to be healthy, financial bids for ~21 EPC projects worth Rs124bn likely to be opened March 17, bids for 23 HAM projects worth Rs260 and 2 BOT project worth Rs28bn be submitted by March 17. Maharashtra govt is looking at awarding projects worth Rs100bn and MRSDC also come out with tenders for Mumbai Nagpur expressway (16 packages) worth Rs260bn. In Mining segment ~6 projects are up for bidding in next 2 quarters. In Irrigation 17 projects worth Rs75bn is up for bidding from Gujarat/MP. SEL is also looking at opportunities in Metro sector Rs100bn worth of Metro projects will be up for bidding in next few months. Further ~Rs bn worth projects are in pipeline and tenders are expected from MMRDC and other agencies within the next twelve months Source: Company, PL Research As per the CMIE data, new investment announcements in Dec 16 quarter were down 12% YoY on TTM basis Exhibit 4: New project announcement trend (Rs bn) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 June 10 Sep 10 Dec 10 Mar 11 June 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Source: CMIE, PL Research February 23,

6 Exhibit 5: Stalled project trend Government targeting step up in spend in key focus areas like Road/Railway/Housing 3,000 2,500 2,000 (Rs bn) 1,500 1, Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 June 10 Sep 10 Dec 10 Mar 11 June 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Source: CMIE, PL Research Exhibit 6: IIP trend General IIP Capital goods Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Source: RBI February 23,

7 Execution steadily picking Sales for the quarter were up 8% YoY to Rs346bn.Sales growth has been in positive for last 3 quarters after several quarters of de growth. While demonetization has some impact on sales, most companies managed to cushion impact. The companies highlighted that few on ground execution challenges continue to remain. International sales continue to see good growth despite concerns of slowdown in various markets like ME/Europe etc. Sales for consumer related segments (AC, Fans, Appliances, Lighting, Pumps etc.) were up 12% YoY in spite of demonetization, possibly led by inventory stocking. Exhibit 8: Sector sales break up (Rs m) Q3FY15 Q4FY15 Q1FY16 Q4FY14 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 YoY gr. ABB 22,384 18,146 19,316 19,690 24,251 20,003 21,015 20,550 24, % SIEMENS 21,860 26,469 23,760 32,995 23,142 27,836 26,204 30,906 22, % GE T&D 7,661 13,682 8,115 9,053 7,553 9,779 8,546 8,777 12, % BHEL 61, ,860 43,617 59,380 53, ,048 56,225 66,645 63, % LNT 149, , , , , , , , , % THERMAX 11,466 15,207 10,012 10,565 10,390 12,932 8,145 8,707 8, % CUMMINS 10,831 11,335 13,143 11,977 11,382 10,654 12,590 12,790 13, % VOLTAS (MEP) 9,511 14,900 15,983 10,626 12,659 18,888 18,552 9,672 11, % KEC 20,533 25,211 18,780 20,209 20,600 25,586 17,847 20,742 19, % KALPATARU 11,471 10,710 11,696 9,464 8,764 13,805 11,874 11,154 11, % Total 327, , , , , , , , , % Exhibit 9: Sector Sales growth (YoY) 10.0% 5.0% 0.0% 5.0% 2.2% 4.6% 6.1% 6.0% 8.5% 6.5% 8.4% 4.1% 0.6% 2.4% 0.5% 10.0% 15.0% 20.0% 20.3% 13.7% 14.2% 14.0% 25.0% Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 February 23,

8 Operating performance Margin better EBITDA for the sector was up 30% YoY to Rs26.9bn (Adj for BHEL). EBIDTA margin improved 170bps YoY to 9.4%. Companies sounded some caution on increasing commodity and likely pressure on margins. Exhibit 10: Sector EBITDA break up (Rs m) Q3FY15 Q4FY15 Q1FY16 Q4FY14 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 YoY gr. ABB 1,800 1,436 1,500 1,557 2,632 1,491 1,701 1,456 2, % SIEMENS 1,890 2,501 2,531 2,817 1,940 3,061 2,338 2,415 2, % GE T&D 405 1, , (1,799) 678 1, % BHEL 2,938 16,818 (2,093) (4,742) (16,120) 3, ,551 2, % LNT 15,695 24,899 9,746 10,124 10,019 31,932 19,050 10,877 13, % THERMAX 1,314 1, , % CUMMINS 1,883 1,759 2,180 2,007 1,727 1,708 2,063 1,990 2, % VOLTAS 574 1,430 1, ,853 1, % KEC 1,045 1,847 1,407 1,548 1,672 2,229 1,496 1,853 1, % KALPATARU 1,118 1,049 1,224 1, ,443 1,308 1,220 1, % Total 28,660 54,424 19,340 17,043 4,428 49,449 29,499 23,500 28, % Exhibit 11: Sector EBITDA margin trend (%) Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 February 23,

9 Profitability Dented by interest cost PAT for the sector was up 26% YoY to Rs17.4bn (Adj for BHEL). Exhibit 12: Sector PAT (Rs m) Q3FY15 Q4FY15 Q1FY16 Q4FY14 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 YoY gr. ABB , , % SIEMENS 1,066 1,544 1,683 1,484 1,140 1,774 1,681 1,705 1, % GE T&D (182) 299 (1,974) % BHEL 2,126 8, (2,049) (10,850) 3, , NM LNT 10,598 18,749 5,632 6,426 7,912 26,164 5,467 8,137 9, % THERMAX 762 1, , % CUMMINS 1,889 1,904 2,107 1,986 1,781 1,641 1,812 1,969 1, % VOLTAS (MEP) 629 1,180 1, ,528 1, % KEC (156) % KALPATARU % Total 18,192 35,697 13,103 10,843 2,933 38,400 11,534 16,485 18, % Exhibit 13: Sector PAT growth (YoY) Adj for BHEL 40% 30% 20% 10% 0% 10% 20% 30% 30% 6% 3% 19% 14% 30% 15% 19% 26% 40% Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 February 23,

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