PGCIL Order Inflow Analysis

Jan-14 Mar-14 May-14 Jul-14 Sep-14 v-14 Jan-15 (%) PGCIL Order Inflow Analysis Executive Summary PGCIL order inflow analysis Ordering activity witnesses traction, contractors better positioned than equipment players Ordering activity picks up in 9MFY15 Ordering activity by Power Grid (PGCIL) witnessed a healthy recovery in 9MFY15 (11% yoy growth, excluding HVDC order). Ordering pace witnessed traction across most key segments including transmission line towers (TLT) and substation. TLT ordering witnesses traction, but remain below historical levels Transmission line tower (TLT) ordering had witnesses a yoy growth of 9.4% to Rs. 41.2bn in 9MFY15. Core TLT contractors KECI, KPP, Tata Projects - secured a healthy share of ~46% of the overall TLT ordering during the period. While the improved ordering is a positive trend, it continues to remain below historical level. Competitive intensity has stabilized at ~6 bidders per TLT contract over the past 3-4 quarters. We expect EBITDA margin for TLT contractors to be ~9-1% going forward. Substation ordering registers robust growth, Chinese/Korean players continue to dominate GIS bids Substation orders registered robust growth of 33% yoy in 9MFY15. Chinese/Korean players continued to dominate the Gas Insulated Substation (GIS) segment by bidding for/winning majority of the GIS orders inspite of competition from MNC players (ABB, ATD and SIEM). With TBEA expected to manufacture GIS from its new Gujarat facility, competitive intensity is expected to increase going forward. Sustained shift towards GIS ordering by PGCIL and increased dominance by Chinese/Korean players remains a concern for domestic players due to the absence of technological and/or pricing superiority Transformer and reactor ordering remains low Transformer orders recovered from a low base in 9MFY15 but continued to remain low (Rs. 2.5bn in value) compared to historical levels. Similarly, reactor ordering were also negligible during the period. While this can be attributed partially to the inclusion of transformer and reactors with substation package, lower ordering activity in these segments with presence of Chinese players (with local manufacturing facility) is expected to add to the competitive pressures among domestic players Contracting players relatively better positioned than equipment manufacturers We believe contracting players KECI and KPP (transmission line towers) and TEEC (substation) are better positioned than equipment players due to relatively benign competitive environment (absence of Chinese players). On the other hand, equipments manufacturers are expected to witness higher competitive intensity due to increased presence of large players (Toshiba through acquisition of Vijai Electricals) and TBEA (local manufacturing facility) Our take on coverage companies We maintain our Buy rating on KPP, given the strong execution in the TLT segment, tapering losses in the infrastructure segment and investments in BOT assets, real estate and Shubham logistics. We maintain our positive view on TEEC due to improvement order inflow in EPC segment (substation) and investments in wind and transmission BOT assets. We retain our negative stance on KECI due to growth and margin challenges in the new segments and SAE Towers. We maintain Sell on ABB due to the stretched valuations and on CRG due to margin headwinds in its international power segment. Date Jan 8, 215 Market data BSE SENSEX 26,98 Nifty 8,12 Performance (%) 1m 3m 12m Sensex -6 2 3 BSE CG Index -7 1 54 ABB -3 17 92 CRG -8-1 35 KECI -14-12 58 KPP 18 44 149 TEEC 12 43 25 BSE CG Index vs Sensex - Relative performance 8% 7% 6% 5% 4% 3% 2% 1% % -1% CG Index Sensex VIJAYARAGHAVAN SWAMINATHAN raghavan@sparkcapital.in +91 44 4344 22 RAVI SWAMINATHAN ravi@sparkcapital.in +91 44 4344 58 Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 1

Valuation Matrix Company Sales (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E ABB* 78,87 82,75 92,154 5,44 6,71 7,717 2,185 2,414 3,314 CRG 148,81 165,473 186,419 8,167 1,47 12,39 3,923 5,655 6,818 KECI 83,518 87,136 93,17 5,51 6,21 6,743 1,353 2,4 2,472 KPP 77,677 85,321 94,8 7,197 8,313 9,425 2,178 2,783 3,49 TEEC 8,435 1,414 12,78 2,189 2,531 2,947 1,19 1,36 1,715 Company EPS (Rs.) RoE (%) RoCE (%) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E ABB* 1.3 11.4 15.6 8. 8.4 1.8 8.4 8.7 1.5 CRG 6.3 9. 1.9 1.1 13. 14.1 7.1 8.9 9.7 KECI 5.3 7.9 9.6 1.9 14.8 15.9 1.3 1.1 1.9 KPP 13.6 17.5 21.9 9.9 11.5 13. 7.6 8. 8.6 TEEC 19.4 22.9 3.1 12.6 13.4 15.8 1.1 1.8 12.8 Company. shares (mn) CMP (Rs.) Mkt Cap P/E (x) Target Upside (Rs. mn) FY16E FY17E P/E (x) Price (Rs.) % Rating ABB* 211.9 1,281 271,444 112.4 81.9 35x 547-57% SELL CRG 626.8 178 111,562 19.7 16.3 15x 164-8% SELL KECI 257.1 9 23,139 11.3 9.4 1x 96 7% SELL KPP 153.5 219 33,66 12.5 1. 1x 223 2% BUY TEEC 57.1 387 22,98 16.9 12.9 12x 44 4% BUY *- Calendar Year Page 2

Ordering activity witnesses recovery; TLT, substations orders register healthy growth Pick in ordering activity in 3QFY15 has led to 11% yoy growth in PGCIL orders in 9MFY15 5 PGCIL ordering value ex-hvdc (Rs. bn) 4 3 2 1 12 1 8 6 4 2 PGCIL order inflow (Rs. bn) - ex-hvdc order 113.4 113.9 84.7 52.8 93.8 PGCIL ordering value (Rs. bn) 9MFY11 9MFY12 9MFY13* 9MFY14 9MFY15* Order inflow (Rs. bn) - ex-hvdc order, * - excluding 8kV HVDC order Ordering has improved across key sub-segments, * - excluding 8kV HVDC order TLT, Substation and HVDC orders form major portion of ordering 5 4 3 2 1 41.2 37.7 29.8 22.4 1.2 6.8.8 2.7 3.2 3.4 TLT Substation Conductor Transformer Insulator 9MFY14 Order value (Rs. bn) 9MFY15 Order value (Rs. bn) PGCIL 9MFY15 order inflow break-up - Rs. 127bn Transformer Insulator 2% 3% Conductor 5% Substation 24% Others 7% Transmission line 33% HVDC order 26% Page 3

Domestic TLT ordering witnesses healthy traction, competitive intensity stabilizes TLT ordering has recovered, but remains below historical levels Competitive intensity has stabilized over the past few quarters 7 6 5 4 3 2 1 61 48 38 41 27 9MFY11 9MFY12 9MFY13* 9MFY14 9MFY15* Order value (Rs. bn) 9 PGCIL TLT orders - Avg. no of bidders 8 7 6 5 4 TLT orders - Avg. no of bidders, * - excluding 8kV HVDC order KPP and KECI would continue to have higher share of international orders KPP FY15E Order inflow Geographical break-up Internatio nal 57% Domestic 43% KECI FY15E Order inflow Geographical break-up Internatio nal 63% Domestic 37% Ordering in the TLT segment has witnessed healthy growth of 9.4% yoy but continues to remain below historical levels. Share of 765kV transmission line is currently ~38% of overall TLT orders and is likely to increase going forward While current recovery in domestic ordering has been a positive trend, we expect core transmission players KECI and KPP to increase their focus on international market for order inflow as pace of ordering in the domestic market remains below historical levels. We expect share of international TLT ordering to continue to increase in the medium term Competition scenario in the TLT segment has stabilized over the past 3-4 quarters with average bidders for a TLT order being ~6 players. While this is relatively lower from a historical perspective and expected to benefit existing players, we do not expect further reduction in competitive intensity going forward. Page 4

Substation ordering sees significant pick-up, Chinese continue to dominate GIS space Substation orders have witnessed strong growth in 9MFY15 35 3 25 2 15 1 5 11.3 PGCIL substation orders (Rs. bn) 23.4 2.3 22.4 29.8 9MFY11 9MFY12 9MFY13 9MFY14 9MFY15 PGCIL substation orders (Rs. bn) Transformer orders have picked up from a low base, ordering value remains low s 1 8 6 4 2 2.3 PGCIL transformers orders (Rs. bn) 8.6 4.4.8 2.7 9MFY11 9MFY12 9MFY13 9MFY14 9MFY15 PGCIL Transformer orders (Rs. bn) GIS orders have been on a rising trend, Chinese players continue to dominate the space 1 8 6 4 2 3 PGCIL Gas Insulated Subsation (GIS) ordering trend 1 7 9 9 7 7 7 FY11 FY12 FY13 FY14 FY15 (so far). of GIS orders GIS orders as a % of substation orders - RHS 8 6. of orders secured by Chinese Ordering activity in the equipment segment had witnessed significant traction, with substation orders growing by ~33% yoy in 9MFY15. Similarly, ordering in the transformer segment has recovered albeit from a low base. Ordering in Gas insulated substation (GIS) and Extra high voltage (EHV) segments had picked up over the past few months, with Chinese players continuing to dominate the segment. GIS currently constitute ~4% of the substation ordering and is likely to have a higher share going forward With TBEA expected to manufacture GIS (4kV) from its recently set-up facility in Gujarat, we believe competitive intensity would remain high, especially in GIS. Also, Toshiba (through its acquisition of Vijai Electricals) is currently bidding for transformer orders thereby increasing competition further 5% 4% 3% 2% 1% % Page 5

Recommendation History (1/2) 14 12 1 8 6 4 2 Historical ABB Target Report Date CMP (Rs.) TP (Rs.) Recommendation 9/Sep/14 1,15 464 Sell 7/v/13 647 323 Sell 14/Aug/13 492 371 Sell 9/May/13 538 392 Sell 9/Apr/13 486 398 Sell 25/Feb/13 587 398 Sell 3/v/12 77 392 Sell 7/v/12 781 426 Sell 12/Aug/12 771 468 Sell 12/Jun/12 75 395 Sell 1/May/12 75 395 Sell 3/Mar/12 854 453 Sell Report Date CMP (Rs.) TP (Rs.) Recommendation 2/Mar/12 828 453 Sell 27/Feb/12 828 453 Sell 29/Dec/11 582 382 Sell 9/v/11 71 452 Sell 4 3 2 1 Crompton Greaves Historical Target Report Date CMP (Rs.) TP (Rs.)Recommendation 18/Dec/14 171 164 Sell 17/Oct/14 191 164 Sell 9/Sep/14 225 166 Sell 6/Aug/14 195 166 Sell 4/Jun/14 189 159 Sell 31/Jan/14 112 91 Sell 11/v/13 13 88 Sell 8/Aug/13 88 93 Add 3/May/13 96 95 Reduce 9/Apr/13 92 95 Sell 31/Jan/13 18 96 Sell 11/Dec/12 113 94 Sell 3/v/12 116 94 Sell Report Date CMP (Rs.) TP (Rs.)Recommendation 5/v/12 113 94 Sell 29/Jul/12 115 111 Reduce 23/Jul/12 13 17 Sell 18/Jul/12 129 113 Reduce 12/Jun/12 12 113 Reduce 29/May/12 11 113 Reduce 3/Mar/12 137 111 Sell 2/Mar/12 149 112 Sell 27/Feb/12 149 112 Sell 1/Feb/12 144 112 Sell 29/Dec/11 126 11 Reduce 2/Oct/11 143 134 Reduce 15 1 5 KEC International Historical Target Report Date CMP (Rs.) TP (Rs.) Recommendation 4/v/14 14 96 Sell 9/Sep/14 17 116 Add 4/Aug/14 112 116 Add 5/May/14 77 88 Buy 13/Feb/14 54 67 Buy 28/Oct/13 33 62 Buy 5/Aug/13 26 61 Buy 9/May/13 49 67 Buy 9/Apr/13 55 77 Buy 31/Jan/13 6 77 Buy 1/Jan/13 69 84 Buy 3/v/12 63 84 Buy 31/Oct/12 69 84 Buy Report Date CMP (Rs.) TP (Rs.) Recommendation 1/Aug/12 57 73 Buy 18/Jun/12 54 75 Buy 12/Jun/12 52 75 Buy 7/May/12 54 72 Buy 3/Mar/12 61 78 Buy 2/Mar/12 58 67 Buy 27/Feb/12 59 67 Buy 2/Feb/12 53 67 Buy 29/Dec/11 37 66 Buy 31/Oct/11 57 7 Buy Page 6

Recommendation History (2/2) 25 2 15 1 5 Historical Kalpataru Target Report Date CMP (Rs.) TP (Rs.) Recommendation 12/v/14 169 223 Buy 9/Sep/14 168 235 Buy 5/Aug/14 166 212 Buy 4/Jun/14 18 214 Buy 3/Feb/14 77 13 Buy 5/v/13 79 113 Buy 3/Jul/13 63 1 Buy 2/May/13 78 13 Buy 9/Apr/13 77 116 Buy 29/Jan/13 99 117 Buy 3/v/12 8 111 Buy 2/v/12 81 111 Buy Report Date CMP (Rs.) TP (Rs.) Recommendation 7/Aug/12 71 91 Buy 12/Jun/12 8 17 Buy 24/May/12 8 17 Buy 3/Mar/12 17 118 Add 2/Mar/12 17 117 Add 27/Feb/12 17 117 Add 13/Feb/12 19 117 Add 29/Dec/11 91 15 Add 24/Oct/11 1 115 Add 5 4 3 2 1 Techno Electric Report Date CMP (Rs.) TP (Rs.)Recommendation 12/v/14 3 44 Buy 23/Sep/14 283 376 Buy Historical Target Page 7

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