Capital Goods

4QFY17E Results Preview

Pawan Parakh, CFA Ashutosh Mehta, ACA

pawan.parakh@hdfcsec.com ashutosh.mehta@hdfcsec.com
12 APR 2017 +91-22-6171 7314 +91-22-3078 8241
 CAPITAL GOODS : 4QFY17E RESULTS PREVIEW

4QFY17E: Public sector capex to drive order flows

Our coverage universe is likely to witness ~15% YoY growth in Expect 15% YoY Rev Growth For Our Capital Goods Universe
revenues, primarily led by a low base effect (for most companies), Revenue (Rs mn) YoY growth (%)
and a deferment of execution in 9mFY17, rather than an on-ground
pick up in industrial activity. 600,000 30.0%
25.0%
Order flows continue to be dominated by public sector capex, led by 500,000
20.0%
sectors like Power T&D, Railways, Metros and Hydrocarbons. Orders 400,000 15.0%
from Power Grid grew 112% YoY to Rs 80.2bn in 4QFY17 (vs Rs 300,000 10.0%
37.9bn YoY). Consequently T&D EPC companies (KPP, KECI and TEEC). 5.0%
200,000
are likely to end FY17 with a healthy order book. 0.0%
100,000
Power generation orders continued to be muted, with no major -5.0%
0 -10.0%
orders announced by BHEL. L&Ts announced order flows for 4QFY17

1Q FY16

2Q FY16

3Q FY16

4Q FY16

1Q FY17

2Q FY17

3Q FY17

4Q FY17E
stand low at Rs 155bn. However, L&T has had a higher proportion of
unannounced order flows in the last few quarters.
Key results A harsh summer should drive UCP revenues (+11% YoY, Source: Company, HDFC sec Inst Research
despite a high base) for Voltas. All transmission EPC companies (KECI,
KPP and TEEC) are likely to report strong revenues led by robust Overall EBITDA Margins Are Expected To Expand ~30bps YoY
order books. Suzlon would report another profitable quarter on the EBITDA (Rs mn) EBITDA margin (%)
back of higher volumes and increase in OMS revenues. 90,000 16.0%
80,000 14.0%
A weak private sector capex cycle should continue to pose headwinds 70,000 12.0%
for Thermax, both in terms of order flows and execution. Sanghvi 60,000
10.0%
Movers would be hit by lower utilisation and gross yields. 50,000
8.0%
40,000
Company-specific monitorables include: Order inflow guidance for 30,000
6.0%
L&T, update on sale of international power business for CG Power 20,000 4.0%
and a pick up in export orders for Triveni Turbines. 10,000 2.0%

Top picks: Voltas (pick up in AC demand), Engineers India (expected 0 0.0%

1Q FY16

2Q FY16

3Q FY16

4Q FY16

1Q FY17

2Q FY17

3Q FY17

4Q FY17E
pick up in refining capex) and Kalpataru Power (substantial
improvement in the order book) are our top picks in the sector. We
downgrade Cummins, AIA Engineering & KECI to NEUTRAL on the
back of steep valuations. Source: Company, HDFC sec Inst Research
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 CAPITAL GOODS : 4QFY17E RESULTS PREVIEW

4QFY17E: Revenue growth picks up, but on a low base

4QFY17E
COMPANY WHATS LIKELY KEY MONITORABLES
OUTLOOK
The announced order flows from L&T stand muted at ~Rs 155bn The outlook for working capital requirements.
in 4QFY17E, against an implied order flow of ~Rs 550bn for The outlook for sale of non-core assets in
4QFY17E (to meet its 10% growth guidance for FY17E). FY18E.
Larsen & Toubro AVG We expect L&T to clock ~13% YoY revenue growth for the Progress in defence order flows.
quarter, led by strong execution.
We expect core E&C EBIT margins to improve 190 bps to ~14.7%.
We expect 25% growth in revenues owing to a surge in both the The outlook for exports.
domestic and export business. Pricing environment in the domestic market.
We expect EBITDA margins to contract 180bps YoY to ~14.9% on
Cummins India GOOD the back of an increase in commodity prices.
However, higher depreciation and taxes are likely to result in
APAT growth of 9% YoY.
We expect moderation in EBITDA margins (400 bps) led by Growth and outlook for mining sector
AIA Engineering AVG FerroChrome (up ~53% in 2H vs 1HFY17) and Scrap prices (up volumes
~13%).
We expect revenue growth of ~3.9% YoY, led by 6/-3/11% YoY The expected demand environment in the
growth in the EMP/EP/UCP segments, respectively. ongoing summer season.
Voltas GOOD We expect EBIT margin contraction to 2.6/29.3/15.3% in Order flows / margin outlook for the EMP
EMP/EP/UCP segments respectively. segment.
The confluence of growth in the Energy segment (11.3% YoY) and Guidance on loss reduction in subsidiaries.
decline in the Environment segment (7.8% YoY), are likely to The outlook for order inflows for FY18E.
result in SA revenue growth of 11% YoY in 4QFY17.
Thermax BAD A decline in subsidiary revenue (~48% YoY) is likely to result in
flat consolidated revenue for 4QFY17.
SA EBITDA margins are likely to remain flat YoY at 9.0%.

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 CAPITAL GOODS : 4QFY17E RESULTS PREVIEW

4QFY17E: Revenue growth picks up, but on a low base

4QFY17E
COMPANY WHATS LIKELY KEY MONITORABLES
OUTLOOK
Revenue growth of 65% in 4QFY17E looks optically high on The outlook for order inflows from the
account of a low base. domestic and overseas markets for FY18E.
Provision write backs are likely to continue, which should aid
Engineers India AVG margins in 4QFY17.
With an EBIT margin of 20.5/21.7% for PMC/LSTK, we expect
APAT to grow ~95% YoY.
We expect Suzlon to report volumes of 481 MW in 4QFY17E (vs. The outlook for the wind industry size and
443 MW in 4QFY16). Suzlon's expected market share for FY18E.
Suzlon is likely to report forex gain in 4QFY17E, with appreciation The outlook for the sale of remaining solar
Suzlon GOOD in the INR (vs USD). assets
With an improvement in realisations and higher OMS, we expect
Suzlon to report APAT of Rs 2.26bn (vs Rs 0.50bn YoY).
We expect revenue growth of 18/33% YoY in SA and the The update on the commencement of
subsidiaries, leading to ~22.4% consolidated revenue growth. commercial operations in the relocated
Carborundum
The international business is likely to witness strong growth due facilities.
GOOD to deferral in silicon carbide volumes in Russia from 1HFY17.
Universal
We expect 100bps YoY contraction in EBTIDA margins to ~16.7%,
on the back of margin pressure in the Electro-mineral and
Ceramic business.
We expect strong revenue growth of 22.3% YoY in 4QFY17E. The outlook for traction in railway orders.
KEC International GOOD EBITDA margins are likely to remain flat YoY at 8.7%, as most of The margin outlook for the non-transmission
the legacy projects are completed. EPC business
We expect strong revenue growth of ~28.5% YoY in 4QFY17E, as The outlook for order flows from T&D and the
execution picks up. Railway business.
We expect margins to be stable at 10.6% for the standalone The road map for recovery in the
Kalpataru Power GOOD entity. performance of Shubham Logistics.
With announced order inflows of Rs 28.5bn in 4QFY17, we expect
KPP to end FY17 with an order book of ~Rs 94bn (standalone
business). 4
 CAPITAL GOODS : 4QFY17E RESULTS PREVIEW

4QFY17E: Revenue growth picks up, but on a low base

4QFY17E
COMPANY WHATS LIKELY KEY MONITORABLES
OUTLOOK
Headline numbers are not comparable YoY, as CRG would The progress in sale of the international
continue reporting International Power business under power businesses (piecemeal manner).
discontinued operations .
On a like-to-like basis, we expect revenues to decline by ~5.0%
YoY, led by a decline in the Power business (~8.1% YoY). The
CG Power and
AVG Industrial SA business is likely to be flat YoY.
Industrial
We expect SA EBIT margins of 9.9/11.9% for the
Power/Industrial segments respectively.
Loss of Rs 335mn in international subsidiaries will offset profits in
the SA business (Rs 841mn). We expect a consolidated profit of
Rs 509mn.
We expect 18.1% YoY growth in revenues for 4QFY17E, largely The outlook for order flows from
driven by exports. international markets (especially in the 30
Triveni Turbines GOOD Higher raw material cost is likely to lead to a 370bps YoY decline plus MW segment).
in EBITDA margins to 21.5%.
We expect APAT to remain flat at Rs 332mn.
We expect revenue growth of ~21.3% YoY, driven by strong The outlook for the sale of wind assets.
execution in the EPC segment (+21% YoY). The outlook for order flows on the back of
Techno Electric GOOD
No major contribution to the top line is expected from the Wind progress in the UDAY programme.
segment, as 4Q is a seasonally weak quarter.
EBIT margins for the EPC segment are likely to contract 150bps
YoY to 15.5%.
We expect revenues to remain flat at Rs 1.6bn. The outlook for the wind sector capex for
We expect to end FY17E with a utilisation rate of ~77% (80.5% in FY18E/19E.
Sanghvi Movers AVG
FY16) and yield of ~2.8% (2.9% in FY16). The outlook for refinery and power expansion
We expect EBITDA margins to remain flat YoY in 4QFY17 at plans in FY18E/FY19E.
66.3%, on account of lower utilisations and average gross block
yields
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 CAPITAL GOODS : 4QFY17E RESULTS PREVIEW

4QFY17E: Financial summary

NET SALES (Rs bn) EBITDA (Rs bn) EBITDA Margin (%) APAT (Rs bn) EPS (Rs/sh)
Company 4Q QoQ YoY 4Q QoQ YoY 4Q QoQ YoY 4Q QoQ YoY 4Q 3Q 4Q
FY17E (%) (%) FY17E (%) (%) FY17E (bps) (bps) FY17E (%) (%) FY17E FY17 FY16
Larsen & Toubro 374.7 42.6 13.0 58.2 130.8 19.8 15.5 593.9 88.1 31.5 223.6 30.9 33.8 10.4 25.8
Cummins India * 13.2 -2.4 24.6 2.0 -12.8 11.4 14.9 -178.4 -177.1 1.8 -8.2 8.9 6.6 7.1 6.0
AIA Engineering 6.5 10.2 9.8 1.6 -4.8 -4.0 25.3 -398.0 -363.6 1.2 -1.2 -11.7 12.6 12.8 14.3
Voltas 19.6 66.3 3.9 1.7 95.9 -5.9 8.9 134.2 -93.0 1.3 61.5 -26.6 3.9 2.4 5.3
Thermax 14.4 76.8 11.3 1.3 62.7 11.1 9.1 -79.2 -1.6 1.0 73.3 -11.7 8.2 4.8 9.3
Engineers India * 4.7 45.5 65.1 1.1 40.8 189.1 24.1 -79.9 1,033.8 1.4 60.1 94.6 2.0 1.3 1.0
Suzlon 43.2 30.4 32.0 5.2 -30.9 23.1 11.9 -1,057.9 -86.2 2.3 -25.5 353.9 0.4 0.5 0.1
Carborundum Universal 6.1 16.4 20.4 1.0 15.8 15.7 17.0 -7.8 -69.9 0.6 30.8 48.8 3.4 2.6 2.3
KEC International 31.3 63.6 22.3 2.7 49.0 21.6 8.7 -84.9 -5.0 1.0 64.4 28.9 4.0 2.4 3.1
Kalpataru Power * 17.7 57.2 28.5 1.9 57.7 30.1 10.6 3.3 13.2 0.8 48.5 17.9 5.5 3.7 4.7
CG Power & Industrial # 14.1 13.3 0.1 1.0 14.4 -38.5 6.8 6.4 -424.0 0.2 -43.2 -77.3 0.4 0.6 1.6
Triveni Turbines 2.5 24.8 18.1 0.5 2.1 0.7 21.5 -478.3 -370.8 0.3 -5.2 -3.2 1.0 1.1 1.0
Techno Electric 4.0 11.0 21.3 0.7 -12.8 29.5 16.6 -451.9 105.0 0.5 20.4 80.1 4.3 3.6 2.4
Sanghvi Movers * 1.6 20.8 -1.8 1.1 20.1 -1.5 66.3 -37.7 20.1 0.3 41.6 -23.4 7.7 5.4 10.0
Aggregate 553.5 40.7 15.1 80.0 73.6 17.7 14.4 273.8 32.4 43.9 106.5 24.8
Aggregate (ex-CGPower) 539.5 41.6 15.5 79.0 74.8 19.1 14.7 278.3 43.9 43.7 109.9 28.2
*Note represents SA numbers
#Note numbers are not comparable YoY or QoQ on account of regrouping international business under discontinued operations and certain Ind AS adjustments
Source: Company, HDFC sec Inst Research

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 CAPITAL GOODS : 4QFY17E RESULTS PREVIEW

4QFY17E: Peer valuation

Mcap CMP TP EPS (Rs/sh) P/E (x) EV/EBITDA (x) RoE (%)
Company Reco
(Rs bn) (Rs) (Rs) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E
Larsen & Toubro ^ 1,588 1,705 BUY 1,798 64.8 69.2 69.8 20.8 19.5 19.3 18.7 17.0 15.0 13.1 12.8 11.9
Cummins India * 272 981 NEU 1,033 27.3 30.6 34.4 35.9 32.0 28.5 32.6 28.7 25.2 22.8 23.3 23.6
AIA Engineering 145 1,535 NEU 1,571 47.0 47.6 63.2 32.6 32.3 24.3 23.4 21.5 16.7 18.3 16.5 19.5
Voltas 137 414 BUY 462 13.3 15.3 17.7 31.2 27.2 23.5 23.1 19.3 16.3 17.2 17.4 17.8
Thermax 118 991 SELL 796 26.3 27.8 31.8 37.6 35.7 31.1 26.7 23.6 19.9 12.8 12.4 13.0
Engineers India * 104 154 BUY 178 5.6 6.2 8.0 27.6 24.9 19.3 21.7 19.2 13.5 13.8 14.6 18.0
Suzlon 99 20 BUY 24 1.0 1.1 1.2 18.9 18.6 16.1 9.8 9.7 8.0 NA NA NA
Carborundum Universal 56 298 BUY 340 8.9 11.5 13.6 33.3 25.8 21.9 15.9 13.7 11.9 13.4 15.4 15.9
KEC International # 55 213 NEU 212 10.2 12.3 14.1 20.9 17.3 15.1 10.2 8.9 8.0 16.1 16.8 16.6
Kalpataru Power * ^ 52 339 BUY 392 17.2 18.5 21.3 15.4 14.4 12.5 10.6 9.7 8.5 11.1 10.8 11.2
CG Power & Industrial ^ 50 80 BUY 84 -1.2 1.6 1.6 NA 43.6 42.2 14.9 13.1 12.0 -1.7 2.2 2.3
Triveni Turbines 46 140 BUY 152 4.0 4.5 5.1 35.2 31.2 27.4 25.0 21.7 18.6 39.0 34.5 31.1
Techno Electric ^ 44 389 NEU 400 18.2 21.1 23.9 17.7 15.3 13.5 13.5 12.3 10.8 19.5 19.7 19.3
Sanghvi Movers * 10 237 BUY 331 21.8 25.7 27.6 10.9 9.2 8.6 4.4 4.2 3.6 12.0 12.7 12.2
*Note represents SA numbers ^ P/E adjusted for value of Subs /JV's / non-core businesses
# We have increased our EBITDA margin estimates from 8.8/9.0% to 9.3/9.4% for FY18E/19E. Consequently, our APAT is increased by 11.3/11.1% for FY18E/19E.
Source: Company, HDFC sec Inst Research

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 CAPITAL GOODS : 4QFY17E RESULTS PREVIEW

Rating Definitions
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-) 10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-) 10% returns over the next 12 month period

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Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No

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 CAPITAL GOODS : 4QFY17E RESULTS PREVIEW

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