Capital Goods -...

March 16, 2018

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

Capital Goods

ELECRAMA 2018‐Demand revival visible

Sector Update Kunal Sheth

[email protected] +91‐22‐66322257

Shreyans Jain [email protected] +91‐22‐66322256

Sensex v/s BSE Capital Goods Index

60708090

100110120130140

Mar‐17

May‐17

Jul‐17

Sep‐17

Nov‐17

Jan‐18

Mar‐18

BSE Capital Goods Sensex

Source: Bloomberg

Stock Performance

(%) 1M 6M 12M

Sensex (2.4) 2.8 12.2

BSE Capital

Goods Index (3.7) 1.9 14.4

ABB (11.1) (5.5) 11.7

Ashok Buildcon 1.7 14.2 16.6

Bharat Electronics (2.9) (12.5) 0.7

BHEL (9.1) (2.5) (23.8)

C.G. Cons. Elc. 0.9 5.7 16.3

Engineers India (5.0) 3.1 5.1

J.Kumar Infra. (8.5) 40.8 17.7

KEC Int. (1.8) 20.3 119.1

Cummins India (9.4) (17.9) (13.2)

Kalpataru Power (2.7) 29.9 59.0

KSB Pumps (2.9) 4.9 25.5

Larsen & Toubro (3.3) 5.9 22.6

Sadbhav Eng. (6.7) 26.1 27.9

Siemens (12.2) (19.5) (12.0)

Thermax 2.2 22.8 33.7

Voltas 6.9 14.7 60.2

We visited ELECRAMA 2018, which is the flagship showcase of the Indian Electrical

Industry ecosystem with ~900‐1000 corporate participants (over 221 Transformers

companies, 321 Cables & Conductors companies, 202 Control & Switchgear

companies and 113 Instruments & Instrumentation companies etc were present).

Key takeaways are as follows:

Industry participants indicated improving outlook: The overall tone from most

participants was positive on reviving demand/improving public spend.

Interaction with most players indicated improved traction in demand

environment over the last one year driven across T&D/Industrial/light electrical

spectrum.

Demand for Industrial products seeing healthy traction: Our interaction with

different manufacturers of motors/industrial drives/pumps suggests that there

is demand revival. Few sectors where demand has seen some positive traction

are steel/cement/Oil&Gas/Railway/water etc. Implementation of IEE norms and

Mandatory ISI marking is leading to shift to organized markets in motors.

Light electrical‐confident of sustained growth: Light electrical companies

comment that seeing demand uptick since last 5‐6 months in products like

MCB/switchgears /wires etc as builder’s rush to complete pending projects due

to RERA. Expect Housing for all also to be good demand driver in medium term.

Wire & cable demand players are expecting strong growth to continue led by

uptick in public spending in infrastructure.

Competition is likely to heat up as lot of player’s dominant in wire & cables

(Polycab/RR Kabel/Finolex) are trying to extend brand and get into aligned

segment of MCB/switchgear/fans/appliances. We believe scale up in appliance

is a challenging task given that channel is different from traditional channel for

wires.

Digital/automation key themes displayed by larger players, MV product seeing

tailwind from SEB demand: Large players like ABB/SIEMENS showcased

capability on the digital/automation/IoT with wide array of products indicating

future trends and also taking market in that direction. Lot of players also

displayed product on ‘Make in India’ theme. Market participants indicate that

States capex on system upgradation and inter‐state transmission line is driving

demand for HV/MV products/substation(GIS)/automation etc. Most companies

also highlighted improving outlook and demand from international markets like

Africa, SAARC region etc.

In the lower KV range and more commoditised products

(Cables/Transformer/Conductor/Switchgear etc.) the spend on RE/IPDS is

driving demand due to governments serious push to achieve the electrification

targets. The commentary across players indicates that competition continues to

be very tough across segments.

March 16, 2018 2

Capital Goods

Renewable segment going through consolidation, railway/metro going strong.

Policy uncertainty/aggressive bidding in solar/wind has led to slowdown in

spending, however most participants long term potential remains strong and

current phase is temporary and industry should return back to growth next year.

Railway/metro capex continues at very healthy pace and all players were

confident of trend to continue for next few years.

Smart meter: The government is coming out with large tender for 5mn meters

floated by EESL for smart meters. Companies are optimistic about increase in

smart meter tendering given the government’s focus on reducing T&D losses.

Outlook: Step up in SEB capex and government focus on key schemes like

RE/IPDS is driving demand for T&D. Strong uptick in Rail/Metro capex and

recovery in pockets of industrial spend are likely to act as tailwind. While

demand outlook is improving, competitive intensity continues to be high.

ABB/KEC/Kalpataru power are out preferred play in T&D/Industrial space.

Exhibit 1: PL Coverage Valuation

Companies Price (Rs)

TP (Rs)

Rating Mcap

(Rs bn)

P/E P/B EV/EBITDA ROE

FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20

Larsen & Toubro 1,268 1,556 BUY 1,773.8 27.1 23.9 20.9 3.0 2.7 2.5 21.9 20.0 18.6 12.2 12.1 12.4

BHEL 86 89 Reduce 316.7 44.9 23.5 18.5 0.9 0.9 0.9 17.8 9.3 8.2 2.1 3.8 4.7

Siemens 1,103 1,401 ACC 392.8 55.3 42.2 36.9 6.5 6.0 5.6 35.3 27.2 24.0 12.3 14.9 15.7

ABB 1,341 1,747 ACC 284.1 67.6 54.7 43.7 8.3 7.4 6.5 38.4 29.0 24.1 12.9 14.3 15.8

Cummins India 768 967 Buy 212.8 31.2 27.0 23.8 4.9 4.5 4.1 27.5 24.4 21.1 16.8 17.4 18.0

Bharat Electronics 149 211 Buy 333.6 19.7 16.4 14.9 3.0 2.6 2.2 12.4 10.3 8.9 19.1 16.9 15.8

Thermax 1,165 1,309 ACC 138.8 46.4 36.7 29.4 4.6 4.2 3.8 28.5 22.4 18.2 10.4 12.1 13.7

Engineers India 161 204 ACC 101.5 24.7 24.3 19.7 3.2 3.0 2.8 17.6 17.5 13.1 13.9 12.9 14.8

Voltas 628 702 ACC 207.8 36.0 33.3 28.8 5.6 5.0 4.5 30.5 26.0 22.4 16.5 15.9 16.4

KEC International 386 413 BUY 99.2 24.2 20.7 18.2 5.2 4.2 3.4 11.8 10.0 8.9 23.5 22.4 20.8

Kalpataru Power 455 528 ACC 69.9 20.3 17.3 15.5 2.6 2.3 2.1 12.5 10.5 9.2 13.0 13.7 13.7

KSB Pumps 775 925 ACC 27.0 40.1 28.2 24.3 4.3 3.8 3.5 23.9 17.0 14.8 11.3 14.3 14.9

Sadbhav Eng. 383 475 BUY 64.9 18.8 16.5 15.3 3.5 3.1 2.7 17.9 15.1 13.2 12.9 13.0 12.5

Ashoka Buildcon 226 287 BUY 42.3 43.3 26.3 15.3 2.1 2.1 2.0 10.0 7.9 6.9 2.6 4.3 7.1

J.Kumar Infra 302 403 BUY 22.9 18.8 15.2 12.4 1.6 1.4 1.3 8.1 6.6 5.6 8.6 9.9 11.1

Source: Company Data, Bloomberg, PL Research (All prices as on February 20, 2018)

March 16, 2018 3

Capital Goods

Light Electrical Industry

Lot of players dominant in the wires & cables segment (Polycab/RR Kabel/Finolex) are trying to extend their brand and get into

aligned segment of MCB/switchgear/fans/appliances

March 16, 2018 4

Capital Goods

Players like Polycab and RR Kabel are entering the highly competitive Consumer Durables segment, displaying their wide array of

products

March 16, 2018 5

Capital Goods

MCB

Companies have come out with Smart

MCBs with Three level indicators, High

speed mechanism, safety shutters,

independent manual structure etc.

Havells has even come out with new

panel designs for their Distribution

boards

March 16, 2018 6

Capital Goods

Motors and Pumps

IE3 motor with Smart Sensors

Motors and Pumps with Compuslory ISI mark being made mandatory now.

March 16, 2018 7

Capital Goods

Digital Automation

Companies like ABB and Siemens showcased their

technologies going fully digital as well as smart solutions.

ABB displayed the Digital grid which is stronger, smarter and

greener. Siemens displayed their Cyber Security and

Mindspace Fleet Manager technology

March 16, 2018 8

Capital Goods

Make in India

Crompton Greaves displayed their “Made in India” Circuit Breakers upto 800kv which can be used by Utilities across the world

and Medium Voltage Swtichgears and Propulsion Systems.

TBEA displayed their growth in phases and how their MVA sales of Transformers and Reactors by “Making in India”.

March 16, 2018 9

Capital Goods

UDAY Scheme

UDAY is a 3 year long programme where performance of the States is contingent to

the time spent under UDAY, as different states have joined UDAY at different points

in time.

Early results under UDAY are encouraging, with some distinct benefits on operations.

Going forward, improvement in metering to enhance the performance.

Performance slack in some states may be attributed to interlinked factors like lead

time of interventions, data‐lag and seasonality of operations etc.

UDAY is a supply side intervention which aims to release the latent demand, that

exists in the system due to short supply of power to the consumers.

Under UDAY, total energy billed by DISCOMs increased by 9% in FY17* over FY16,

indicating a considerable growth in consumption, which in the past years had grown

around 5‐6%.

24X7 Reliable & Affordable Supply

Commercially Viable Discoms

Eliminate stress of Banking Sector from DISCOM exposure

Exhibit 2: Post UDAY Improvement Trend

1364.51378.8

1408.91433.1

1456.41480.8

1503.71523.7 1530.3

1250.0

1300.0

1350.0

1400.0

1450.0

1500.0

1550.0

Mar‐16 Jun‐16 Sep‐16 Dec‐16 Mar‐17 Jun‐17 Sep‐17 Dec‐17 Mar‐18

Post UDAY Improvement Trend

Source: GoI data, PL Research

March 16, 2018 10

Capital Goods

Exhibit 3: Electricity Access to un‐connected Households (Nos in Lakh)

13.1

3.8

0.1 0.0

5.1

7.6

3.3

0.1 0.0 0.00.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Maharashtra Telangana Himachal

Pradesh

Meghalaya Assam

Target Achievement


Exhibit 4: Key improvement under UDAY

Parameters FY16 FY17 Target FY18

ACS‐ARR Gap 0.6 0.42 0.2

(Rs. / kWh)

AT&C Losses (%) 21 20 17


March 16, 2018 11

Capital Goods

Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY)

Government of India has launched the scheme “Deendayal Upadhyaya Gram Jyoti

Yojana” for rural electrification. The erstwhile Rajiv Gandhi Grameen Vidyutikaran

Yojana (RGGVY) scheme for village electrification and providing electricity

distribution infrastructure in the rural areas has been subsumed in the DDUGJY

scheme.

Under DDUGJY‐RE, Ministry of Power has sanctioned 921 projects to electrify

1,21,225 un‐electrified villages, intensive electrification of 5,92,979 partially

electrified villages and provide free electricity connections to 39.7mn BPL rural

households.

Exhibit 5: Funding Mechanism of DDUGJY

Agency Nature of support

Quantum of support

(Percentage of project cost)

Other than Special Category States

Special Category States #

Govt of India Grant 60 85

Discom Contribution* Own Fund 10 5

Lender (FIs/ Banks) Loan 30 10

Additional Grant from GOI on achievement of prescribed milestones Grant 50% of total loan

component (30%) i.e. 15% 50% of total loan

component (10%) i.e. 5%Maximum Grant by GOI (including additional grant on achievement of prescribed milestones)

Grant 75% 90%

Source: Industry, PL Research # Special Category States (All North Eastern States including Sikkim, J&K, Himachal Pradesh, Uttarakhand) * Minimum contribution by Discom(s) is 10% (5% in case of Special Category States). However, Discom(s) contribution can go up to 40% (15% in case of Special Category States), if they do not intend to avail loan. In case, the Discom(s) do not avail loan, the maximum eligible additional grant would be 15% (5% in case of Special Category States) on achievement of prescribed milestones. The loan component would be provided by REC or by other FIs/Banks.

March 16, 2018 12

Capital Goods

Exhibit 6: Electrification and last mile connectivity: Outlay Rs425.6bn


March 16, 2018 13

Capital Goods

Exhibit 7: DDUGJY Electrification Status

State Total Electrified Uninhabited Remaining

Odisha 3,474 2,896 571 7

Assam 2,892 2,732 150 ‐

Bihar 2,747 2,642 105 ‐

Jharkhand 2,525 2,467 58 ‐

Arunachal Pradesh 1,578 797 16 765

Uttar Pradesh 1,529 1,476 53 ‐

Chhattisgarh 1,080 985 ‐ 95

Meghalaya 912 900 12 ‐

Rajasthan 495 427 68 ‐

Madhya Pradesh 472 402 49 21

Manipur 276 269 3 4

Jammu & Kashmir 134 45 ‐ 89

Nagaland 82 78 4 28

Uttarakhand 76 46 2 3

Mizoram 58 51 4 ‐

Karnataka 39 39 ‐ ‐

Himachal Pradesh 35 28 7 ‐

Tripura 26 26 ‐ ‐

West Bengal 22 22 ‐ ‐

Total 18,452 16,328 1,102 1,012


March 16, 2018 14

Capital Goods

Saubhagya Scheme

Government of India launched the ‘Pradhan Mantri Sahaj Bijli Har Ghar Yojana’ –

Saubhagya to achieve universal household electrification in the country with the

total cost of Rs163.2bn including a Gross Budgetary Support (GBS) of Rs123.2bn from

the government during the entire implementation period.

Exhibit 8: Electrification Status as on date

Source: GoI website, PL Research

March 16, 2018 15

Capital Goods

Exhibit 9: Saubhagya Scheme


Exhibit 10: Saubhagya – Household progress since 10th October 2017 (in lakhs)


March 16, 2018 16

Capital Goods

Exhibit 11: Saubhagya – un electrified Household (as per LOI)


March 16, 2018 17

Capital Goods

Integrated Power Development Scheme

An integrated scheme for urban areas with outlay Rs 270.5bn, targeting IT

Enablement (Quality and Reliability) and System Strengthening

Achievement under IPDS

IT enablement completed in 1367 towns; fresh sanctions for 1932 towns

amounting to Rs 9.85bn

Old System strengthening projects completed in 970 towns; fresh sanctions for

3616 towns

Expected to boost industry performance, as IPDS directs interventions in urban

areas where most industrial hubs/ centres are located

Rs270.52bn sanctioned under IPDS ‐ Rs262.36bn System strengthening + Rs

9.85bn IT + Rs 690mn Smart meters for Old Kashi Pilot

System Strengthening projects for 3616 towns – Rs262.36bn sanctioned

including Rs163.14bn as GOI Grant, Rs.48.17bn released

Exhibit 12: Quantum of work envisaged for System Strengthening in Urban sector

Milestone Name Unit Sanctioned Quantity Awarded QuantityCompletion as on

18.01.2018

% Physical Progress Achieved w.r.t.

awarded Quantity

33/11 KV Substation

New No. 1,825 1,591 168 11%

MVA 12,998 11,730 1,124 10%

Augmentation No. 2,145 1,537 414 27%

MVA 8,675 7,775 1,890 24%

Lines

LT Line CKm 123,653 159,981 31,794 20%

11 KV Line (Excluding feeder segregation)

CKm 111,412 98,252 14,986 15%

33&66 KV Line CKm 25,183 23,486 1,953 8%

Feeder Segregation Feeder Segregation (excluding 11 KV New Lines)

CKm 159,571 147,703 11,679 8%

Distribution Transformers

Distribution Transformers

No. 385,638 360,849 31,108 9%

MVA 12,686 12,598 2,172 17%

Energy Meters

Consumer Nos 15,160,243 10,371,200 3,242,446 31%

DTR Nos 377,120 331,082 32,665 10%

11 KV Feeder Nos 29,336 14,817 3,822 26%


March 16, 2018 18

Capital Goods

Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage PL’s Recommendation Nomenclature

45.0% 43.4%

11.6%

0.0%0%

10%

20%

30%

40%

50%

BUY Accumulate Reduce Sell

% of Total Coverage

BUY : Over 15% Outperformance to Sensex over 12‐months

Accumulate : Outperformance to Sensex over 12‐months

Reduce : Underperformance to Sensex over 12‐months

Sell : Over 15% underperformance to Sensex over 12‐months

Trading Buy : Over 10% absolute upside in 1‐month

Trading Sell : Over 10% absolute decline in 1‐month

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

DISCLAIMER/DISCLOSURES

ANALYST CERTIFICATION

We/I, Mr. Kunal Sheth (MBA), Mr. Samir Bendre (BE,MBA), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

Terms & conditions and other disclosures:

Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com

This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.

Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.

PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014

PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities.

PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company.

PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.

PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report.

PL or its associates might have received compensation from the subject company in the past twelve months.

PL or its associates might have managed or co‐managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months.

PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months

PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report.

PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report.

It is confirmed that Mr. Kunal Sheth (MBA), Mr. Samir Bendre (BE,MBA), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company

Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest.

PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.

DISCLAIMER/DISCLOSURES (FOR US CLIENTS)

ANALYST CERTIFICATION

The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report

Terms & conditions and other disclosures:

This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.

In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Marco Polo Securities Inc. ("Marco Polo").

Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer.

Capital Goods -...

Documents

Transcript of Capital Goods -...