Engineering

GDP gro

wth

Cap

ex cycle

Ord

ers &

Sales

Infra s

pen

d

Profit

s

TopbuysTopbuys

Capex DHOOM*

September 2010

Dhirendra Tiwari ([email protected]); Tel: +91 22 3029 5127

Navneet Iyengar ([email protected]); Tel: +91 22 3029 5126

* Dhoom is a Hindi word for great fanfare, fireworks, music, dance & fun.

Engineering

September 2010 2

Engineering | Capex DHOOM

Capex DHOOM

Page No.

A graphic story of Indian Engineering .............................................................3-6

Capex DHOOM ............................................................................................. 7-12

Capex cycle gathering momentum .............................................................. 13-14

Infrastructure expenditure likely to accelerate ......................................... 15-16

Power sector at an inflexion point ............................................................... 17-20

Power plant equipment: opportunity to scale up ........................................ 21-24

Nuclear power project awards commence .................................................. 25-28

Annual opportunity of Rs400b in the Twelfth Plan for BoP ....................... 29-30

T&D equipment makers: huge opportunity, growing competition ............ 31-42

Capex DHOOM: Financials trends ............................................................ 43-44

Companies ...................................................................................................45-115

ABB ....................................................................................... 46-52

BGR Energy ......................................................................... 53-59

BHEL ..................................................................................... 60-67

Crompton Greaves ............................................................... 68-75

Cummins India ...................................................................... 76-85

Larsen & Toubro .................................................................. 86-95

Siemens ............................................................................... 96-107

Thermax ............................................................................ 108-115

September 2010 3


Projects worth US$2t in the pipeline

Capex DHOOM: A graphic story of Indian Engineering

India is in the NTD Era

Twelfth Plan target for infrastructure spendingAt 4.5x of Tenth Plan Comprises 10% of GDP

514

1,025

227

10th plan actual 11th planrevised

12th plan target

2.3x

4.5x

5.1%

7.6%

10.0%

10th planactual

11th planrevised

12th plan target

21 33 57 150 29

3 451

461

479

508 72

1 837 946 1,

214

1,31

4

1,54

4

1,77

2 2,02

5

600

1,23

0

FY

51

FY

60

FY

70

FY

80

FY

90

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E

FY

13E

First US$ Trillion

Second US$ Trillion6 years

60 years

1,8723,515 3,934 4,534

5,855

11310510096

92

Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11

Added (Rsb) Outstanding (RHS)- RsbOutstanding (Rs t)Added (Rs b)

It took India almost 60 years

after independence to

create its first trillion dollar

of GDP. Growing at 13-15%

per annum, it will add the

next trillion dollar (NTD) of

GDP in just 6-7 years. This

linear growth in GDP will

translate into exponential

growth for several sectors.

Engineering is one of them.

Sustained GDP growth, led

by the industrial sector, is

creating a massive capex

cycle. There is a slew of

projects in various stages

of implementation with

outstanding investment of

US$2t. This spells a huge

and sustained business

opportunity for the Indian

engineering sector.

The whole of India is "work-

in-progress". India's infra

spend is poised to double

from US$500b in the

Eleventh Plan (FY08-12) to

US$1t in the Twelfth Plan

(FY13-17), triggering huge

opportunities.

India's GDP (US$ b)

September 2010 4


164

173

188

227

199

202

217

257

327

454

580

749

1,11

7

1,60

8

2,22

5

2,85

6

3,65

2

4,46

5

6.3

2.6

5.04.4 4.3 4.3

4.6 4.6

1.51.9 1.9 1.9

2.12.4

3.0 3.1 3.0

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E

Order Book (Rs b) BTB (x)

A bulging order book ...

... will soon restore sales growth

94 130

159

178

178

178

198

222

245

323

411

551

695

884

993

1,21

6

1,53

2

160

27.126.1

34.3

27.1

31.8

12.110.9

0.1-0.2

11.3

0.9

12.4

22.526.0

22.2

38.8

10.6

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E

Sales (Rs b) Sales Grow th (%, YoY)

EBITDA margins (%) poised to rise higher

11.213.1

14.1 13.713.1

11.8

7.3

11.611.0

10.5

10.9

12.3

13.9 13.7 13.114.7

16.0 16.3

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E

The aggregate order book

of engineering majors

covered in this report is

beginning to show a rising

trend, reflecting the capex

dhoom. Book-to-bill ratio is

also inching upwards,

suggesting improving

visibility.

Expanding order book will

restore sales growth to

20-25% after a muted FY10.

EBITDA margins are

expanding due to strong

operating leverage and a

fairly benign raw material

cycle.

Capex DHOOM: A graphic story of Indian Engineering (continued)

September 2010 5


PAT growth will recover

EBITDA growth is higher

than PAT growth,


quality of earnings as the

share of financial income is

falling.

The Indian engineering

sector has always traded at

a premium to market

valuations, indicating

superior earnings growth

and long-term visibility. We

expect the sector's valuation

premium to sustain going

forward.

Engineering Index v/s Sensex

0

6,000

12,000

18,000

24,000

Feb

-08

Apr

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Sensex Cap Goods Index - Rebased

Engineering P/E v/s Sensex P/E

171616

0

12

24

36

48

Mar

-94

Dec

-94

Sep

-95

May

-96

Feb

-97

Oct

-97

Jul-9

8

Apr

-99

Dec

-99

Sep

-00

May

-01

Feb

-02

Oct

-02

Jul-0

3

Apr

-04

Dec

-04

Sep

-05

May

-06

Feb

-07

Oct

-07

Jul-0

8

Apr

-09

Dec

-09

Sep

-10

-90

-40

10

60

110Sensex P/E Engg Sector P/E Prem/(Disc) to Sensex - RHS

In the last couple of years,

the Engineering Index

underperformed the

markets, led by

heavyweights like BHEL

and L&T. We have a positive

view on both the stocks,

and expect the

underperformance to

reverse.


0

20

40

60

80

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

PAT Grow th (% YoY) EBITDA Grow th (% YoY)

Average 10 year premium of 16%

September 2010 6


Valuation: P/E-EPS growth matrix

Valuation: EV/EBITDA-EBITDA growth matrix

Our top picks in order ofpreference are -? BHEL? L&T? Siemens? Cummins? BGR

We are Neutral on ABB,Crompton Greaves andThermax.


BGRL&T

Siemens

ABB

Crompton

ThermaxCummins

BHEL

0

12

24

36

48

15 20 25 30 35 40 45EPS CAGR (%)-(FY10-12E)

PE

R (F

Y08

E)

Crompton

L&T

Siemens ABB Thermax

Cummins

BHEL BGR

10

15

20

25

30

20 28 36 44 52EBITDA-CAGR (%) (FY10-12E)

EV

/EB

ITD

A (F

Y10

)

Comparative valuationRATING CMP TARGET EPS (RS) PER (X) EV/EBITDA (X) ROE (%)

(RS) PRICE *PER RET. FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12(RS/SH) (X) (%)

ABB# Neutral 872 762 30 (13) 16.7 14.1 25.4 52.1 62.0 34.4 34.0 40.4 21.6 15.6 11.7 18.4BHEL Buy 2,465 2,935 20 19 95.7 119.3 146.7 25.8 20.7 16.8 18.8 12.4 9.9 32.5 32.7 32.3BGR Energy Buy 783 958 18 22 28.0 41.0 53.2 27.9 19.1 14.7 15.9 10.1 7.5 31.7 35.5 33.9Crompton Neutral 309 329 18 7 12.6 14.1 17.3 24.4 21.9 17.8 22.5 18.3 15.6 38.4 34.2 32.9Cummins Buy 748 840 20 12 22.4 30.8 42.0 33.4 24.3 17.8 17.2 14.1 11.3 30.4 35.7 39.3L&T Buy 1,995 2,356 25 18 61.6 75.8 93.7 32.4 26.3 21.3 32.4 26.3 21.3 19.8 19.4 20.3Siemens## Buy 787 907 30 15 24.0 30.2 38.8 32.8 26.0 20.3 21.0 17.3 13.5 38.7 26.1 27.6Thermax Neutral 789 813 20 3 21.8 30.4 40.6 36.3 26.0 19.4 21.1 15.6 11.9 25.0 29.9 31.5PER is based on FY12E; # Year end December; ## Year end September

September 2010 7


Capex DHOOM

We believe India is on the cusp of a meaningful capex boom, driven by impending large

investments in infrastructure and industrial activities. The rapid economic growth over the

past decade has strained India's existing infrastructure. The investment ratio (defined as

the percentage of GDP to the GDP growth rate) has declined from 50 for 1988-1997 to 38

for 1998-2007. Under-investment in a period of high economic growth has aggravated the

constraints. India, in our opinion, is now among the leading global destinations for

infrastructure and investment spending over the next decade.

Capex cycle gathering momentum

Industrial capex is at an inflexion point, as is evident from a V-shaped recovery in terms ofnew projects announced. According to CMIE, an estimated Rs100t+ worth of projectsare under various stages of implementation and another Rs5t-7t worth of projects arebeing added every quarter. Further evidence of the capex cycle in play can be obtainedfrom the runaway growth in the capital goods sector of IIP and the eventual coming up ofthe basic goods industry to record near double-digit growth in 2010. A continuation ofthese trends would create the necessary conditions for accelerated growth in corporatecapex.

Strong growth in the Capital Goods Index implies a thrust on investments by themanufacturing sector. As capacity utilization across key sectors picks up, order-books ofcapital goods companies will rise sharply, resulting in accelerated revenue and profit growth.We believe a recovery should lead to improved revenue growth from FY11 (expect 24%CAGR over FY10-12), a sharp improvement over FY08-10 (just 19% CAGR).

Infrastructure expenditure likely to accelerate

We believe India's infrastructure is a 'work-in-progress', and offers significant opportunitiesas the country builds on the basic infrastructure. Infrastructure spending is expected toincrease from US$227b in the Tenth Plan to US$514b in the Eleventh Plan (as per the MidTerm Appraisal by the Planning Commission) and further to US$1t in the Twelfth Plan.The share of the private sector is expected to increase from 25% in Tenth Plan to 36% in

TWELFTH PLAN TARGET FOR INFRASTRUCTURE SPENDING…

AT 4.5X OF TENTH PLAN COMPRISES 10% OF GDP PRIVATE SECTOR SHARE TO RISE FROM 25%

IN TENTH PLAN TO 50% IN THE TWELFTH PLAN

Source: IPA

514

1,025

227

10th planactual

11th planrevised

12th plantarget

2.3x

4.5x

5.08%

7.55%

9.95%

10th planactual

11th planrevised

12th plantarget

56

186

512

50.0

36.2

24.9

10th planactual

11th planrevised

12th plantarget

US$b% of total

COMPANY NAME PG.

ABB 46

(Neutral, Rs872)

BGR Energy 53

(Buy, Rs783)

BHEL 60

(Buy, Rs2,465)

Crompton Greaves 68

(Neutral, Rs309)

Cummins India 76

(Buy, Rs748)

Larsen & Toubro 86

(Buy, Rs1,995)

Siemens 96

(Buy, Rs787)

Thermax 108

(Neutral, Rs789)

September 2010 8


Eleventh Plan and 50% in the Twelfth Plan. The infrastructure spending boom will triggeropportunities for several companies in segments such as electrical and mechanical.

Power sector at an inflexion point

Power sector investments are at an inflexion point and we expect capacity additions toaccelerate given 95GW of projects under construction to be commissioned over the next4-5 years. This compares with capacity addition of 41GW over the past five years andcurrent installed base of 165GW. The share of private sector is 19% of installed capacityand is expected to contribute 32% of the capacity addition in the Eleventh Plan and 45%of the capacity is under construction.

Power sector economics are favourable, driving large private sector investment. Reflectingbuoyed momentum in the sector, power capex has been increasing since the enactment ofThe Electricity Act, 2003. Investment in the power sector grew 22% CAGR over FY05-10, against 8.6% over FY98-05. We expect power sector investments to grow at anaccelerated pace over the next five years. This will provide growth opportunities forcompanies across the power value-chain, including BTG equipment, transmission anddistribution.

Power plant equipment: opportunity to scale up

With annual demand of over 25GW, demand for power plant equipment has been strong inthe Eleventh Plan. We believe ordering in FY11 and FY12 will be equally good, withstrong ordering expected by NTPC (30GW), states like Maharashtra and Rajasthan and afew large IPPs.

India is expected to have an installed power capacity base of about 180GW by FY12. Tomeet the government's target of about 700GW by FY27, India will have to award nearly520GW between FY12 and FY22, implying market opportunity of nearly 50GW a yearbeyond FY12, from the current level of about 25GW a year, implying significant opportunityfor Indian power equipment manufacturers and Balance-of-Plant contractors.

Competitive environment favours domestic manufacturers, BHEL tomaintain 55% market share

While competitive intensity has increased with several new players setting up manufacturingfacilities, we believe BHEL will continue to maintain a 55-60% market share. This is giventhat the new entrants will largely occupy the space vacated by Chinese competition. Pricingcould be under pressure, but we believe given the lead times required to set up capacities,develop sub-suppliers, recruit and train people, very few new entrants will be able to gainsignificant market share in the next five years.

The Indian Central Electricity Authority has advised all central and state PSUs to invitebids for supercritical boilers and turbine-generators only form companies that are settingup indigenous manufacturing facilities. This, coupled with increasing focus on thermalefficiencies, will limit imports, particularly from China.

95GW of projects under

construction to be

commissioned over the

next 4-5 years

Market opportunity of nearly

50GW a year beyond FY12

BHEL will maintain 55%

share as new entrants only

occupy the place vacated by

Chinese vendors

September 2010 9


T&D equipment makers: huge opportunity, growing competition

With planned investment outlay of Rs2,800b during the Eleventh and Twelfth plans, T&Dis expected to grow strongly in the next few years. PGCIL is likely to spend Rs280b inFY11 and FY12 against Rs253b over FY08-10. We believe investments in the T&D sectorwill continue to grow beyond FY12, with PGCIL planning to expand inter-regionaltransmission capacity to 75GW by FY17 from 20GW in FY09. Expectedly, there is greaterfocus on extra-high voltage (EHV) system to minimize losses.

With strong demand, competition has intensified. With pick-up in demand, we expectcompetitive intensity to moderate, helping companies improve margins. We believe Siemensand Crompton will be key beneficiaries of growth in the EHV segment. With demand of160,000 MVA falling short of capacity of 210,000 MVA, we see competition remainingstrong in the sub-400kV segment, putting margins under pressure.

Earnings growth accelerating; reasonable valuations

We are positive on the Indian capital goods sector. We believe strong momentum in theeconomy, increasing investments in infrastructure and a likely surge in manufacturingcapex will drive growth for capital goods companies over the next two years. We likepower generation equipment makers, extra-high voltage T&D players and select industrialequipment producers.

Top Picks

BHEL: The biggest beneficiary of US$25b annual power equipment opportunity; will

maintain dominant position in the industry.

L&T: The best play on India’s capex boom; will grow at 25% over next four years.

Siemens: One of the biggest beneficiaries of accelerating T&D expenditure. Also, a

key partner in Siemens AG’s widening footprint in developing markets, creating strongexports opportunity.

Cummins: Benefitting from growing DG set market in India, driven by acute power

shortage. Key sourcing destination for Cummins Inc; exports will grow three-fold byFY12.

BGR: Transforming from a BoP contractor to a power EPC & Equipment

manufacturer. Only integrated company in power equipment space after BHEL andL&T.

PGCIL is liekly to spend

Rs280b in FY11 and FY12

against Rs253b over

FY08-10

Comparative valuationRATING CMP TARGET EPS (RS) PER (X) EV/EBITDA (X) ROE (%)

(RS) PRICE *PER RET. FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12

(RS/SH) (X) (%)

ABB# Neutral 872 762 30 (13) 16.7 14.1 25.4 52.1 62.0 34.4 34.0 40.4 21.6 15.6 11.7 18.4

BHEL Buy 2,465 2,935 20 19 95.7 119.3 146.7 25.8 20.7 16.8 18.8 12.4 9.9 32.5 32.7 32.3

BGR EnergyBuy 783 958 18 22 28.0 41.0 53.2 27.9 19.1 14.7 15.9 10.1 7.5 31.7 35.5 33.9

Crompton Neutral 309 329 18 7 12.6 14.1 17.3 24.4 21.9 17.8 22.5 18.3 15.6 38.4 34.2 32.9

Cummins Buy 748 840 20 12 22.4 30.8 42.0 33.4 24.3 17.8 17.2 14.1 11.3 30.4 35.7 39.3

L&T Buy 1,995 2,356 25 18 61.6 75.8 93.7 32.4 26.3 21.3 32.4 26.3 21.3 19.8 19.4 20.3

Siemens## Buy 787 907 30 15 24.0 30.2 38.8 32.8 26.0 20.3 21.0 17.3 13.5 38.7 26.1 27.6

Thermax Neutral 789 813 20 3 21.8 30.4 40.6 36.3 26.0 19.4 21.1 15.6 11.9 25.0 29.9 31.5

PER is based on FY12E; # Year end December; ## Year end September

September 2010 10


11.213.1

14.1

13.713.1

11.8

7.3

11.6

11.0

10.5

10.9

12.313.9

13.7

13.1

14.716.0

16.3

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E

5 10 11 13 11 10 7 11 13 17 27 36 54 71 95 101

129

162

2528

7

3331

4936

55

3022

64

-34-11-15

18

89

11

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E

PAT (Rs b) PAT Grow th (%)

12 18 22 21 21 20 13 23 24 26 35 50 77 95 116 146 194 249

33.4 28.125.722.023.7

52.443.437.1

4.86.5

76.9

-34.6

-5.60.7-4.2

19.2

49.0

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E

EBITDA (Rs b) EBITDA Grow th (%, YoY)

Source: Company/MOSL

EBITDA MARGINS AT NEAR HIGHS (%)

PAT GROWTH IN LINE WITH REVENUE GROWTH...

...BUT OPERATING PROFIT GROWS FASTER

ENGINEERING P/E VS SENSEX P/E

EBITDA margin expansion

led by increasing utilization

and favorable raw material

prices

Decreasing other income

due to higher capex brings

PAT growth in line with

revenue growth

Robust revenue growth

has enabled fixed cost

absorption

Superior earnings growth

translating into a premium

over the broader market171616

0

12

24

36

48

Mar

-94

Dec

-94

Sep

-95

May

-96

Feb

-97

Oct

-97

Jul-9

8

Apr

-99

Dec

-99

Sep

-00

May

-01

Feb

-02

Oct

-02

Jul-0

3

Apr

-04

Dec

-04

Sep

-05

May

-06

Feb

-07

Oct

-07

Jul-0

8

Apr

-09

Dec

-09

Sep

-10

-90

-40

10

60

110Sensex P/E Engg Sector P/E Prem/(Disc) to Sensex - RHS

Average 10 year premium of 16%

September 2010 11


Opportunity &

competitive advantage

Key beneficiary of

US$25b annual power

equipment opportunity.

We expect the company

to maintain over 55%

market share in the

Twelfth Plan.

Revenue & Orders

We expect inflows of

~34GW by FY12 and

revenue of 22% CAGR

over FY10-12.

Derisking strategies

Technical collaboration

with Alstom and Siemens

for supercritical boilers

and turbines. JVs with

SEBs to develop power

projects will ensure

robust intake.

Earnings outlook

Expect earnings CAGR

of 24% by FY12. We

expect adjusted EBIDTA

margin expansion of

250bp over FY10-12.

Rating

BHEL trades at 17x FY12

earnings, at a 26%

discount to L&T. We

reiterate Buy with a

target price of Rs2,934,

based on 20x FY12E

earnings.

BHEL (BHEL IN; Mkt Cap USD26.5b, CMP Rs2,465, Buy)

Siemens is expected to

benefit from a Rs2.4t

investment in T&D in the

Twelfth Plan. It is a key

partner in Siemens AG's

global network, creating

a big export opportunity

(25% of sales).

FY10 TTM order-intake

was Rs120b, up 41%.

Current order book is

Rs154b, up 51% YoY.

Order flow momentum is

expected to be strong.

Siemens India will cater

to a growing renewable

energy market overseas.

The company is also

likely to make India a hub

for value-priced

products.

Expected to post

earnings of 26% CAGR

over FY09-12. Margins

improved from 9-10% to

12-13% driven by

investment-led

indigenization.

Siemens trades at 20x

September 2012

earnings. We reiterate

Buy with a target price

of Rs907 based on 30x

FY11 EPS.

Siemens (SIEM IN; Mkt Cap USD5.8b, CMP Rs787, Buy)

BGR has entered the

power plant EPC

business. It also has a

JV with Hitachi to make

boiler and turbine-

generators.

Expect 45% revenue

CAGR over FY10-12.

Order book is Rs94b

with a BTB of 2.6x TTM.

Strong order inflows in

FY11 and FY12 are

expected, providing

strong growth visibility.

A JV with Hitachi will

help BGR to cater to the

power equipment market

and a contracted value

chain will ensure

accelerated long-term.

BGR is expected to post

38% earnings CAGR

over FY10-12. Current

debt at Rs9.3b will rise

to Rs14.5b by the end of

FY11. A rise in interest

rates can impact

earnings.

We recommend a Buy

with a target price of

Rs958, based on 18x

FY12E earnings. We

have not factored in

value for the

manufacturing JV.

BGR Energy (BGRL IN; Mkt Cap USD1.2b, CMP Rs783, Buy)

Top picks: ORDER framework

Increased outsourcing

from Cummins Inc and

50% market share of the

DG sets market in India

will drive Cummins

India's growth.

We expect domestic

sales to post 27% CAGR

by FY12 and exports to

treble by FY12 to Rs15b.

Cummins is investing

US$300m to enhance the

product portfolio,

particularly for export

markets. It plans to

expand capacity by 20%

CAGR over five years.

Expect earnings of 37%

CAGR over FY10-12.

EBITDA margins are

expected to improve by

260bp by FY12 from

18.5% in FY10.

We recommend a Buy

with a target price of

Rs840, based on 20x

FY12E earnings. We see

an upside to our FY11

earnings estimates and

target price.

Cummins (KKC IN; Mkt Cap USD3.2b, CMP Rs748, Buy)

L&T is among the biggest

beneficiaries of India's

capex boom. Its entry

into segments like power

equipment, defense,

shipbuilding and power

development, will help

sustain long-term

growth.

L&T has an order-book

of Rs1,078b, with BTB

ratio of 2.9x TTM

revenue. We expect

29% revenue and 23%

order intake CAGR over

FY10-13, led by growth

in the power, infra,

hydrocarbon and

process sectors.

L&T is present in

financial services (L&T

finance/infra finance), IT/

ITES (L&T Infotech) and

developmental projects

(L&T IDPL). It plans to

grow these businesses

to 40% of group revenue

by FY14.

Expected to post 25%

earnings CAGR over

FY10-13, backed by

strong revenue and

order intake growth. We

expect EBITDA margins

to stay stable at 12.5-

13%.

L&T trades at 26.3x

FY11E and 21.3x FY12E

earnings. We recommend

a Buy on the stock with

a target price of Rs2,356

(25x FY12E earnings and

Rs427 per share for

subsidiaries).

Larsen & Toubro (LT IN; Mkt Cap USD26.4b, CMP Rs1,995, Buy)

September 2010 12


Indian Engineering Companies: Comparative ValuationsCMP EV EPS EPS P/E EV/ EV/ DPS DIV ROE ROCE BV P/BV

(RS) (RS M) (RS) (% GR) (X) EBIDTA (X) SALES (X) (RS) YIELD (%) (%) (%) (RS) (X)

ABB Dec 08 181,376 25.1 8.3 34.7 23.6 3.1 2.6 0.3 28.4 46.2 100.0 8.7

Dec 09 872 179,617 16.7 -33.4 52.1 34.0 2.9 2.3 0.3 15.6 24.3 114.4 7.6

Dec 10 177,623 14.1 -15.9 62.0 40.4 2.7 1.6 0.2 11.7 18.7 126.8 6.9

Dec 11 171,907 25.4 80.5 34.4 21.6 2.2 2.9 0.3 18.4 29.2 149.3 5.8

BGR Mar 09 57,273 16.1 29.2 48.7 26.8 3.0 3.0 0.4 22.3 19.7 78.3 10.0

Mar 10 783 55,391 28.0 74.2 27.9 15.9 1.8 7.0 0.9 31.7 22.8 98.1 8.0

Mar 11 54,447 41.0 46.6 19.1 10.1 1.2 5.0 0.6 35.5 25.3 133.3 5.9

Mar 12 53,537 53.2 29.6 14.7 7.5 0.8 5.0 0.6 33.9 25.8 180.6 4.3

BHEL Mar 09 1,105,014 72.9 42.1 33.8 26.2 4.1 17.0 0.7 30.1 46.9 264.3 9.3

Mar 10 2,465 1,110,044 95.7 31.3 25.8 18.8 3.3 23.3 0.9 32.5 51.4 325.2 7.6

Mar 11 1,079,957 119.3 24.7 20.7 12.4 2.7 33.4 1.4 32.7 54.8 405.4 6.1

Mar 12 1,087,544 146.7 23.0 16.8 9.9 2.2 41.1 1.7 32.3 53.6 504.1 4.9

Crompton Mar 09 193,779 8.7 53.2 35.4 30.4 4.2 1.1 0.4 36.6 52.9 19.4 15.9

Mar 10 309 192,750 12.6 44.6 24.4 22.5 3.6 1.3 0.4 38.4 55.0 27.5 11.2

Mar 11 189,937 14.1 11.8 21.9 18.3 3.0 2.3 0.7 34.2 50.2 35.6 8.7

Mar 12 198,067 17.3 22.9 17.7 15.6 2.6 2.9 0.9 32.9 49.0 45.6 6.8

Cummins Mar 09 148,043 20.9 47.7 34.9 29.5 4.3 9.0 1.2 33.7 41.8 69.3 10.5

Mar 10 748 147,681 22.4 7.1 32.6 26.0 4.8 12.0 1.6 30.4 39.5 78.0 9.4

Mar 11 146,062 30.8 37.3 23.7 16.5 3.5 12.0 1.6 35.7 46.3 94.7 7.7

Mar 12 142,754 42.0 36.4 17.4 11.9 2.5 15.0 2.1 39.3 49.5 119.2 6.1

L&T Mar 09 1,264,757 51.5 31.1 38.8 32.4 3.7 10.2 0.5 24.5 26.2 212.7 9.4

Mar 10 1,995 1,229,699 61.6 19.7 32.4 25.9 3.3 12.6 0.6 19.8 23.1 304.1 6.6

Mar 11 1,228,115 75.8 23.1 26.3 21.1 2.8 15.9 0.8 19.4 22.1 349.3 5.7

Mar 12 1,201,208 93.7 23.6 21.3 16.3 2.1 19.1 1.0 20.3 22.2 403.5 4.9

Siemens Sep 09 265,401 16.5 16.5 47.8 25.9 3.1 5.0 0.6 38.6 60.1 86.5 9.1

Sep 10 787 265,425 24.0 46.0 32.8 21.0 2.9 5.0 0.6 38.7 40.8 104.7 7.5

Sep 11 265,425 30.2 25.8 26.0 17.3 2.2 7.0 0.9 26.1 41.3 126.8 6.2

Sep 12 265,425 38.8 28.3 20.3 13.5 1.7 10.0 1.3 27.6 43.5 153.8 5.1

Thermax Mar 09 88,916 24.1 -0.4 32.7 21.1 2.6 5.0 0.0 32.9 48.0 84.5 9.3

Mar 10 789 83,678 21.8 -9.9 36.3 21.1 2.5 6.0 0.0 25.0 38.2 91.7 8.6

Mar 11 87,202 30.4 39.8 26.0 15.6 1.9 7.0 0.0 29.9 45.2 113.9 6.9

Mar 12 87,481 40.6 33.7 19.4 11.9 1.4 7.0 0.0 31.5 47.9 146.4 5.4

Source: MOSL

September 2010 13


Capex cycle gathers momentum

Industrial capex is at an inflexion point, as is evident from a V-shaped recovery in terms of

new projects announced. According to CMIE, an estimated Rs100t+ worth of projects are

in various stages of implementation and Rs5t-7t worth of projects are being added every

quarter. Further evidence of the capex cycle in play can be obtained from runaway growth

in the capital goods sector and of the IIP and the basic goods industry recording near

double-digit growth in 2010. A continuation of these trends would create conditions

necessary to accelerate growth in corporate capex.

Strong growth in the Capital Goods Index implies a thrust on investment by the manufacturingsector. As capacity utilizations across key sectors picks up, order-books of capital goodscompanies will rise sharply, resulting in accelerated revenue and profit growth. We believea recovery should lead to improved revenue growth from FY11 (expect CAGR of 24%over FY10-12), a sharp improvement over FY08-10 (19% CAGR).

11

8

11

7

12

5

8

5

9

3

64

56

1

6

0

2

-1

1

-1-1

12

87

109

1012

1816

151515

11

6

14

9

May

'07

Jul '

07

Sep

'07

Nov

'07

Jan

'08

Mar

'08

May

08

July

08

Sep

08

Nov

08

Jan

09

Mar

09

May

09

July

09

Sep

t 09

Nov

09

Jan

10

Mar

10

May

10

July

10

1811

2223

12

31

212124

18

311

2012

48

18

1

21

40

7

1612

-8-7-3

13

28

131212

3944

3134

0

5554

63

Mar

'07

May

'07

Jul '

07

Sep

'07

Nov

'07

Jan

'08

Mar

'08

May

08

July

08

Sep

08

Nov

08

Jan

09

Mar

09

May

09

July

09

Sep

t 09

Nov

09

Jan

10

Mar

10

May

10

July

10

86 86 83

108

8983

95

107

Steel Cement Fertilizers Refineries

FY09 FY10

Source: RBI

IIP INDEX GROWTH (% YOY) CAPITAL GOODS INDEX GROWTH (% YOY)

Source: RBI

Why the capex cycle can sustain over three years

#1. Capacity utilizations are peaking: Several key industries are apparently facingcapacity constraints. While there is a lack of comprehensive, updated data on capacityutilization in India, evidence confirms this trend. With easy liquidity and continuing momentumin consumer demand, we believe the Indian corporate sector will aggressively build freshcapacities during the next three years.

KEY INDUSTRIES FACE CAPACITY CONSTRAINTS (%)

we believe the Indian

corporate sector will

aggressively build fresh

capacities during the next

three years

September 2010 14


#2. Impressive growth in outstanding project expenditure: According to CMIE,several projects are in various stages of implementation with outstanding investment ofUS$2t. This is significant to propel an industrial resurgence for a long time once global anddomestic uncertainties settle down.

PROJECTS WORTH US$2T IN THE PIPELINE

Source: RBI

#3. Recent corporate performance supports growth theory: The 1QFY11 financialtrend indicates that Indian companies' top-line growth was a robust 26% YoY in 1QFY11.This augurs well for continued industrial recovery, as the pick up in the underlyingconsumption demand will necessitate the need to invest in large projects.

1QFY11 CORPORATE TOPLINE GROWTH MAINTAINS MOMENTUM (%)

1QFY10 2QFY10 3QFY10 4QFY10 1QFY11

I. MOSL Universe

Sales Growth -17 -13 14 30 26

PAT Growth -1 21 18 14 -16

II. MOSL Universe excluding RM

Sales Growth -11 -5 19 28 28

PAT Growth -13 -9 25 38 10

III. Sensex Cos

Sales Growth -15 -7 20 32 31

PAT Growth -20 -17 15 40 3


Capital formation growth indicates capex cycle recoveryDriven by public and private investment, capital formation rebounded in FY10, after dippingin FY09. We believe the trend will continue due to demand drivers in the economy, increasingcapacity utilizations and upbeat business confidence.

0

2,000

4,000

6,000

8,000

Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11

0

30,000

60,000

90,000

120,000Added (Rsb) Outstanding (RHS)- Rsb

GCF CYCLE UP AGAIN (%) BENIGN INTEREST RATES HELP INDUSTRIAL, CAPEX GROWTH (%)

Source: RBI

-15

0

15

30

45

Mar

-92

Mar

-94

Mar

-96

Mar

-98

Mar

-00

Mar

-02

Mar

-04

Mar

-06

Mar

-08

Mar

-10

GDPGCFRatio of GCF/GDP

Growth (%)

(%)Growth (%)

-10

0

10

20

30

Mar

-92

Mar

-94

Mar

-96

Mar

-98

Mar

-00

Mar

-02

Mar

-04

Mar

-06

Mar

-08

Mar

-10

PLR (Max) IIP: Basic goods

IIP: Capital goods IIP: Intermediate goods

Projects with outstanding

investment of US$2t are

in various stages of

implementation

Topline growth at a robust

26% YoY in 1QFY11

September 2010 15


Infrastructure expenditure likely to accelerate

We believe India's Infrastructure is 'work-in-progress', and offers significant opportunities

as it builds on basic infrastructure. Infrastructure spending is expected to increase from

US$227b in the Tenth Plan to US$514b in the Eleventh Plan (as per the Mid Term Appraisal

by the Planning Commission) and to US$1t in the Twelfth Plan. The share of the private

sector is expected to increase from 25% in the Tenth Plan to 36% in the Eleventh Plan

and 50% in the Twelfth Plan. The infrastructure spending boom will trigger opportunities

for companies across various segments including the electrical and mechanical sectors.

India to spend over US$500b on infrastructure in the Eleventh Plan

The revised estimate (based on the mid-term appraisal for the Eleventh Five-YearPlan (FY08-12) by the Planning Commission) for infrastructure investment in theEleventh Plan is over US$500b, or ~2.3x more than the Tenth Plan spend.

Power, telecom, irrigation, roads and railways comprise most of the investment at35%, 17%, 17%, 14% and 10% of expenditure, respectively.

Twelfth Plan spend initial estimate US$1t

Based on initial estimates by the Planning Commission for the Twelfth Plan (FY13-17),total investment on infrastructure is estimated at US$1,025b. In the Twelfth Plan, private sector investment has been targeted at "at least" 50% of

the total investment, or US$500b, which is about as much as total spending oninfrastructure in the Eleventh Plan.

TWELFTH PLAN: PLANNED INVESTMENT IN INFRASTRUCTURE

FY12 FY13 FY14 FY15 FY16 FY17 TOTAL

12TH PLAN

GDP at Market Price (Rs b) 63,143 68,825 75,020 81,772 89,131 97,153 411,901

Rate of Growth of GDP (%) 9.0 9.0 9.0 9.0 9.0 9.0 9.0

Infrastructure GCF as % of GDP 8.4 9.0 9.5 9.9 10.3 10.7 10.0

Infrastructure GCF (Rs b) 5,285 6,194 7,127 8,095 9,180 10,395 40,992

Infrastructure GCF (US$ b)* 132 155 178 202 230 260 1,025

*@ Rs40/$ Source: Mid -term Appraisal of Eleventh Plan by Planning Commission

Greater importance of private participation, focus on PPP model

The Planning Commission noted that higher infrastructure investment in the TenthPlan, at US$227b against planned US$218b, was driven by increased private sectorcapex. The contribution of the private sector in infrastructure investment increased to25% in the Tenth Plan against an earlier target of 20%.

The contribution of the private sector in infrastructure investment is expected to riseto 36% during the Eleventh Plan against a 30% target earlier. In the Twelfth Plan, theprivate sector investment contribution is targeted at 50% of the total investment.

infrastructure investment in

the Eleventh Plan is over

US$500b, or ~2.3x more

than the Tenth Plan spend

Twelfth Plan, private sector

investment has been targeted

at "at least" 50% of the total

investments of US$500b

September 2010 16


Debt funding a key challenge; recent initiatives to improve availabilty

Infrastructure spending in the Eleventh Plan entails debt funding of US$200b andequity funding of US$228b, plus grants. For FY11 and FY12, the debt fundingrequirement would be US$130b and availability could be restricted to US$105b, leavinga gap of US$25b. But equity funding requirement of US$47b would be largely met.

The dependence on bank lending for infrastructure projects is significantly higher.Lending to the infrastructure sector grew from Rs70b in FY00 to Rs2,700b in FY09 (a40x increase) and constitutes 10% of bank lending. Long-term funding requirement isthe key to infrastructure sector development and thus, bank lending is not a sustainableviable option (given asset-liability mismatch, sectoral caps and corporate/group caps).

Recent initiatives to improve infrastructure financing: (1) Higher/upfront ViabilityGap Funding (VGF) for centre/state government projects, (2) incorporation of IIFCLwith the specific intention of financing or securitizing existing infrastructure bank debt,(3) standing committee on infrastructure finance, (4) tax benefits up to Rs20,000 forinvestment in instruments like long-term infrastructure bonds.

Key measures/reforms to boost infrastructure financing: (1) Create a vibrantcorporate bond market, (2) strengthen capital base/exposure limits of IIFCL, (3)regulatory reforms to divert insurance/pension funds into infrastructure financing, (4)asset classification for infrastructure bonds.

ESTIMATED GAP IN DEBT FUNDING OVER FY11 AND FY12 (US$ B)

ESTIMATED

REQUIREMENT AVAILABILITY GAP

Banks 66.9 50.5

NBFC (Incl. IIFCL) 31.2 25.2

Insurance Co / Pension funds 13.0 13.0

External Commercial Borrowing 19.2 16.6

Total Debt 130.3 105.3 (25.0)

Equity 46.6 46.6 (0.0)

Total funds 176.9 151.9 (25.0)

Source: Mid Term Appraisal of Eleventh Plan, by Planning Commission

TWELFTH PLAN TARGET FOR INFRASTRUCTURE SPENDING…

AT 4.5X OF TENTH PLAN COMPRISES 10% OF GDP PRIVATE SECTOR SHARE TO GO UP FROM 25%

IN TENTH PLAN TO 50% IN TWELFTH PLAN

Source: IPA

514

1,025

227

10th planactual

11th planrevised

12th plantarget

2.3x

4.5x

5.08%

7.55%

9.95%

10th planactual

11th planrevised

12th plantarget

56

186

512

50.0

36.2

24.9

10th planactual

11th planrevised

12th plantarget

US$b% of total

Lending to the infrastructure

sector grew from Rs70b in

FY00 to Rs2,700b in FY09

(a 40x increase) and

constitutes 10% of

bank lending

September 2010 17


Power sector at an inflexion point

Power sector investments are at an inflexion point and we expect capacity additions to

accelerate given 95GW of projects under construction to be commissioned over the next

4-5 years. This compares with capacity addition of 41GW over the past five years and a

current installed base of 165GW. The share of the private sector is 19% of installed capacity

and is expected to contribute 32% of the capacity addition in the Eleventh Plan and 45%

of the capacity is under construction.

Power sector economics are favorable, driving large private sector investments. Reflectingbuoyed momentum in sector, power capex has been steadily increasing since the enactmentof The Electricity Act 2003. Total investment in the power sector posted 22% CAGR overFY05-10, against 8.6% over FY98-05. We expect power sector investments to grow atan accelerated pace in the next five years. This will provide growth opportunity forcompanies across the power value-chain, including BTG equipment, transmission anddistribution.

STRONG VISIBILITY FOR INVESTMENTS

Source: CEA

NEARLY US$500B INVESTMENT PLANNED OVER FY08-17

Source: CEA

957

442

248 217124 120 113 91 76

1,431 1,496

305 286

700

187 177 172 122

USA China Japan Russia India France Germany Brazil UK

2005 (MW) 2030 (MW)

4,109 4,951

1,400

2,4002,870

4,000

11th Plan 12th Plan

Generation (Rs b) Transmission (Rs b) Distribution (Rs b)

Over two decades India and

China are expected to

attract substantial global

investment

September 2010 18


Demand, shortages, bankable power sector drive up private investment

One of the key indicators of growth in the Indian power sector is the rapid evolution of themerchant power market. Since 2006, when the government started encouraging merchantpower plants and allocated coal mines to merchant power producers, the number ofmerchant power plants has increased considerably. Merchant power plants enjoy thesame fiscal incentives as mega-power plants. Strong merchant rates have also attractednew entrants to this space.

Merchant power rates have shot up to Rs3-3.5 a unit for an average 25-year PPA andRs7-12 a unit for short-term contracts (3-6 months). Recent merchant day-ahead rates onpower exchanges, which are good indicators of the trend, also show strong momentum.

MERCHANT POWER RATES - RS/UNIT (IEX DATA) JULY 2008 - AUGUST 2009

PEAK DEMAND TO DOUBLE BY FY22

SHORTAGES INCREASE

Source: CEA

7.0 7.4

6.2

7.8

5.3

3.54.1

5.3

3.1

2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11*

One of the key indicators

of growth in the Indian

power sector is the rapid

evolution of the merchant

power market

0

600

1,200

1,800

2,400

FY07 FY12 FY17 FY22

0

100

200

300

400Energy Reqd (BU) Peak Load (GW)

All India Peak Deficit (%)

13.3

17.0

12.911.311.812.411.3

18.318.320.5

16.518.0

13.9 13.0 12.213.5 13.8

12.013.8

FY

93

FY

94

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

YT

DF

Y11

The peak shortage is likely

to be over 10% in the

foreseeable future

September 2010 19


Power capex accelerating

Power capex has been steadily increasing since the enactment of The Electricity Act2003 (TEA, 2003). Reforms, even though partial, have transformed the power sector intoa bankable sector, which is attracting substantial private investment. We expect powersector investments to grow at an accelerated pace in five years.

INVESTMENT IN THE POWER SECTOR POSTED 22% CAGR OVER FY05-10

CAPACITY ADDITIONS LAG DUE TO EXECUTION ISSUES

Source: The 17th EPS Report

EXPECT FASTER GENERATION CAPACITY ADDITIONS, DRIVING INVESTMENTS IN THE CHAIN (5-YEAR ROLLING

CAPACITY ADDITION, GW)

126 130 125 153 136 171 178 170 176 222 272 332 38168 82 88 82 116 110 143 176 210273

294

398

579

FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10(P)

State (Rs b) Central (Rs b)

22% CAGR

8.6% CAGR

0

25

50

75

100

1st P

lan

2nd

Pla

n

3rd

Pla

n

4th

Pla

n

5th

Pla

n

6th

Pla

n

7th

Pla

n

8th

Pla

n

9th

Pla

n

10th

Pla

n

11th

Pla

n(E

)

0

30

60

90

120Target (GW) Commissioned (GW) (%)

Source: CEA/MOSL

10 14

21 18 17 20

41

118

103

7258

5

121

0

35

70

105

140

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

E20

12E

2013

E20

14E

2015

E

95GW of projects under

construction

Reforms have transformed

the power sector into a

bankable sector

September 2010 20


Coal: a big issue

Since 55-60% of India's installed power capacity will be based on coal as fuel in theforeseeable future, policy-makers and developers are concerned about adequate coalsupply. About 75% of non-coking coal produced in India is consumed by the power sector.

COAL SHORTAGE AT 41MT IN FY11

FY10 FY11E FY12E

Coal demand 404 444 507

Indigenous coal availability 363 388 414

Shortfall 41 46 74

Imports 28 41 68

Source: CEA

With power projects being commissioned in the Eleventh Plan, it is expected that theshortage of coal will increase from FY13. Coal shortage is expected to reach 150mt byFY17, unless there is significant improvement in domestic coal availability.

Key reasons for coal shortage

Focus on open-cast mining, which produces inferior quality coal; Inadequate investment by domestic coal miners; Logistics constraints, limiting imports; road transport and wastage are also issues.

Action needed to improve situation

There is need for action if the situation is to improve. Allocation of captive blocks to power utilities has raised hopes. But progress is slow

due to land, environmental and technological issues. Coal imports need the creation of adequate infrastructure and it will put pressure on

the domestic coal industry to be efficient. Amendment of the Coal Mines Act to facilitate (a) private participation in coal mining

for purposes other than those specified, and (b) future coal blocks must be offered topotential entrepreneurs;

Use of advanced technology for economic exploitation of coal lying at greater depthsin mines.

Coal shortage is expected to

reach 150mt by FY17 unless

there is significant

improvement in domestic

coal availability

September 2010 21


Power plant equipment: opportunity to scale up

With annual demand of over 25GW, demand for power plant equipment has been strong in

the Eleventh Plan. We believe ordering in FY11-12 will be equally good, with strong ordering

expected by NTPC (30GW), key states like Maharashtra and Rajasthan, and a few large

IPPs.

India is expected to have an installed power capacity base of about 180GW by FY12. To

meet the government's target of around 700GW by FY27, the country will have to award

nearly 520GW between FY12 and FY22, implying a market opportunity of nearly 50GW a

year beyond FY12, from the current level of about 25GW a year, implying significant

opportunity for the Indian power equipment manufacturers as well as Balance-of-Plant

contractors.

ORDER INFLOW DURING ELEVENTH PLAN GROWS OVER 3X (GW)

Source: MOSL

Changing profile of Indian power sector will impact equipment makers

India's thermal power sector has undergone upgrades in operating steam temperature andpressure, to improve efficiency and power. This is slated to take a quantum leap forwardwith the introduction of super-critical steam parameters of 250 bar and 6,000 degrees C,compared with high-end sub-critical parameters of 170 bar and 5,400 degrees C. Fromthe Twelfth Plan, an increasing number of supercritical sets will come into the grid.

SUPERCRITICAL PROJECTS TO ACCOUNT FOR ~60% OF CAPACITY ADDITION IN THE TWELFTH PLAN

37

100

140

21

60

80

10th Plan 11th Plan 12th Plan

Orders placed Capacity added

Annual power equipment

demand at 25GW per annum

From the Twelfth Plan,

an increasing number of

supercritical sets will come

into the grid

Source: CEA/MOSL

9.6

44.530.5

0.0

7.543.6

64.1

10th Plan 11th Plan 12th Plan 13th Plan

Subcritical (GW) Supercritical (GW)

September 2010 22


Competitive environment significantly altered

Given the large investment in the power sector in India, new players have entered thepower equipment market. But given the lead times required to set up capacities, developsub-suppliers, recruit and train people, very few new entrants will be able to make headway,in the next five years. We expect BHEL to maintain 55-60% market share going forward.

BOILER MANUFACTURING CAPACITY TO REACH 38GW BY FY12

TURBINE GENERATOR MANUFACTURING CAPACITY WILL MATCH BOILER CAPACITY

Source: CEA/MOSL

COLLABORATIONS IN THE SUPERCRITICAL SPACE

COMPANY BOILER TURBINE GENERATOR

Alstom, France BHEL (collaboration) 51:49 JV with Bharat Forge

Siemens AG, Germany - BHEL (collaboration)

Mitsubishi Heavy Industries (MHI), Japan 51:49 JV with L&T 51:49 JV with L&T

Toshiba, Japan - 75:25 JV with JSW Energy/ JSW Steel

Riley Power Cethar Vessels -

(collaboration)

Hitachi Power Europe and Hitachi, Japan 30:70 JV BGR energy 26:74 JV BGR energy


Domestic players to benefit from power ministry proposals imposing import dutyon mega power projects A draft Cabinet note circulated by the power ministry recommends imposing import

duty of 5%, CVD of 10% and SAD of 4%, implying effective import duty of about20%, on imported power equipment. Imported power equipment, for projects of over1,000MW, is exempt from duties under the Mega Power Policy. Domestic manufacturers

610

1520

4

4

4

42

FY06 FY08 FY10 FY12

BHEL L&TBGR-Hitachi Thermax-Babcox WilcoxCethan Vessels Ansaldo

610

1520

4

5

4

3

FY06 FY08 FY10 FY12

BHEL L&T Bharat Forge Alstom BGR - Hitachi JSW - Toshiba

New players have

entered the power equipment

market but… very few new

entrants will be able to make

headway in the next

five years

September 2010 23


will also have to pay CVD and SAD. The difference in duties on imported and domesticequipment will be 6-7%. The above recommendations are in line with the Arun MairaCommittee report.

It was reported that domestic manufacturers are disadvantaged to about 14% because1. Sales Tax/VAT Entry-tax/Octroi are applicable to supplies from domestic

manufacturers and not to overseas supplies (disadvantage 5-6%).2. Higher financing cost (disadvantage 2.4-3.2%).3. Low customs duty on foreign competitors' supplies: applied rate is nil for mega

projects and 5% for project imports.4. Lack of quality infrastructure and dependence on foreign sources for critical raw

material and components. Introduction of performance standards for power equipment (both efficiency and

environment protection), which will act as non-tariff barriers from October 2010. Domestic equipment makers like BHEL and L&T stand to benefit from these

recommendations, as the price difference between BHEL and Chinese sets will fallsubstantially. This will encourage domestic power generators to source equipmentfrom local companies like BHEL and L&T.

Chinese equipment suppliers - a dwindling forceChinese equipment suppliers are executing 31GW of power projects in India, accountingfor 33% of projects under execution. With two Reliance UMPPs, in its order-book, ShanghaiElectric has the highest order-book in India. We believe that stricter performancebenchmarks and stress on a local manufacturing base will put Chinese suppliers at adisadvantage.

SHANGHAI ELECTRIC DOMINATES AMONG CHINESE COMPANIES (GW)

Source: CEA/MOSL

Power capacity additions will accelerate

With BHEL having the capacity to deliver 20GW a year during the Twelfth Plan and L&Tand other domestic manufacturers having the capacity to supply 16-20GW a year,competition from Chinese and globally established suppliers can result in equipment pricesfalling, thus putting pressure on margins. It is important for the market to grow at anaccelerating pace to absorb the new manufacturing capacity being built. It is very likelythat inefficient players among new manufacturers may not optimally use capacity,maintaining pressure on larger companies like BHEL and L&T.

12.70

6.60 6.75

3.60

1.98

SEC Dongfang SEPCO Harbin SCMEC

The government is expected

to provide fiscal incentives

to domestic manufacturers

It is important for the market

to grow at an accelerating

pace to absorb the new

manufacturing capacity

being built

31GW of power projects

under execution by Chinese

BTG companies

September 2010 24


India is expected to have an installed power capacity base of about 180GW by FY12. Tomeet the government's target of about 700GW by FY27, India will have to award nearly520GW between FY12 and FY22, implying market opportunity of nearly 50GW a yearbeyond FY12, from the current level of about 25GW a year, implying significant opportunityfor Indian power equipment manufacturers and Balance-of-Plant contractors.

POWER EQUIPMENT MARKET TO CROSS 35GW PER ANNUM

Source: CEA/MOSL

BHEL to maintain over 55% market share

While competitive intensity has increased with several new players setting up manufacturingfacilities, we believe BHEL will continue to maintain a 55-60% market share. This is giventhat the new entrants will largely occupy the space vacated by Chinese competition.Pricing could be under pressure, but we believe given the lead times required to set upcapacities, develop sub-suppliers, recruit and train people, very few new entrants will beable to gain significant market share in the next five years.

BHEL MARKET SHARE IN THE TENTH PLAN BHEL MARKET SHARE IN THE ELEVENTH PLAN

L&T

Doosan 2%

SEPCO7%SCMEC

4%

Dongfang12%

SEC12%

BHEL63%

Others4%

Harbin7%

Doosan 5%

SEC14%

SEPCO7%

Dongfang2%

BHEL55%

L&T6%

New entrants to

occupyspace vacated

by Chinese companies

132185

270

700

FY07 FY12E FY17E FY27E

14GW p.a.

43GW p.a.

Source: CEA/MOSL

Market opportunity for BTG

companies to double and

reach 50GW beyond FY12

September 2010 25


Nuclear power project awards commence

Nuclear Power Corporation Ltd's (NPCIL) ambitious target to add about 15GW of capacitybetween 2010 and 2020 will bring in investment of US$20b-25b over 10 years. This comesagainst a backdrop of the Indo-US nuclear deal (123 agreement) and the India-specificwaiver from the Nuclear Suppliers Group (NSG) under the aegis of the InternationalNuclear Energy Agency (IAEA). The India-specific waiver at the NSG gives India theright to pursue nuclear ambitions and access to nuclear fuel for the first time in 30 years.

Initial project awards for a 1.4GW capacity unit (at Kakrapar, Unit 3 and 4, Gujarat) beingset up by NPCIL came after a gap of 5-6 years. NPCIL intends to commence construction/awards shortly on another 1.4GW capacity unit at Rawatbhata, Rajasthan. Over 16GWof capacity is being planned through international co-operation with imported fuel, forwhich preliminary activities have been commissioned/completed in some cases. This entailsa meaningful opportunity for Indian companies, with an established presence in the nuclearpower segment.

15-20GW NUCLEAR PROJECTS TO BE IN CONSTRUCTION PHASE IN 3-4 YEARS

SITE STATE REACTOR MW TECHNOLOGY PARTNER

TYPE

Indigenous technology

Kakrapar, Unit 3 & 4 Gujarat PHWR 1,400

Rawatbhata, Unit 7 & 8 Rajasthan PHWR 1,400

Bargi Madhya Pradesh PHWR 1,400

Kumharia Haryana PHWR 1,400

International co-operation *

Kudankulam 3 & 4 Tamil nadu LWR 2,000 Atomstroyexport (VVER-1000)

Jaitapur 1 & 2 Maharashtra EPR 3,350 Areva

Haripur West Bengal LWR 2,000 Atomstroyexport (VVER-1000)

Kowada Andhra Pradesh LWR 2,200 Westinghouse

Chhayamithi Virdi Gujarat LWR 2,700 GE - Hitachi

*Capacity indicated based on initial two units; eventually each nuclear park will have 6-8 reactors


NUCLEAR POWER CAPACITY ADDITION CHARACTERIZED INTO THREE PHASES

IMPLEMENTATION STATUS

First Phase (10GW) NPCIL - Based on uranium reserves available, India has the potential to produce about 10GW of

nuclear power (based on PHWR technology).

- NPCIL is undertaking the stage 1 program; comprising: 4,120MW operational, 2,660MW

under construction and sites approved for 2,800MW (of which project awards from

1,400MW have started).

Second Phase Bhavinya (wholly owned - Bhavinya is setting up a 500MW FBR reactor at Kalpakkam, Chennai. This will use depleted

Government company uranium from NPCIL's operating plants as fuel.

under DOE) - FBR technology is not commercial anywhere and the first Indian FBR is expected to start

operations in two years.

- If successful, the depleted uranium from spent fuel and plutonium can potentially add

200GW by 2050 without the need to import additional fuel/reactors.

Third Phase International - NPCIL is facilitating and developing 40GW of capacity based on light water reactor

co-operation technology, in collaboration with foreign vendors. This will be based on imported uranium

- Sites have been identified and allocated to global companies and technology finalized.

Preliminary activities have been commissioned/completed in certain cases.

Source: Powerline/Industry

Nuclear Power Corporation

Ltd’s target to add 15GW of

capacity between 2010 and

2020 will bring in

investment of US$20b-25b

over 10 years

Over 16GW of nuclear power

capacity is being planned

through international co-

operation with imported fuel

September 2010 26


Source: CEA/MOSL

With a 22% CAGR in

capacity build-out in the

next 10 years, India will

attract investments of

US$20b-25b across verticals

like reactors and civil

construction

INDIA'S NUCLEAR CAPACITY FORMS 2% OF THE INSTALLED BASE, TO REACH 63GW BY 2032

1.9 3.4 4.17.3

23.7

63

FY95 FY00 FY10 FY11 FY20 FY32

3x

3x

WORLD-WIDE TREND IN NUCLEAR CAPACITY ADDITION 2008: INDIA AND CHINA HAVE THE HIGHEST PIPELINE

COUNTRY NUCLEAR ELEC.GEN REACTORS REACTORS REACTORS REACTORS URANIUM

BILL % OF TOTAL IN OPS UNDER CONS PLANNED PROPOSED REQ (TN)

KWH GENERATION NO MW NO MW NO MW NO MW

Canada 88.6 14.8 18 12,652 2 1,500 4 4,400 3 3,800 1,675

China 65.3 2.2 11 8,587 20 21,880 37 38,860 120 120,000 2,875

Finland 22.0 29.7 4 2,696 1 1,600 0 0 1 1,000 1,149

France 418.3 76.2 58 63,236 1 1,630 1 1,630 1 1,630 10,153

Germany 140.9 28.3 17 20,339 0 0 0 0 0 0 3,453

India 13.2 2.0 18 3,981 5 2,660 23 21,500 15 20,000 908

Japan 240.5 24.9 54 47,104 1 1,373 13 17,195 1 1,300 8,003

South Korea 144.3 35.6 20 17,716 6 6,700 6 8,190 0 0 3,804

Pakistan 1.7 17.5 2 1,310 0 0 2 1,310 1 655 175

Russia 152.1 16.9 31 21,743 9 7,130 7 8,000 37 36,680 4,135

UAE 0.0 0.0 0 0 0 0 4 5,600 10 14,400 0

Ukraine 84.3 47.4 15 13,168 0 0 2 1,900 20 27,000 2,031

USA 809.0 19.7 104 101,119 1 1,180 11 13,800 19 25,000 19,538

China currently has 21GW of capacity under construction which is eight times India's 2.6GW under construction Source: IAEA

Enough domestic fuel to generate 10GW of nuclear power

Based on current uranium reserves, India can produce about 10GW of nuclear power(based on PHWR technology), which is the first stage of the India's three stage nuclearpower program.

If plutonium and depleted uranium from spent fuel from the first-stage plants are recycledas fuel for second-generation Fast Breeder Reactors (FBRs), India can potentially achieve200,000MW by 2050 without importing additional reactors or uranium. The challenge togenerating power through FBR is that it takes 8-10 years for an FBR to produce enoughplutonium to start another FBR. A 500MW prototype FBR is being built at Kalpakkam,Tamil Nadu by Bhavinya.

India's uranium reserves of about 107,268 tons are fairly small. Of this, 78,000 tons are ofpoor quality. The actual quantity available for power generation after accounting for variouslosses in mining (15%), milling (20%) and fabrication (5%) is estimated at about 61,000tons. India produces only half of its annual requirement of 980 tons of uranium, resulting inlow utilization across plants.

India produces only half of

its annual requirement of

980 tons of uranium,

resulting in low utilization

across plants

September 2010 27


INDIA'S URANIUM PRODUCTION TO RISE MEANINGFULLY OVER 2-3 YEARS

OPERATIONAL LOCATION TECHNOLOGY CAPACITY (TON PA) YEAR OF PRODUCTION

Jaduguda Jharkhand Underground 175 1967

Bhatin Bihar Underground 175 1968

Narwapahar Bihar Underground 175 1995

Turamidh Jharkhand Underground 190 2011

Bandhuhurang Jharkhand Open Cast 190

Total 905

Under development

Domiasiat Proposed open cast 340 2012

Tummalapalle Proposed open cast 220 2012

lambapur-Peddagattu Proposed open cast 130 2012

Total 690

Total production a year (by 2012) 1,595

Source: Powerline

Nuclear fuel sourcing from abroad after the NSG waiver

To meet demand due from planned nuclear generation capacity of 20GW by 2020 comparedwith 4.12GW currently, India will need to obtain 5,000 tons of uranium a year, a 10-foldincrease from current levels. To achieve this, India will have to exercise options likeexpanding its existing mines and importing fuel. Consequently, India has signed long termagreements with Areva (France), TVEL Corporation (Russia), Kazatomprom (Kazakhstan)for fuel supply to existing and new reactors under safeguards. Also, a large part of theincremental capacity is being set up through international co-operation and the contractsentail fuel supply arrangements as a pre-condition.

RUSSIA AND KAZAKHSTAN HAVE MORE THAN 20% OF URANIUM RESERVES IN THE WORLD

TU %

Australia 1,243,000 22.3

Kazakhstan 817,000 14.7

Russia 546,000 9.8

South Africa 435,000 7.8

Canada 423,000 7.6

USA 342,000 6.1

Brazil 278,000 5.0

Namibia 275,000 4.9

Nigeria 274,000 4.9

Others 941,000 16.9

Total 5,574,000

Source: World Nuclear Association

Generation costs comparable to imported coal based thermal projects

NPCIL estimates the cost of setting up nuclear power projects at Rs60m-80m/MW andconstruction time of 5-6 years. PLFs demonstrated globally have been over 85%. Nuclearpower plants in general have a shelf life of about 60 years and hence the fixed costs arespread over a longer time frame, which enables tariffs from these plants at Rs2.5-Rs3.5/unit (in line with thermal coal projects based on imported coal).

The projects being set up through international co-operation also entail a letter of credit onconcessional terms, which also lowers fixed charges. For instance, the Kudankulam project,being built with Russian co-operation, is being funded through Russian credit of US$1.6bat 4% interest, repayable over 15 years after commercial operations. For the 3.3GW

Based on current reserves of

uranium, India has potential

to produce about 10GW of

nuclear power (based on

PHWR technology)

A large part of the

incremental capacity is

being set up through

international co-operation

and the contracts entail fuel

supply arrangements as a

pre-condition

To meet demand from

planned nuclear generation

capacity of 20GW by 2020

India will need to obtain

5,000 tons of uranium a year

NPCIL estimates

the cost of setting up nuclear

power projects at Rs60m-

80m/MW and construction

time of 5-6 years

September 2010 28


Jaitapur project, the French government is supporting a credit line for French equipmentsupplies.

Supply chain: opportunity scale-up for Indian companies

L&T and BHEL will be key beneficiaries of increased investment in nuclear power. L&Tis probably the only Indian company that can execute nuclear power projects on a lumpsum turnkey (LSTK) basis. Both companies have formed JVs with NPCIL to makecomponents for nuclear power plants: BHEL for steam turbine generators and L&T forspecial steel and ultra heavy forgings. L&T and BHEL have signed co-operationagreements and are in talks with global companies to set up a manufacturing base fornuclear power plant components, with potential for exports, given the Indian cost arbitrage.We believe nuclear power will drive order intake for these companies in FY11 and FY12.HCC is strongly positioned in civil construction, which comprises 30-35% of the cost ofnuclear power plants.

L&T, BHEL AMONG KEY BENEFICIARIES

PRODUCTS AND SERVICES COMPANIES THAT PROVIDE THEM

LSTK L&T

Civil construction L&T, HCC, Gammon

Fabrication L&T, BHEL, Walchand Industries, Godrej & Boyce, Richardson & Cruddas

Nuclear reactor L&T

Steam turbines, generators BHEL

Boiler feed pumps KSB, Kirloskar, Mather & Platt, Jyoti, Bharat Pumps

Special forgings Bharat Forge, BHEL, Fomas, MGM


JOINT VENTURE ROUTE: BRIDGING THE TECHNOLOGY GAP

BHEL 1. NPCIL (steam turbine generators)

- Manufacture steam turbine generator sets for 700MWe rating projects and later increase to higher capacities.

- Media reports indicate the JV company is in talks with international companies like Alstom, Siemens, GE, Areva and

Toshiba to source technology, and offer 26% stake as a technology partner.

2. Talks with international companies like GE-Hitachi

- Media reports indicate BHEL is in talks with GE-Hitachi to make castings and forgings for nuclear power plants.

- The company is in talks for technology to commission nuclear reactors on an EPC basis.

3. NPCIL (EPC activities on the turbine side)

- Engineering, procurement and construction on the secondary side (turbine side) of nuclear power plants of 700MWe

and above rating within India and abroad.

L&T 1. Co-operation agreement with international companies

- Signed co-operation agreements with four of the five major advanced reactor makers: GE Hitachi of the US;

Atomstroyexport, part of Rosatom of Russia; Toshiba Westinghouse of the US and Atomic Energy of Canada (AEC).

- L&T will undertake construction of nuclear power plants, including supply of reactor equipment and systems, valves,

electrical and instrumentation products.

2. JV with NPCIL (Forgings)

- To produce special steels and ultra heavy forgings at Hazira.

- The facility will have a dedicated steel melt shop producing ingots weighing up to 600mt each, and a heavy forge shop

equipped with a forging press, which will be one of the largest in the world.

- The JV will supply finished forgings for nuclear reactors, pressurizers and steam generators, and heavy forgings for

critical equipment in the hydrocarbon sector and for thermal power plants.

- L&T will have 74% stake and NPCIL will have 26% stake.

- The project cost will be Rs17.25b, funded through a DER of 3:1.

- The plant is due for completion in April 2011 and will start exports in FY13.

HCC 1. MOU with AMEC Plc

- Explore the application of consulting and EPC services to establish nuclear power plants in India.


L&T and BHEL will be key

beneficiaries of increased

investment in nuclear power

September 2010 29


Annual opportunity of Rs400b in the Twelfth Plan for BoP

Balance-of-Plant (BoP), an integral part of power plant EPC contract comprising of 18-20

packages, accounts for nearly 40% of the value. Given 95GW of capacity under execution,

and likely ordering of over 60GW in next two years, we expect the segment to provide

significant growth opportunity. While there are many companies providing individual

packages, there are very few credible integrated BoP contractors in the country. BGR,

which has such capabilities, is among the best plays in the sector.

Balance of Plant (BoP) comprises nearly 40% of an EPC contract of a power project.BoP consists of the remaining systems, components and structures that comprise a completepower plant with the exception of main plant equipment such as boiler, turbine and generator(BTG). BoP orders are tendered in 17-18 packages.

TWELFTH PLAN BOP REQUIREMENT (UNITS)

10TH PLAN 11TH PLAN 12TH PLAN

Coal handling 23 68 70

Ash handling 23 69 70

DM plant 32 69 70

Cooling towers 41 79 70

Chimneys 36 79 77

Fuel oil systems 22 71 70

PT plant 36 76 70

Source: CEA/MOSL

Changing business model favors large contractors with EPC capabilities

Over the past few years, several power projects have been awarded using the 'twin-package route', in which a project developer awards a BTG package and a complete BoPpackage. The twin package route is one in which a project is divided under two broadcategories: Boiler, turbine and generator (BTG) Complete balance of plant (BoP) package

Several projects have been awarded in this manner recently like Marwa Thermal PowerProject (2x500MW) where BTG is being supplied by BHEL and the balance of plant willbe executed by BGR Energy. In another project where an extension is proposed, BhusawalThermal Power Station (2x500MW), the main plant equipment is being supplied by BHELand the BoP contract is awarded to Tata Projects Ltd. We expect the trend will continueto benefit large BoP operators.

EVOLVING METHODS OF CONTRACTING FOR POWER PROJECTS

Source: Industry/MOSL

Balance of Plant comprises

nearly 40% of an EPC

contract of a power project

Over the past few years,

several power projects have

been awarded using the

‘twin-package route’ and we

expect the trend to continue

Single EPC routeMultiple

packages route

Power project

contracting models

Twin package route

September 2010 30


PRESENCE OF MULTIPLE VENDORS (NOS) MEANS SCALE ECONOMIES CRUCIAL TO GROWTH

Source: MOSL

The sector will see huge growth in 10 years. With rising demand, existing companies willraise the scale of operation. We expect several new listings and fund raising exercises inthe sector in the next few years.

KEY BALANCE OF PLANT (BOP) VENDORS

PACKAGE TOP VENDORS

Coal Handling Plant Techpro, L&T, Elecon Engineering, TRF

Ash Handling Plant Indure, Macawber, DC Industrial Plants, Mahindra, Techpro, Mcnally Bharat

DM Plant Driplex, Doshi Ion Exchange, Ion Exchange, Thermax, Triveni

Cooling Tower Paharpur, Gammon, BGR, NBCC

Chimney Gammon, NBCC, Simplex, Lanco

Source: MOSL

89

5 54 4

5 5

CH

P

AH

P

DM

Pla

nt

Coo

ling

Tow

er

Chi

mne

y

FO

Sys

tem

s

Wat

erT

reat

men

t

Ele

ctric

al

September 2010 31


T&D equipment makers: huge opportunity, growingcompetition

With planned investment outlay of Rs2,800b during the Eleventh and Twelfth Plans, T&D

is expected to grow strongly in next few years. PGCIL is likely to spend Rs280b over

FY11-12, as against Rs253b over FY08-10. We believe investments in T&D sector will

continue to grow beyond FY12, with PGCIL planning to expand inter-regional transmission

capacity to 75GW by FY17 from 20GW in FY09. Expectedly, there is greater focus on

extra-high voltage (EHV) system to minimize losses.

With strong demand, competition has also intensified. With pick up in demand, we expect

competitive Intensity to moderate, helping companies improve margins. We believe

Siemens and Crompton Greaves will be key beneficiaries of growth in EHV segment. With

demand of 160,000 MVA falling short of capacity of 210,000 MVA, we see competition

remaining strong in the sub-400kV segment, keeping margins under pressure.

PLANNED INVESTMENT OUTLAY (RS B)

SEGMENT TENTH PLAN ELEVENTH PLAN TWELFTH PLAN

(PLANNED) (PROPOSED)

Generation All 1,201 4,109 4,951

Transmission Central 174 550 1,000

State 285 750 1,000

Private - 200 400

Total 459 1,400 2,400

Sub-transmission & distribut. State & Private 350 2,870 4,001

Total T&D 809 4,270 6,401

Total power investments 2,010 8,379 11,352

T&D:Generation (x) 0.7 1.0 1.3

Source: CEA

Despite slippages, investments reflect 20%+ CAGR in Eleventh Plan

With ~60GW of capacity likely to be commissioned in the Eleventh Plan, only 65% of theplanned investment is likely to materialize by FY12, which would be 1.6-1.7x Tenth Planinvestments.

The transmission sector invested ~Rs550b over FY08-10, amounting to nearly 40% ofplanned investments. Transmission investment, being back ended, is expected to accelerateover two years.

PGCIL to achieve its Eleventh Plan targets

PGCIL, the central transmission utility, is likely to achieve capex of Rs550b targeted in theEleventh Plan, despite delays in generation capacity additions. This is largely due toincremental capex towards transmission projects linked to generation capacities being setup by private sector entities, which were not part of original estimates. Also, ~40% ofPGCIL's capex is towards system strengthening, not completely linked to generationcapacity additions.

Over FY08-10, PGCIL's capex was Rs254b and targeted spending in FY11 and FY12 isRs286b. Under the Twelfth Plan (FY13-17), targeted capex is over Rs1t, ~2x the EleventhPlan capex, driven by investments in EHV transmission corridors for private IPP projectsand system strengthening.

India has underinvested in

T&D infrastructure… but

since the Tenth Plan, the

ratio of T&D to generation

investment has improved

PGCIL, the central

transmission utility, aims to

achieve capex of Rs550b

during the Eleventh Plan

September 2010 32


Inter-regional transmission capacity to grow

Development of the national grid is required to facilitate exploitation of unevenly distributedgeneration resources in India to their optimum potential. To encourage open access, powertrading and balancing the demand-supply scenario, inter-regional transfer capacityaugmentation has been the focal point of PGCIL investments. PGCIL plans to ramp upthe IR capacity from 22,400MW currently to 38,650MW by the end of the Eleventh Plan.

EXPECT PGCIL TO ACHIEVE ELEVENTH PLAN TARGETS MEANINGFUL ACCELERATION IN PLAN-WISE CAPEX BY PGCIL (RS B)


25 26 24 32 41 63 66 81 106

157

129

14.1

13.2

11.3

13.8 15

.7

19.8

17.3

17.6 19

.8

19.2 20

.5

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E

Capex (Rs b) % to Capital Employed

85

189

550

1,00

0

Nin

th(F

Y97

-01

)

Ten

th(F

Y02

-07

)

Ele

vent

h(F

Y08

-12

)

Tw

elfth

(FY

13-

17)

INTER-REGIONAL TRANSMISSION CAPACITY TO GROW 5X OVER FY02-17

INTER-REGIONAL AT THE AT THE ADDITION AT THE LIKELY ADDIT. AT THE

GRIDS (MW) END OF END OF DURING END OF DURING END OF

9TH PLAN 10TH PLAN 11TH PLAN 11TH PLAN 12TH PLAN 12TH PLAN

ER-SR 620 3,130 500 3,630 4200 7,830

ER-NR 120 3,430 8,700 12,130 5,900 18,030

ER-WR 360 1,790 4,700 6,490 10,500 16,990

ER-NER 1,240 1,260 1,600 2,860 0 2,860

NR-WR 980 2,120 2,100 4,220 10,200 14,420

WR-SR 1,680 1,720 1,000 2,720 6,300 9,020

NER/ER - NR/WR 0 6,000 6,000 0 6,000

132/110 kV 600 600 0 600 0 600

Total, all India 5,600 14,050 24,600 38,650 37,100 75,750

ER/SR/NR/WR-Eastern/Southern/Northern/Western region Source: Company/MOSL

IR CAPACITY PLANNED

Large transmission corridors for IPPs

Given expectations of an accelerated pace of generation capacity additions, CERC recentlyapproved setting up of nine high speed transmission corridors (HSTCs) to evacuate powerfrom upcoming generation stations in the coal belt of Orissa, Jharkhand and Chhattisgarh,from hydro power projects in Sikkim and coastal projects in Andhra Pradesh and TamilNadu. PGCIL is setting up these corridors, aimed at evacuating electricity from 38 privatesector players putting up an aggregate generation capacity of ~42GW. Since most of thiscapacity is likely to be commissioned over 3-4 years, transmission spending has to bematched in line with project commissioning, entailing accelerated execution by PGCIL.

20.6

38.7

75.8

150


2x

2x

September 2010 33


HIGH SPEED TRANSMISSION CORRIDORS TO EVACUATE ~42GW POWER (CAPEX; RS B)

Phase 1 generation projects in Orissa 88

IPP projects

- Jharkhand 57

I - Sikkim 13

- Bilaspur complex, Chhattisgarh and Madhya Pradesh 12

- Chhattisgarh 288

- Krishnapatnam, Andhra Pradesh 21

- Tuticorin , Tamilnadu 24

- Srikakulam, Andhra Pradesh 30

- Southern region for transfer of power to other regions 48

Total 581


765kV transmission network to expand 5x in Twelfth Plan period

Over the past decade, development of the transmission network has improved significantlyto keep pace with growth in generation capacity. To match bulk transmission requirementsof large power projects, increased focus has been placed on augmenting EHV capacities.

765KV GRIDS TO EXPAND 5X IN THE TWELFTH PLAN

UNIT CUMULATIVE TRANSMISSION CAPACITY AT THE END OF

8TH 9TH 10TH 11TH 12TH

PLAN PLAN PLAN PLAN(E) PLAN(E)

Transmission Lines

765 kV ckm 409 971 2,184 7,612 32,612

HVDC +/- 500kV ckm 3,138 3,138 5,872 11,078 16,078

HVDC 200kV Monopole ckm - 162 162 162 162

400kV ckm 36,142 49,378 75,772 125,000 175,000

230kV/220kV ckm 79,601 96,993 114,629 150,000 190,000

Total Transmission Line ckm 119,290 150,642 198,5699 293,852 413,582

Substations

HVDC BTB MW 1,500 2,000 3,000 3,500 3,500

HVDC Bipole+Monopole MW 1,500 3,200 5,200 11,200 27,200

Total-HVDC Terminal Capacity MW 3,000 5,200 8,200 14,700 30,700

765kV MVA - - 2,000 53,000 163,000

400kV MVA 40,865 60,380 92,942 145,000 225,000

230/220kV MVA 84,177 116,363 156,497 230,000 325,000

Total- AC Substation Cap. MVA 125,042 176,743 251,439 428,000 713,000

Source: CEA/MoP

EHV system gains prominence

To optimize the right-of-way and land requirements with minimal transmission losses forlarge high speed transmission projects, extra high voltage (EHV) systems (765kV) arebeing increasingly preferred and accommodated through - Upgrading and uprating of the existing transmission corridor; Hybrid system comprising HVDC and EHV AC system upto 800kV with multi-circuits; Extra high rise and multi circuit towers to avoid deforestation and protection of wild

life.

Large capacity

additions by IPP will

drive transmission

investments

Extra high voltage systems

of 765kV are being

increasingly preferred

September 2010 34


PLAN-WISE 765KV SUBSTATION CAPACITY SHARE TO RISE FROM 30% TO 40%

CAPACITY AT THE END OF THE PLAN PERIOD PLAN-WISE ADDITION

(MVA) 10TH PLAN 11TH PLAN (E) 12TH PLAN (E) 10TH PLAN 11TH PLAN (E) 12TH PLAN (E)

765kV 2,000 53,000 163,000 2,000 51,000 110,000

400kV 92,942 145,000 225,000 32,562 52,058 80,000

230/220kV 156,497 230,000 325,000 40,134 73,503 95,000

Total 251,439 428,000 713,000 74,696 176,561 285,000

Source: CEA

PGCIL: 12TH PLAN CAPACITY ADDITION (PHYSICAL)

Transmission lines (ckm) 54,000 - 66,000

+ 600kV / 800kV HVDC 4,000-6,000

765 kV AC 25,000-30,000

400 kV AC 25,000-30,000

New Substations (Nos.) 75-90

765 / 400 kV 25-30

400/200/132 kV 50-60

1200/400 kV 1-2

Transformation capacity (MVA) 130,000-150,000

765 / 400 kV 90,000 - 100,000

400/200/132 kV 40,000 - 50,000

Source: PGCIL

Multiple downstream beneficiaries from transmission investment

PGCIL ORDERS IN FY09, FY10 (RS M)

PRODUCT CATEGORY FY09 FY10

Tower package 47,402 44,003

Substation 24,830 20,593

Transformer 10,628 11,331

Reactor 2,527 12,780

Insulator 3,936 9,622

Conductor 36,993 14,837

Others 3,157 3,557

RE works 15,243 2,668

Total 144,716 119,393


India-based MNCs lead HV substation space

Given the high degree of system reliability involved, multinational companies have dominatedthe substation turnkey business in India. ABB and Siemens entered the space 5-7 yearsago, but Areva (after taking over Alstom's T&D business) made inroads in the segment inthe past couple of years. BHEL and Crompton Greaves (technology for high voltagesystems though a European subsidiary, Ganz) are among Indian companies entering thisspace.

In the long-term, integrated players in EHV with strong expertise in the local market willbenefit from high entry barriers and significant demand pick-up. But players that haveentered recently, mainly MNCs, are aggressively pricing in the 765kV substation segment,resulting in low margins for winners.

In the long-term, integrated

EHV players with local

market expertise will benefit

Transformer + substations +

reactor spend formed 38% of

PGCIL orders during FY10

September 2010 35


Source: CEA/MOSL

Local competition in the high voltage segment (up to 400kV)Besides integrated MNCs in India, transformer makers have increased their presence inthe substation market, gearing up for structural change in the award pattern by customers(especially SEBs, which prefer turnkey substation projects in the EHV segment). Equipmentmakers like Crompton Greaves and Hyosung, gained 15% of substation orders placed byPGCIL in FY10. This put standalone EPC contractors like L&T, Jyoti Structures andKEC at a relative disadvantage for equipment sourcing.

CENTRAL TRANSMISSION SUBSTATION ORDERS IN FY09, FY10 (VALUE)

Source: CEA/MOSL

9.2

5.4

12.08.6

13.612.914.6

16.318.7

14.8

19.318.117.4

15.214.7

11.311.4

1QFY07 3QFY07 1QFY08 3QFY08 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11

AGGRESSIVE PRICING HITS AREVA'S MARGINS (%)


AREVA T&D COMMANDS 50% OF THE EHV MARKET

ABB13%

Siemens33%

Areva T&D54%

Others4%

ABB17%

GET4%

ECI3%EMCO

3%ICSA3%

Hyosung3%Crompton

& JV6%

Areva T&D13%

Siemens32%

Jyoti Structures

3%

JV of Areva & L&T

9%

Equipment makers likeCrompton Greaves and

Hyosung, gained15% of PGCIL’s FY10

substation orders

September 2010 36


EHV transformer segment in a sweet spot: advantage Crompton

The 765kV segment, or the extra high voltage (EHV) transformer segment, comprises29% of the transformer capacity addition proposed in the Eleventh Plan, with 51,000MVA. This is expected to increase to 110,000 MVA or 39% of planned capacity additionduring the Twelfth Plan. About 78% of transformer ordering by PGCIL in FY09 andFY10 were in the 765kV/500 MVA (333 MVA in a few cases) range.

EXPECTED EHV EQUIPMENT NEEDED IN THE TWELFTH PLAN

TRANSFORMER NUMBERS

765kV 500 MVA 1 phase 210




Source: CEA/MOSL

While transformers' EHV range is expected to grow strongly in the Eleventh and Twelfthplans, large companies in this segment like Crompton Greaves, ABB and Areva T&D arelikely to benefit from strong demand, significant technological entry barriers and limitedcompetition compared with other transformer segments.

PGCIL: 765KV TRANSFORMER MARKET SHARE

Source: CEA/MOSL

Crompton Greaves (with European subsidiary, Ganz) is the only Indian supplier that hasbeen competitive in PGCIL's 765kV transformer and reactor orders. But its Chinese andKorean competition grabbed most of the orders in this space (79% of the PGCIL market).Contrary to previous expectations, domestic MNCs Areva T&D, ABB and Siemens wonno contracts. With PGCIL easing the cap on local content (to 70% from 50% earlier) andmandating local manufacturing, domestic companies will improve their market shares.

Intense competition in the space, despite technology barrier in EHV space

Crompton Greaves, along with its subsidiary, Ganz is only Indian company to win ordersfor 765kV transformers - reactors from PGCIL, which initially mandated 70% of imports.However, with increasing focus on local manufacturing, companies such as Cromptonand Siemens should benefit.

TBEA19%

Crompton + Ganz36%

ABB3%

Hyosung, Korea33%

Baoding, China9%

The EHV transformer

segment, comprises 29% of

the transformer capacity

addition proposed in the

Eleventh Plan

Large companies in the

EHV transformer segment

will benefit from strong

demand, technological entry

barriers and relatively

limited competition

With PGCIL easing

the cap on local content

and mandating local

manufacturing, domestic

companies will improve

market share

September 2010 37


Transformer market - still reeling under pricing pressure

Transformer realizations declined 35-40% in FY10, mainly due to a fall in prices of keycommodities, rupee appreciation and intense competition. With demand of 160,000 MVAfalling short of capacity of 210,000 MVA, we see competition remaining strong, keepingmargins under check.

HIGH VOLTAGE (400KV) TRANSFORMER MARKET (FY09-10)

CURRENT CAPACITY SCENARIO (000' MVA) RECENT CAPACITY ADDITIONS (000' MVA)

BHEL34%

TBEA5%

Crompton33%

Areva T&D17%

Siemens6%

EMCO2%

Maclean 2%

Vijai Elec.1%

30 28

2320 20 20

1815

1311

84

Are

va CG

TR

IL

BH

EL

Em

co

Vija

i

AB

B

Sie

men

s

Vol

tam

p

Bha

rat B

ijli

Indo

Tec

h

IMP

15.0

10.0

21.5

16.0

7.6

4.5

Indo

Tec

h

Vol

tam

p

TR

IL

Are

vaT

&D

Em

co

Sie

men

s

Source: CEA/MOSL

Excess capacity and stagnant demand over the past 18 months have affected theperformance of several small transformer makers. But with the recovery in power andindustrial demand, the worst may soon be behind such companies.

MARGINS IN POWER BUSINESS BOTTOMING OUT - EBIT MARGINS (%)

Source: CEA/MOSL

-15

-5

5

15

25

35

1QF

Y06

3QF

Y06

1QF

Y07

3QF

Y07

1QF

Y08

3QF

Y08

1QF

Y09

3QF

Y09

1QF

Y10

3QF

Y10

1QF

Y11

Voltamp ABB-Pow erCrompton Greaves-Pow er Siemens-Pow er

Tough pricing environment,

competition will keep

profitability in check

September 2010 38


Transmission line towers package

The tower package comprises supply of towers and civil work associated with the erectionof towers and commissioning of transmission lines (like foundation, erection and stringing).Key integrated players in the transmission line business include Jyoti Structures, KalpataruPower Transmission, KEC International and L&T, which accounted for 57% of the industryduring the Tenth Plan.

Sufficient capacity in the domestic market

The installed tonnage capacity of transmission towers is estimated at 1.13mtpa accordingto industry sources. But the capacity build up has been catering to increasing demandfrom domestic and overseas businesses. About 20% of the total is expected to cater to agrowing overseas requirement (mainly the Middle East and North Africa) for transmissionline towers.

TOWER TONNAGE CAPACITY BUILD-UP - TPA ('000S) KEY PLAYERS: CAPACITIES TPA ('000S)

Source: CEA/MOSL

New players keep competitive environment tough

As most of the risk due to material price variability is passed on, profitability for transmissionline EPC contractors is impacted by competitive pricing pressure more than commodityprices.

SNAPSHOT OF EBITDA MARGINS OVER FY02-10 (%)

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Jyoti Structures 2.4 9.1 10.1 9.7 11.0 13.0 12.7 12.4 11.9

Kalpataru Power 15.9 10.7 9.9 11.7 15.4 17.3 14.8 12.2 11.7

KEC international -9.3 7.3 12.0 9.7 9.4 12.3 12.6 8.8 8.9


Competitive intensity in the transmission line segment remains tight. Domestic andforeign players are crowding the market, which has limited design content and isdominated by civil construction companies. But the EPC projects business has notseen high intensity of foreign competition, unlike the equipment space.

New entrants (like A2Z, EMC, CCC, Skipper, and Best & Crompton), which wererelatively less successful in FY08-09 in gaining sizable market share, have startedtaking a joint-venture route to increase their strength and presence in high voltagesegments in the PGCIL market. Players like Emco and Associated Transrail, whichwere aggressive in FY09, are focusing on execution of existing projects.

COST COMPOSITION OF

TRANSMISSION LINE (%)

Tower30%

Conductor30%

Civil30%

Design5%

Insul-ator5%

475560

820910

1,132

FY05 FY06 FY07 FY08 FY09

51

108 110

151

KalpataruPow er

JyotiStructures

KECInternational

L&T

There is stiff competitive in

the transmission line

segment, which is dominated

by civil construction

companies

September 2010 39


The leading players

are losing market share

to new domestic and

foreign entrants

TOWERS SEGMENT PROJECT AWARD DISTRIBUTION (%, MARKET SHARE)

FY09 FY10

KEC International 19.4 1.8

Jyoti Strutures 15.4 14.1

Kalpataru 14.7 5.0

Tata Projects 5.8 22.2

Associated Transrail Structure / Gammon 17.2 2.5

L&T 7.3 9.4

EMCO 7.7 0.0

JV of EMC & ICOMM 6.0 5.6

Shyama Power 1.0 0.0

JV of SPIC -SMO & Aster 1.3 6.9

Aster Telecom 1.1 0.0

Best & Crompton 0.5 0.0

Bajaj Electricals 1.5 1.4

JV of ECI & ICOMM 1.0 0.0

ICOMM Tele 0.0 8.0

Inabensa Spain & Skipper Steels JV 0.0 3.8

IVRCl Infra 0.0 8.5

JV of SPIC -SMO & Sujana Towers 0.0 2.3

Others 0.0 8.7

Source: PGCIL

In FY09, three players, KEC, Jyoti Structures and Kalpataru, controlled 50% of thetowers project awards. But in FY10, with the entry of new players their share shrankto 21%.

While implementation of the two-envelope bid system from FY10 has not significantlyimpacted the pricing scenario, PGCIL imposed a cap on the maximum number ofprojects a transmission line contractor (especially a new entrant) could execute, basedon past performance. This will help limit aggressive bids and stabilize prices in thenear term.

These filters, coupled with the likely strengthening of pre-qualification norms forproposed EHV transmission corridors in FY11, should help the pricing environment tostabilize and improve profitability of new order flows for established EPC contractors.

Distribution sector: gaps to be plugged

Historically, India's focus has been on fresh capacity additions, coping with power deficitissues, while ignoring the capabilities of an efficient T&D infrastructure. The distributionsystem catered to increased demand without adequate system modernization, resulting inhigh losses, poor quality and unreliability of energy supply. The unavailability of apt sub-transmission and distribution infrastructure is a bottleneck in the power value chain,worsening the power situation. Government-backed schemes like APRDP (AcceleratedPower Reforms and Development Programme) and RGGVY (Rajiv Gandhi Gramin VidyutiKaran Yojana) were initiated to address issues at the sub-T&D level.

SEBs revived, losses continued, leading to APDRP remodeling in FY09

The main objective of APDRP was to bring AT&C losses to less than 15% in five years inurban and high-density areas. Though the program, along with other initiatives has led tosome reduction in overall AT&C losses and significant improvement in the health of thestate grids sector, it failed to achieve the desired results of overall loss reduction to 15% inall towns.

High losses and poor

quality of power due to

inefficient distribution

New Entrants

September 2010 40


Source: CEA/MOSL

Revised APDRP

During the Eleventh Plan, a remodeled APDRP was introduced with structural changes,and a carrot-and-stick approach adopted, in which benefits to state utilities would accrue(grant component) on achieving pre-determined targets over five years.

KEY FEATURES OF REVISED APDRP

Total outlay Total proposed outlay Rs532b

Composition Rs332b grant from government: Rs200b to be loan component

Purpose-orientation - IT baseline data & adopting IT applications (Rs100b)

- Carrot and stick approach: Disbursement based on AT&C loss

reduction (Rs400b)

Incentive structure No incentives linked to cash loss structure, but 50% grants against

loans, with AT&C loss of 15%

Schematic PFC as nodal agency to provide single window service under

R-APDRP.

Source: CEA/MOSL

PHASING OUT OF FUND REQUIREMENT (RS B)

FY08 FY09 FY10 FY11 FY12 TOTAL DISBURSEMENTS

Part-A (Loan)

IT baseline data related projects 5.0 35.0 60.0 - - 100.0 From third year,

FY10

Part-B (Loan)

Sub T&D loss reduction related proj. 50.0 125.0 125.0 100.0 400.0 From fifth

year (FY12)

Part-C &D (Grant) 0.3 3.5 13.0 13.5 1.5 31.8 11th Plan

Total 5.3 8.9 198.0 138.5 101.5 531.8 11th Plan

Source: MoP

However, due to delay from SEBs to commit to a targeted T&D loss reduction, the schemehas been delayed. While work on building an IT backbone database has begun, the T&Dspend is expected to accelerate over FY12-13.

FUND FLOW UNDER APDRP

INVESTMENT COMPONENT (RS B) INCENTIVE COMPONENT (RS B)

17.6

5.98.1

2.75.9

26.2

21.8

10.914.3

23.6

30.124.2


Funds released Funds utilises

3.8

5.0

0.7

5.8

2.1

11.3


The T&D spend is expected

to accelerate over FY12-13

September 2010 41


Ambiguous DPRsInadequate preparedness by

CPSUs / state discoms

DELAYS in

Execution (led by right of way issues)

Payments

Elongated working capital cycle

Lower profitability

The government has

approved capital subsidy of

Rs280b for phase I of the

Eleventh Plan

Rural electrification: Difficult terrain

The Bharat Nirman initiative has given significant thrust to the Rajiv Gandhi GraminVidyutikaran Yojana (RGGVY), which aims at providing access to electricity to all villagesand households, bridging the urban-rural gap.

Under RGGVY, the government approved capital subsidy of Rs280b for phase I of theEleventh Plan, and Rs50b in the Tenth Plan. Funds are released by REC, the nodal agency,against sanctioned projects in installments, based on execution.

STATUS OF RGGVY (AS ON 30 JUNE 2010)

Un-electrified villages to be covered 118,000

Un-electrified households to be covered 78m

Detailed project reports (DPRs) received 619

DPRs sanctioned (Tenth and Eleventh plans) 573

Cost of DPRs sanctioned (Tenth and Eleventh plans) Rs263.54b

Funds released (Tenth and Eleventh plans) Rs213.41b

Villages electrified 81,573

Households 11.8m

Tentative cost of RGGVY Phase II Rs300b

Source: CEA/MoP

Tough project management requirement makes fast growing businesses unviablefor large engineering companies DPRs are based on base surveys and estimates by local utilities which makes them

ambiguous. Hence, the scope of work is subject to changes when the EPC contractorexecutes the project.

There is inadequate preparedness by CPSU and discoms to monitor and facilitatetimely execution of projects, due to inadequate inspection teams and differences overthe revised scope of work.

With 70-80% bought-out components, low voltage rural electrification projects werebeing viewed as a sweet spot over FY06-08, by large T&D players to add incrementalvolume growth to business with reasonable 10-12% margins.

But issues with managing large sub-contractors, payment delays, stretched workingcapital during a tough credit environment and increased competition with entry ofmany small players acted negatively on the profitability of these projects.

T&D majors lke ABB, Areva T&D and Kalpataru Power, decided to refrain from thebusiness after bitter experiences.

Ambiguous DPR''s and entry

of small players has put

profitability check for all

rural electrification jobs

September 2010 42


0

4,000

8,000

12,000

16,000

1QC

Y07

2QC

Y07

3QC

Y07

4QC

Y07

1QC

Y08

2QC

Y08

3QC

Y08

4QC

Y08

1QC

Y09

2QC

Y09

3QC

Y09

4QC

Y09

1QC

Y10

2QC

Y10

-35

0

35

70

105Pow er Segment - Revenue (Rs m) Pow er YoY (%)

-5

0

5

10

15

20

1QC

Y07

2QC

Y07

3QC

Y07

4QC

Y07

1QC

Y08

2QC

Y08

3QC

Y08

4QC

Y08

1QC

Y09

2QC

Y09

3QC

Y09

4QC

Y09

1QC

Y10

2QC

Y10

Pow er segment ABB

0

2,000

4,000

6,000

8,000

1QF

Y07

2QF

Y07

3QF

Y07

4QF

Y07

1QF

Y08

2QF

Y08

3QF

Y08

4QF

Y08

1QF

Y09

2QF

Y09

3QF

Y09

4QF

Y09

1QF

Y10

2QF

Y10

3QF

Y10

4QF

Y10

1QF

Y11

0.0%

5.0%

10.0%

15.0%

20.0%T&D Revenue (Rs m) EBIT (%)

ABB: RURAL ELECTRIFICATION A REVENUE DRIVER BUT HIGH EXIT COSTS HIT PROFITS

EXPOSURE TO RURAL ELECTRIFICATION IMPACTS ABB MARGIN - EBIT MARGIN (%)

KALPATARU POWER: DELAY IN FEEDER SEPARATION PROJECT HITS PROFITS

Source: MOSL

Source: MOSL

Source: MOSL

EBIT margins in power

systems (projects) stood at

-5.1% in 2QCY10 as

compared to 10.1%

in 3QFY08

Project related write-off's

cost escalations hurt

margins for ABB

Management of project

timelines, working capital

and cash flow key to

profitability in project

business

September 2010 43


Capex DHOOM: Financials trends

164

173

188

227

199

202

217

257

327

454

580

749

1,11

7

1,60

8

2,22

5

2,85

6

3,65

2

4,46

5

6.3

2.6

5.04.4 4.3 4.3

4.6 4.6

1.51.9 1.9 1.9

2.12.4

3.0 3.1 3.0

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E


ORDER BACKLOG CAGR OF 25% OVER FY10-12E

REVENUE CAGR OF 24% OVER FY10-12E

94 130

159

178

178

178

198

222

245

323

411

551

695

884

993

1,21

6

1,53

2

160

27.126.1

34.3

27.131.8

12.110.9

0.1-0.2

11.3

0.9

12.4

22.526.0

22.2

38.8

10.6

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E

Sales (Rs b) Sales Grow th (%, YoY)

EBITDA MARGINS (%) POISED TO RISE HIGHER

11.213.1

14.1 13.713.1

11.8

7.3

11.611.0

10.5

10.9

12.3

13.9 13.7 13.1

14.7

16.0 16.3

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E

Aggregate order book of

engineering majors covered

in this report is already

beginning to show a rising

trend, reflecting the capex

dhoom. Book-to-bill ratio is

also inching upwards,


visibility

Expanding order book will

restore sales growth to the

robust 20-25% range, after a

muted FY10

EBITDA margins are

expanding on the back of

strong operating leverage

and a fairly benign raw

material cycle

September 2010 44


EBITDA GROWTH AND PAT GROWTH

5 10 11 13 11 10 7 11 13 17 27 36 54 71 95 101

129

162

2528

7

3331

4936

55

3022

64

-34-11-15

18

89

11


12 18 22 21 21 20 13 23 24 26 35 50 77 95 116 146 194 249

49

19-4 1 -6

-35

6 524 22 26 33 2837 43 5277

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10E

FY

11E

FY

12E

EBITDA (Rs b) EBITDA Grow th (%, YoY)

COMPANY-WISE ORDER BOOK AND BOOK TO BILL RATIO

COMPANY ORDER BACKLOG (RS B) BTB (X)

ABB 85.3 1.4

BHEL 1,480.0 4.2

BGR Energy 94.0 2.6

Crompton Greaves 68.0 0.7

Larsen & Toubro 1,078.2 2.9

Siemens 135.5 1.6

Thermax 69.8 2.0

EBITDA growth is higher

than PAT growth suggesting

improving quality of

earnings as share of

financial income is falling

REVENUE TREND

REVENUES (RS B) % CAGR

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY05- FY10-

FY09 FY12E

ABB* 23 30 43 59 62 66 78 96 29 21

BHEL 100 137 176 198 329 395 486 615 35 25

BGR Energy 8 15 19 31 47 65 NA 45

Crompton Greaves 20 25 34 39 53 63 76 91 28 20

Cummins 12 15 18 23 33 28 39 52 29 36

L&T 133 149 179 252 367 441 562 785 29 33

Siemens** 18 27 45 77 90 120 153 182 50 23

Thermax 13 16 23 35 35 34 47 61 28 35

*December year ending (FY08=CY07) **September year ending (Sep'07= FY07)

PAT TREND

NET PROFIT (RS B) % CAGR

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY05- FY10-

FY09 FY12E

ABB* 1.5 2.2 3.4 4.9 5.3 3.5 3.0 5.4 37 0

BHEL 9.7 16.8 24.1 25.1 35.6 46.8 58.4 71.8 39 26

BGR Energy NA NA 0.4 0.9 1.2 2.0 3.0 3.8 NA 48

Crompton Greaves 1.4 1.9 1.8 2.8 4.0 5.8 6.9 8.6 30 29

Cummins 1.4 1.8 2.4 2.8 4.1 4.4 6.1 8.3 32 26

L&T 5.8 7.8 13.6 20.7 27.0 30.4 38.2 45.9 47 19

Siemens** 2.5 3.6 4.7 6.3 6.5 8.1 10.2 13.1 28 26

Thermax 0.7 1.0 1.9 2.9 2.9 1.4 3.6 4.8 43 19

*December year ending(FY08=CY07) **September year ending (Sep'07= FY07)

BHEL remains the strongest

in terms of earning visibility

with aBTB of 4.2x

BHEL, Crompton and L&T

remain the consistent

BGR's earnings growth set to

grow exponentially in

FY10-12E (48% CAGR

of over FY10-12E)

45September 2010

Companies

COMPANY NAME PG.

ABB 46

BGR Energy 53

BHEL 60

Crompton Greaves 68

Cummins India 76

Larsen & Toubro 86

Siemens 96

Thermax 108


46September 2010

ORDER framework

ROPPORTUNITY & COMPETITIVE ADVANTAGE REVENUE & ORDERS

O

EDERISKING STRATEGY EARNINGS OUTLOOK

D

RRATING & STOCK PERFORMANCE

STOCK PERFORMANCE (ONE YEAR)

ABB Bloomberg: ABB IN CMP: Rs872 NeutralValuation headwind

YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/

END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA

12/08A 68,370 5,325 25.1 8.3 34.1 8.6 28.4 46.2 2.6 23.1

12/09A 62,372 3,546 16.7 -33.4 38.5 5.6 15.6 24.3 2.1 24.8

12/10E 65,634 2,981 14.1 -15.9 62.0 6.9 11.7 18.7 2.7 40.4

12/11E 78,428 5,380 25.4 80.5 34.4 5.8 18.4 29.2 2.2 21.6

Equity Shares (m) 211.9

52-Week Range (Rs) 887/669

1,6,12 Rel. Perf. (%) 4/-10/-9

M.Cap. (Rs b) 184.9

M.Cap. (US$ b) 4.1

Stock info Financial & valuation summary

Thermal power projects with supercritical parameters (65%of the Twelfth Plan period addition of 100GW) and hydropowerprojects require EHV, HVDC systems for grid connectivity.ABB's technological competence across the T&D value chain,particularly in the EHV category of 765kV, 800kV, 1,200kV andHVDC segments, will drive order intake and revenue. Anincreasing push towards renewable energy sources will drivedemand for smart grid transmission systems in India whereABB's technological reach and competence will give it firstmover advantage.

We expect order inflows in CY10 to total Rs88b, a marginalgrowth of 1.6%. In 1HCY10, order inflows were Rs29b, down34%. Order backlog at the end of 2QCY10 was Rs85b, with abook-to-bill (BTB) ratio of 1.4x (TTM). A few large orders thatABB was expected to secure for 765kV in 2QCY10 werepostponed to 3QCY10, impacting order intake. Given thecontinued loss of market share to Korean and Chinese T&Dcompanies in the products segment and losses from legacyorders in the projects business, we are cautious about ABB'sgrowth in the medium term. We estimate 16% revenue CAGRover CY09-12.

ABB's CY09 exports were 14% of revenue. This is fairly lowcompared with its Indian peers like Crompton Greaves (25%in FY10) and Siemens (20.7% in FY09). ABB's wind generationfacility in Vadodara, Gujarat has the capacity to produce1,200MW of wind generators, with 2.3MW rating, and haspeak revenue potential of Rs4b-5b. This, coupled with theautomation products facility in Bangalore to make air-circuitbreakers, switch fuse units and molded case units, givesABB the ability to generate another Rs4b-5b in export revenuein 2-3 years.

We expect ABB to post revenue CAGR of 15% and PAT CAGRof 29% through CY09-12. We estimate CY10 earnings ofRs2.9b, down 16%, and CY11 earnings at Rs5.38b, up 80%,as ABB gets out of legacy orders in rural electrification andAPDRP, and executes orders received in CY10. We expectEBITDA margin of 6.7% in CY10 (down 180bp) and 10.1%(up 344bp) in CY11. Our assumptions factor in PowerSystems margins expanding from 0.4% in CY09 to normativelevels of 10% by CY11, as projects facing cost escalationsand bad debts get out of the way.

The stock trades at 62x CY10E and 34.4x CY11E earnings,and at an EV of 40.4x CY10E and 21.6x CY11E EBITDA. Weexpect EPS of Rs14.1 (down 16%) for CY10 and Rs25.4 (up81%) for CY11. We are cautious about ABB's growth patternin the medium term, as it battles project-related issues andloss of market share to Indian, Chinese and Korean peers inthe EHV and HVDC categories in products and projects. Weretain our Neutral rating on the stock with a price target ofRs762 (30x CY11E earnings). 600

700

800

900

1,000

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

ABB Sensex - Rebased


47September 2010


In the long-term, ABB's global expertise to help capture emerging trendsin India's T&D sector

Globally, ABB is a leader in HVDC systems, where the source of power is renewable(hydro, wind and solar) and requires efficient conversion of alternating current (AC)to direct current (DC), with minimal T&D loss. ABB's 'HVDC Light' is a preferredchoice of utilities, globally.

Wind power capacity in India is set to more than double from 1.5GW in FY10 to3.5GW in FY12.

With generation-based subsidies of Rs0.5/kwh and the feed in tariffs providing pre-tax RoEs of 22% investment in superior HVDC systems for interconnection to thegrid will be necessary.

Technological competence, project expertise to drive revenue CAGR of14% over CY09-12 in Power Products/Projects

ABB's withdrawal from APDRP/RGGVY and increased execution delays on projects ledto Power Segment (Power Products + Systems) revenue declining 15% in CY09 and 9%in 1HCY10. Its technological competence across verticals of the Power T&D chain,particularly in EHV category of 765kV, 800kV and 1,200kV transformers, reactors, sub-stations and E-BoP, will drive order intake CAGR of 10% and revenue CAGR of 14%through CY09-12.

SLOWER ORDER-INTAKE TO IMPACT REVENUE GROWTH

ABB

Revenue CAGR of 14% in

Power Products/Projects

over CY09-12 against 19%

in CY05-09

WIND POWER CAPACITY ADDITION TO DOUBLE BY FY12 TO 3.5GW SOLAR POWER CAPACITY ADDITION TO REACH 4GW BY FY17


220423

8751,253

1,8401,617 1,800

1,500

2,500

3,500

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E

1

4

20

FY12E FY17E FY22E

2 37 10

1419

27

4437 37

44

55

2 38 11

1521

35

50 50 52 51

63

78

3825

156

3646

34

4539

41

13-1

-15

20

CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10E CY11E CY12E

Revenues (Rs b) Order Intake (Rs b) Revenues (% YoY)

48September 2010

Automation revenue CAGR of 17% over CY09-12

Globally, ABB is the market leader in Automation, with a share of 20%+. It has a strongpresence in Automated Solutions for Oil &Gas, Metals and Minerals. In India, ABB hasexecuted projects for most of the leading cement and metal companies like Grasim, Hindalco,Sterlite, etc.

AUTOMATION: REVENUE CAGR OF 17% OVER CY09-12, BUOYED BY CAPEX 97M TONNE CEMENT CAPACITY TO BE ADDED OVER FY10-12;

UPTICK IN CEMENT, METALS, ETC AUTOMATION OPPORTUNITY OF RS140B FOR ABB


CAPACITY EXPANSION OF 9MT BY TOP STEEL MAKERS (TATA STEEL, SAIL, JSW AND JSPL) OVER FY10-12 PRESENTS

A US$1B-2B OPPORTUNITY

50

150

250

350

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10E

FY

11E

FY

12E

Cap (m ton) Incremental Addition (m ton)

ABB

18 18 2023 25 24

29 30

36 39

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11E

FY

12E


ABB's portfolio of products and services across industries/verticals makes it a preferredsupplier for companies/governments globally.

Exports: untapped potential

ABB's wind generator facility at Vadodara (Gujarat) has a capacity of 1,200MW of windgenerators with 2.3MW rating. It can generate export revenue of Rs4.8b-5b per year atoptimum utilization with CY09 being the first year of operations. ABB is strongly positionedin wind generators and has a 20% share of the global market.

In April 2009, ABB commissioned an Automation Products facility near Bangalore at acost of US$50m. The facility, which will make air circuit-breakers, switch fuse units,molded case circuit breakers, low and medium voltage drives and systems, is likely to add~US$100m to ABB India's revenue in two years.

3 6

9 12

18

24

31 30

35

41

49

3 6

10

13

23

30

36

33

37

44

53201815

-2

2633

27

5766

75

13

CY

02

CY

03

CY

04

CY

05

CY

06

CY

07

CY

08

CY

09

CY

10E

CY

11E

CY

12E

Revenues (Rs b)Order Intake (Rs b)Revenues (% YoY)

49September 2010


EBITDA margin to recover in CY11 as project-related write-offs/escalationsabate

According to the accounting policy adopted by ABB India, forex losses on businesstransactions are taken as part of EBITDA and forex gains are taken as part of otherincome. This impacts reported EBITDA margins. In CY09, bad debt provisions and write-offs were Rs718m, adversely impacting margins. CY09 EBITDA margins were 8.5%(down 278bp), as margins in Power Systems declined to 0.4% (from 8.8% in CY08).

COST COMPOSITION: POOR FIXED COST ABSORPTION IMPACT CY09 MARGINS

COST BREAK-UP % OF REVENUE

CY07 CY08 CY09

Raw Materials 27.0 30.5 29.9

Erections Services 46.6 41.9 42.5

Staff Costs 5.2 5.9 6.2

Royalty/Technology Fees 1.0 1.3 1.3

Bad Debts 0.5 0.9 1.2

IT Related Spend 1.3 1.5 1.5

SG&A 5.8 5.6 7.8


CY09 Power Systems EBIT margin of 0.4% as cost escalations, provisionsrise

Power Systems' EBIT margin of 0.4% was impacted by cost escalation in certain projects,and exit costs from rural electrification projects. We expect margins to return to normativelevels in the medium term.

ABB: CONTRIBUTION OF EXPORTS TO REVENUE (%) IS LOW

13.8

8.6

22.1

10.3

24.3

13.8

8.511.2 10.6

7.6

CY

00

CY

01

CY

02

CY

03

CY

04

CY

05

CY

06

CY

07

CY

08

CY

09

ABB

ABB'S SHARE OF EXPORTS (% OF REVENUE) ONE OF THE LOWEST AMONG INDIAN PEERS

ABB CROMPTON SIEMENS

CY06 CY07 CY08 CY09 FY07 FY08 FY09 FY10 FY07 FY08 FY09

Revenues 42,740 59,303 68,370 62,372 56,998 68,819 87,387 91,409 77,268 82,955 83,887

Exports 4,802 4,509 7,240 8,637 29,407 37,626 52,857 50,566 25,024 30,957 20,537

% of Revenues 11.2 7.6 10.6 13.8 51.6 54.7 60.5 55.3 32.4 37.3 24.5


50September 2010

TREND IN EBIT AND EBIT MARGINS

CY07 CY08 CY09

EBIT (Rs m)

Automation products 1,784 2,268 2,048

Process automation 1,333 1,848 1,488

Power products 2,121 2,601 2,170

Power systems 2,361 2,028 65

Margins (%)

Automation products 13.4 13.1 11.4

Process automation 12.1 13.9 12.3

Power products 13.0 12.7 10.9

Power systems 10.7 8.8 0.4


We expect ABB to post EBITDA margin of 6.7% in CY10 (down 179bp) and 10.1% inCY11 (up 344bp), with Power Systems' EBITDA margin rebounding from 0.4% in CY09to 10% in CY11. Power Systems should begin FY11 without the burden of legacy orderscontaining escalations/write-offs and aim to achieve normative margins, resulting in asteep jump in overall EBITDA margins.

Rating, stock performance

The stock trades at 62x CY10E and 34.4x CY11E earnings and at an EV of 40.4x CY10Eand 21.6x CY11E EBITDA. We expect EPS of Rs14.1 (down 16%) for CY10 and Rs25.4(up 81%) in CY11. We still remain cautious about ABB's growth pattern in the mediumterm, as it continues to battle project-related issues and loss of market share to Indian,Chinese and Korean peers in the EHV, HVDC categories in both products and projects.We retain our Neutral rating with a price target of Rs762 (30x CY11E earnings).

ABB

51September 2010

ABB

1 YEAR FORWARD P/E

1 YEAR FORWARD P/BV

1 YEAR FORWARD EV/EBITDA

ABB VS SENSEX PE PREMIUM / DISCOUNT (%)

Source: Bloomberg/MOSL

34.7

5

25

45

65

85

Dec

-94

Jan-

96

Feb

-97

Feb

-98

Mar

-99

Mar

-00

Apr

-01

May

-02

May

-03

Jun-

04

Jun-

05

Jul-0

6

Aug

-07

Aug

-08

Sep

-09

Sep

-10

Average of 29.5x

Peak of 70.2x

Bottom of 7.6x

5.5

0

5

10

15

20

Dec

-94

Jan-

96

Feb

-97

Feb

-98

Mar

-99

Mar

-00

Apr

-01

May

-02

May

-03

Jun-

04

Jun-

05

Jul-0

6

Aug

-07

Aug

-08

Sep

-09

Sep

-10

Average of 5.3x

Peak of 16.4x

Bottom of 1.6x

115.7

-190

0

190

380

570

Dec

-94

Mar

-96

May

-97

Aug

-98

Oct

-99

Jan-

01

Mar

-02

Jun-

03

Aug

-04

Nov

-05

Jan-

07

Apr

-08

Jun-

09

Sep

-10

22.8

0

20

40

60

Dec

-95

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Feb

-03

Feb

-04

Feb

-05

Feb

-06

Feb

-07

Feb

-08

Mar

-09

Mar

-10

Peak of 44.8x

Average of 19.9x

Bottom of 4.9x

Valuations

Long-period Trend

52September 2010

Financials and valuation

ABB

INCOME STATEMENT (RS MILLION)

Y/E DECEMBER 2009 2010E 2011E 2012E

Net Sales 62,372 65,634 78,428 96,148

Change (%) -8.8 5.2 19.5 22.6

Raw Materials 21,970 21,003 23,528 29,325

Staff Cost 3,892 4,600 5,152 5,873

Other Mfg. Expenses 23,801 27,632 33,097 39,901

Selling Expenses 5,564 6,892 7,372 8,076

Admin. & Other Exp. 1,855 1,116 1,333 1,635

EBITDA 5,290 4,392 7,946 11,337

% of Net Sales 8.5 6.7 10.1 11.8

Depreciation 485 519 562 637

Interest 256 250 275 303

Other Income 726 894 1,168 1,368

PBT 5,274 4,517 8,277 11,766

Tax 1,728 1,536 2,897 4,118

Rate (%) 32.8 34.0 35.0 35.0

PAT 3,546 2,981 5,380 7,648

Adjusted PAT 3,546 2,981 5,380 7,648

Change (%) -33.4 -15.9 80.5 42.2

BALANCE SHEET (RS MILLION)

Y/E DECEMBER 2009 2010E 2011E 2012E

Share Capital 424 424 424 424

Reserves 23,814 26,451 31,209 37,974

Net Worth 24,237 26,874 31,633 38,398

Loans 0 0 0 0

Net Deffered Tax Liability 0 0 0 0

Capital Employed 24,237 26,874 31,633 38,398

Gross Fixed Assets 8,793 9,928 11,313 12,698

Less: Depreciation 2,061 2,580 3,141 3,776

Net Fixed Assets 6,732 7,348 8,172 8,922

Capital WIP 1,163 500 500 500

Investments 169 169 169 169

Curr. Assets 47,493 50,931 62,586 77,811

Inventory 7,294 7,193 8,165 10,010

Debtors 28,577 29,670 33,305 40,830

Cash & Bank Balance 5,241 7,235 12,951 16,961

Loans & Advances 6,380 6,833 8,165 10,010

Current Liab. & Prov. 31,320 32,073 39,794 49,004

Creditors 29,869 31,468 38,677 47,416

Other Liabilities 0 0 0 0

Provisions 1,450 605 1,117 1,588

Net Current Assets 16,173 18,858 22,792 28,807

Application of Funds 24,237 26,874 31,633 38,398

E: MOSL Estimates

RATIOS

Y/E DECEMBER 2009 2010E 2011E 2012E

Basic (Rs)

EPS 16.7 14.1 25.4 36.1

Growth -33.4 -15.9 80.5 42.2

Cash EPS 19.0 16.5 28.0 39.1

Book Value 114.4 126.8 149.3 181.2

DPS 2.3 1.6 2.9 4.2

Payout (incl. Div. Tax.) 1,398.2 10.0 10.0 10.0

Valuation (x)

P/E 38.5 62.0 34.4 24.3

Cash P/E 33.8 52.8 31.1 22.3

EV/EBITDA 24.8 40.4 21.6 14.8

EV/Sales 2.1 2.7 2.2 1.8

Price/Book Value 5.6 6.9 5.8 4.8

Dividend Yield (%) 0.3 0.2 0.3 0.5

Profitability Ratios (%)

RoE 15.6 11.7 18.4 21.8

RoCE 24.3 18.7 29.2 34.5

Turnover Ratios

Debtors (Days) 167 165 155 155

Inventory (Days) 43 40 38 38

Creditors. (Days) 175 175 180 180

Asset Turnover (x) 2.6 2.4 2.5 2.5

Leverage Ratio

Debt/Equity (x) 0.0 0.0 0.0 0.0

CASH FLOW STATEMENT (RS MILLION)

Y/E DECEMBER 2009 2010E 2011E 2012E

PBT before EO Items 5,274 4,517 8,277 11,766

Add: Depreciation 485 519 562 637

Interest 256 250 275 303

Less : Direct Taxes Paid 1,728 1,536 2,897 4,118

(Inc)/Dec in WC -669 -690 1,781 -2,005

CF from Operations 3,619 3,060 7,998 6,582

EO Income 0 0 0 0

CF from Op. incl. EO Items 3,619 3,060 7,998 6,582

(Inc)/Dec in FA -1,547 -472 -1,386 -1,387

(Pur)/Sale of Investments 442 0 0 0

CF from Investments -1,105 -472 -1,386 -1,387

(Inc)/Dec in Net Worth -3 0 0 0

Less : Interest Paid 256 250 275 303

Dividend Paid 496 344 621 883

CF from Fin. Activity -755 -594 -896 -1,185

Inc/Dec of Cash 1,759 1,994 5,716 4,010

Add: Beginning Balance 3,482 5,241 7,235 12,951

Closing Balance 5,241 7,235 12,951 16,961

53September 2010

ORDER framework


O


D



BGR Energy Bloomberg: BGRL IN CMP: Rs783 BuySize on side



03/09A 19,355 1,157 16.1 29.2 48.7 10.0 22.3 19.7 2.9 25.9

03/10A 30,779 2,016 28.0 74.2 27.9 8.0 31.7 22.8 1.8 15.9

03/11E 47,099 2,955 41.0 46.6 19.1 5.9 35.5 25.3 1.2 10.3

03/12E 64,663 3,830 53.2 29.6 14.7 4.3 33.9 25.8 0.9 7.8



1,6,12 Rel. Perf. (%) -14/40/53

M.Cap. (Rs b) 56.3

M.Cap. (US$ b) 1.2


BGR Energy, a strong BOP contractor, entered the power plantEPC business in the past two years. It is well-placed tocapitalize on the growing shortage of power plant contractorsin India. BGR is executing two power projects with aggregatecapacity of 1,800MW. We expect the company to secure similarorders in the near future, which will ensure growth visibilityfor 2-3 years. BGR has a JV with Hitachi to make boilers andturbine-generators, which could be a huge long-term growthdriver.

BGR has an order book of Rs94b, implying a BTB of 2.6x TTMsales. The company is in an advanced stage of execution oftwo power projects, a 1,200MW unit in Rajasthan and a600MW unit in Tamil Nadu. BGR booked Rs27b revenue fromthe two projects and the remaining Rs53b will be booked inFY11 and FY12. We expect 45% revenue CAGR over FY10-12, largely driven by the two projects. Accelerated executionhas resulted in BTB declining from over 5x to 2.6x TTM sales(FY07-11E). However, with order intake growing in FY11, weexpect BTB to improve.

BGR has a JV with Hitachi to make complete power plantequipment, boilers and turbine-generators, with an investmentof Rs44b. Entry into manufacturing will not only boost growthbut also ensure smooth execution of EPC contracts that thecompany is expecting to secure. With manufacturingcapabilities in place, BGR will be the only company in Indiawith complete BTG, BOP and contracting offerings besidesBHEL and L&T. We expect the company to substantially scaleup its EPC projects business in the next few years.

We expect BGR to post earnings CAGR of 38% over FY10-12.The company is well placed in a few key bids expected toopen soon. Success on one or two EPC projects will drivestrong earnings growth beyond FY12 as well. Earnings willbe significantly sensitive to working capital movement. BGRhas debt of Rs9.3b, which is likely to rise to Rs14.5b by theend of FY11. A sharp rise in interest rates can impact earnings.

The stock trades at 14.7x FY12E earnings, given strongearnings growth, the likelihood of strong order inflows andsuccess in breakthrough orders like NTPC bulk tenders. Werecommend a Buy on the stock, with a target price of Rs958(18x FY12E EPS). We have not factored any value for its JVs,which are setting up boiler and turbine facilities.

300

450

600

750

900


BGR Energy Sensex - Rebased


54September 2010


Among the most reputed turnkey BOP contractors

BGR has executed 300MW and 500MW BOP projects and EPC contracts for smallerpower projects. In 2005, the company secured its first large, 500MW, BOP order. It alsoexecuted smaller EPC projects in Tamil Nadu: 120MW CCPP Aban Power worth Rs2.7band a 95MW CCPP Valathur (Phase-I) worth Rs594m.

ONGOING BOP CONTRACTS

SIZE PROJECT CLIENT VALUE (RS M)

2 x 500 MW Marwa CSPGCL 16,330

2 x 500 MW Chandrapur MAHAGENCO** 16,320

500 MW Kothagudam APGENCO* 7,930

500 MW Khaperkheda TPS MAHAGENCO** 9,980

500 MW Kakatiya TPS APGENCO* 6,949


Given the demand growth, several BOP areas continue to face delays due to an inadequatenumber of suppliers. We believe BOP turnkey contractors like BGR will be the biggestgainers, given that there is increasing preference for lump-sum BOP contracts by developers.BGR makes nearly 40% of the components in BOP projects in-house, which gives it acompetitive edge.

Scaling up the value chain

Over the past 10 years, BGR has transformed itself from an equipment maker and BOPcontractor into a full-fledged power plant EPC contractor. In the next stage of integration,BGR will set up facilities to make boilers and turbine-generators in technical and financialcollaboration with Hitachi. BGR is the only company in India, besides BHEL and L&T, tohave integrated manufacturing for BTG.

TURNING INTO AN INTEGRATED POWER EQUIPMENT PLAY

BOP -

Component

Manufacturing

BOP

Projects

Power EPC

Projects

Equipment

Manufacturing

JV Route

Among most respected BOP

contractors

Implementing 2 x 600MW

and 1 x 600MW projects

JV with Hitachi - has

bid for NTPC tender

Growing presence across power sector

BGR Energy

Two EPC contracts,

1,800MW capacity to be

completed in FY11

55September 2010

Two large power EPC projects

Having successfully demonstrated its expertise in turnkey BOP projects, BGR Energy hasreceived two large EPC projects for thermal power plants in Tamil Nadu and Rajasthan,marking its presence in this market. BGR won both the projects against BHEL underinternational competitive bidding. 1 x 600MW Mettur, Tamil Nadu Electricity Board: BGR received the order

valued at Rs31b in June 2008, to be executed over 39 months. The contract was on anEPC basis, including 400kV and 220kV gas-insulated sub-station, river water intakepump house and pipe-bridge across river. The company is sourcing BTG from DongFang,China. The project was 40% complete as at the end of FY10.

2 x 600MW Kalisindh (Jalawar), Rajasthan Electricity Board: BGR receivedthe order valued at Rs49b (dual currency: US$405m + Rs32.96b) in July 2008, to beexecuted over 42 months. The contract was on an EPC basis. BGR is sourcing BTGfrom DongFang, China. The project was 30% complete as at the end of FY10.

Entry into plant equipment manufacturing: a long-term growth driver

BGR recently formed two JVs with Hitachi to make BTG for power plants and will investRs44b to build a 4,000MW capacity unit: BGR Turbines Company Private Limited: Hitachi, Japan will have 26% stake. The

company will invest Rs30b to set up the plant in Tamil Nadu and will start productionin 2012.

BGR Boilers Private Limited: Hitachi Power Europe GmbH will have 30% stake. Thecompany will invest Rs14b to set up the plant in Tamil Nadu and will commenceproduction in 2012.

Earlier, BGR had entered into a 20-year licensing agreement with US-based Foster Wheelerto make boilers of up to 1,000MW rating (including sub and supercritical ). Although,Foster Wheeler has not yet committed capital to this venture.

Still a long way to go: These equipment JVs are in the nascent stages. Nevertheless,JVs with strong and credible technology partners would help BGR to move a step aheadin the power sector value curve, bringing it to a similar platform as the Indian majors -BHEL and L&T. The company has bid for NTPC bulk tenders for boilers (9 x 660MW).Success on that front will accelerate the build-up process.

IN-HOUSE MANUFACTURING CAPABILITY


Turnkey BOP

Key in-house systems Key outsourced systems

Civil & Electrical Works

Chimney

Cooling Tower

Water & Effluent System

Air Fin Coolers

Heat Recovery System

Ash Handling Plant

Coal Handling Plant (Equipment)

Fuel Oil (FO) System

AC System

Electrical System (includes

Instrumentation)

BGR Energy

BGR makes 40% of its BoP

requirements in-house

Executing 3x600MW units;

likely to be complete in FY12

Production to begin

from FY13

56September 2010

Developing strengths to execute large power projects on a turnkey basis

Strong in-house design & engineering team: BGR undertakes design andengineering of civil, mechanical and electrical systems in-house. Over the past twoyears, employee strength increased by over 30% to 1,697 employees (1,425 engineers).

Building strong teams: Last year, T Sankaralingam, ex-Chairman, NTPC, joinedthe company as Managing Director. The company is building teams across functions,which is a key to growth.

Credible management: The management team, led by BG Raghupati, has created astrong team of professionals, which is reflected in smooth progression from being asmall BOP contractor to a large EPC player. We believe the company has now achievedmomentum and should be able to attract managers across business groups.

Key risks and challenges

Performance failure in projects under execution: BGR is sourcing equipmentfrom DongFang for 3 x 600MW units for EPC projects in hand. DongFang had facedproblems with equipment supplied to Lanco and West Bengal Electricity Board in thepast. While BGR has set up risk-measuring mechanisms (by setting up an office inChina, close to DongFang's plant), performance-related issues cannot be ruled out.

Working capital funding issues: Despite timely receipt of advances from clients,BGR will face steep working capital requirements during the peak execution cyclewhen it gets new orders. Delays due to non-availability of working capital and highinterest expenses may adversely impact performance.

BGR'S OTHER BUSINESS DIVISIONS ALSO BENEFITTING FROM FAVORABLE TAILWINDS

DIVISION SCOPE FY10 SALES ORDER-BOOK (RS M)

Oil / Gas Equip. Tanks, processing equip, Compressors 583 4,508

Electrical e-BoP, plant electrical items 135 1,437

Air Fin Coolers Heat exchanger, radiators 810 1,727

Environment Engg. Deaerators, Eff. And water treatment plants, 290 355


Interests in power projects

BGR has 41% interest in Cuddalore Power Company Limited, where BG Raghupathyhas majority holding of ~58.5%. Cuddalore Power is engaged in the development of2 x 660MW coal-based combined cycle thermal power projects in Cuddalore, TamilNadu, India. The project is in the development stage and Cuddalore Power signed apower purchase agreement (PPA) with TNEB on 28 September 2006, to sell all itspower to TNEB on a take-or-pay basis. The project is securing statutory and non-statutory approvals and clearances. BGR's investments in the company will stay low.

BGR, Orissa government sign MoU in April to set up 2 x 660MW projects.

BGR Energy

Building up a team of key top

management professionals

Value unlocking unlikely

in the near term

57September 2010

Financials

45% REVENUE CAGR OVER FY10-12 BTB TO REMAIN STRONG, WITH LIKELY SUCCESS IN EPC ORDERS

EBITDA MARGINS TO REMAIN STEADY AT AROUND 11% PROFIT TO GROW AT 37% CAGR

DEBT TO RISE IN LINE WITH BUSINESS GROWTH ROE OF OVER 25% WILL BE MAINTAINED


Rating and stock performance

We expect BGR's earnings to grow at a CAGR of 37% over FY10-12. However, fasterexecution of its EPC projects in hand and new large BOP projects can provide upside inFY12. We believe the company is well placed in several EPC orders, which will ensureencouraging growth beyond FY12.

The stock trades at 14.7x FY12E earnings, given strong earnings growth, the likelihood ofstrong order inflows and success in breakthrough orders like NTPC bulk tenders. Werecommend a Buy on the stock, with a target price of Rs958 (18x FY12E EPS). We havenot factored in any value for its JVs, which are setting up boiler and turbine facilities.

BGR Energy

15

47

65

3119

37.3

52.7

58.7

27.2

91.5

FY08 FY09 FY10 FY11E FY12E

Revenues (Rs b) Grow th (%)

33

129 138

214

280

6.6

4.34.64.5

2.2


Orderbook (Rs b) BTB (xTTM Sales)

1.62.1

5.4

7.1

3.5

11.011.411.311.110.2


EBITDA (Rs b) Margin (%)

0.9

3.0

3.8

2.0

1.2 29.6

46.5

74.3

30.6

95.1


PAT (Rs b) PAT Gr (%)

5.0

7.1

9.3

14.5

17.0

0.20.20.2

0.3

0.2


Debt (Rs b) Int / EBITDA (x)

32

22

3235 34

2320

2325 26


RoE (%) RoCE (%)

58September 2010

1 YEAR FORWARD P/E

1 YEAR FORWARD P/BV


BGR ENERGY VS SENSEX PE PREMIUM / DISCOUNT (%)


BGR Energy

16.3

0

15

30

45

Jan-

08

May

-08

Sep

-08

Dec

-08

Apr

-09

Jul-0

9

Nov

-09

Feb

-10

Jun-

10

Sep

-10

Average of 14.1x

Peak of 40.4x

Bottom of 5.1x

4.9

0.0

3.0

6.0

9.0

Jan-

08

May

-08

Sep

-08

Dec

-08

Apr

-09

Jul-0

9

Nov

-09

Feb

-10

Jun-

10

Sep

-10

Average of 3.7x

Peak of 8.2x

Bottom of 1.3x

23.0

0

25

50

75

100

Sep

-01

Aug

-02

Jul-0

3

Jun-

04

Apr

-05

Mar

-06

Feb

-07

Dec

-07

Nov

-08

Oct

-09

Sep

-10

Peak of 81.3x

Average of 33.4x

Bottom of 12.8x

0.2

-90

-45

0

45

90

135

Jan-

08

May

-08

Sep

-08

Dec

-08

Apr

-09

Jul-0

9

Nov

-09

Feb

-10

Jun-

10

Sep

-10

Valuations

Long-period Trend

59September 2010


BGR Energy


Y/E MARCH 2009 2010 2011E 2012E

Total Income 19,355 30,779 47,099 64,663

Change (%) 27.3 59.0 53.0 37.3

Raw Material Cost 13,522 21,870 33,882 47,171

Staff Cost 744 1,262 2,019 2,827


EBITDA 2,140 3,487 5,377 7,124

Change (%) 37.8 62.9 54.2 32.5

% of Net Sales 11.1 11.3 11.4 11.0


Interest 579 538 954 1,354

Other Income 266 205 190 211

PBT 1,752 3,051 4,471 5,795

Tax 596 1,037 1,520 1,970

Rate (%) 34.0 34.0 34.0 34.0

Reported PAT 1,156 2,015 2,951 3,824

Adjusted PAT 1,157 2,016 2,955 3,830

Change (%) 29.2 74.2 46.6 29.6


Y/E MARCH 2009 2010 2011E 2012E


Reserves 4,919 6,343 8,876 12,286

Net Worth 5,639 7,063 9,596 13,006

Loans 7,090 9,336 14,526 16,958

Differed Tax Liability 775 1,580 805 417



Less: Depreciation 268 365 506 692

Net Fixed Assets 977 1,454 2,254 2,634

Capital WIP 54 104 200 350

Goodweill 6 6 6 6

Investments 5 5 1,525 3,045

Curr. Assets 25,690 37,699 54,654 70,439

Inventory 140 162 1,057 1,463

Debtors 12,789 19,803 29,009 38,948


Loans & Advances 6,432 7,273 9,412 12,924

Other Current Assets 178 181 282 388

Curr. Liab. & Prov. 13,229 21,289 33,712 46,093

Creditors 4,413 11,028 12,574 17,341

Other Liabilities 8,138 7,928 19,197 26,361

Provisions 677 2,334 1,941 2,391


Appli. of Funds 13,504 17,979 24,927 30,381

E: MOSL Estimates

RATIOS

Y/E MARCH 2009 2010 2011E 2012E

Basic (Rs)

EPS 16.1 28.0 41.0 53.2

Change (%) 29.2 74.2 46.6 29.6

Cash EPS 17.1 29.4 43.0 55.8

Book Value 78.3 98.1 133.3 180.6

DPS 3.0 7.0 5.0 5.0

Payout (incl. Div. Tax.) 21.8 29.3 14.3 11.0

Valuation (x)

P/E 48.7 27.9 19.1 14.7

Cash P/E 45.7 26.6 18.2 14.0

EV/EBITDA 25.9 15.9 10.3 7.8

EV/Sales 2.9 1.8 1.2 0.9


Dividend Yield (%) 0.4 0.9 0.6 0.6

Return Ratio (%)

RoE 22.3 31.7 35.5 33.9

RoCE 19.7 22.8 25.3 25.8

Turnover Ratios

Debtors (Days) 241 235 225 220


Creditors. (Days) 23 36 27 27


Leverage Ratio

Debt/Equity (x) 1.3 1.3 1.5 1.3


Y/E MARCH 2009 2010 2011E 2012E

PBT bef. EO Items 1,752 3,051 4,471 5,795


Interest 579 538 954 1,354

Less: Direct taxes paid 596 1,037 1,520 1,970

(Inc)/Dec in WC -1,292 180 83 -1,582

CF from Operations 519 2,835 4,129 3,783

CF from Op. Incl. EO Items 519 2,835 4,129 3,783

(Inc)/dec in FA -568 -629 -1,038 -716

(Pur)/Sale of Investments 1,509 0 -1,520 -1,520

CF from Investments 941 -629 -2,558 -2,236

(Inc)/Dec in Net Worth 391 804 -771 -382

(Inc)/Dec in Debt 2,063 2,246 5,189 2,433

Less: Interest Paid 579 538 954 1,354


CF from Fin. Activity 1,622 1,923 3,042 276

Inc/Dec of Cash 3,081 4,129 4,613 1,823


Closing Balance 6,152 10,280 14,894 16,716

60September 2010

ORDER framework


O


D



BHEL Bloomberg: BHEL IN CMP: Rs2,448 Buy

Power-ful opportunity



03/09A 267,879 35,670 72.9 42.1 20.7 5.7 30.1 46.9 2.4 15.1

03/10A 334,757 46,839 95.7 31.3 24.9 7.3 32.5 51.4 3.3 18.1

03/11E 402,601 58,407 119.3 24.7 20.7 6.1 32.7 54.8 2.7 12.4

03/12E 495,098 71,837 146.7 23.0 16.8 4.9 32.3 53.6 2.2 9.9


52-Week Range (Rs) 2,585/2,105

1,6,12 Rel. Perf. (%) -9/-9/-10

M.Cap. (Rs b) 1,206.5

M.Cap. (US$ b) 26.5


BHEL is a key beneficiary of the US$25b annual powerequipment opportunity due to its proven capabilities andstrong services base. We expect BHEL to maintain over 55%market share in the Twelfth Plan despite new manufacturingcapacity of 16GW being set up by other Indian companies.We believe imports will fall substantially in future due to qualityconcerns, stringent qualification norms and a possibleimposition of customs duty on imported equipment.

We expect robust order intake over 12-18 months, driven by(i) supportive equity markets, which will enable financialclosure for projects in the private sector, (ii) the National TariffPolicy, which stipulates that central and state sectorcompanies must award projects by January 2011 to beeligible for the CERC method of tariff determination, (iii) bulkordering of 20 supercritical sets (660/800MW each) by NTPCand DVC, expected in 2HFY11, and (iv) order awards of 6.5-6.9GW from JVs, between BHEL and state utilities. We expectrevenue CAGR of 22% over FY10-12 due to a robust BTB ratioof 4.2x TTM revenue and increased capacity of 15GW.

BHEL has entered long-term relationships with Alstom andSiemens for supercritical boilers and turbines. This willprovide BHEL with a platform to absorb the latest equipmentmanufacturing technologies. BHEL has formed JVs with afew state electricity boards to develop power projects, whichwill help the company to scale up its production base forsupercritical sets. BHEL has set up strong capabilities in theT&D, industrial, defense and alternative energy sectors, whichwill provide additional growth drivers in the next few years.

We expect BHEL to post earnings of 24% CAGR over FY10-12, in line with revenue CAGR of 22%. We expect adjustedEBITDA margin expansion of 250bp over FY10-12, as staffcosts (as a percentage of revenue) are expected to fall by505bp over the period. The quality of earning is set to improve,with EBITDA growth of 36% CAGR over FY10-12 along withsuperior RoE's of 33% and 54% over FY11 and FY12.

At a CMP of Rs2,465, BHEL trades at 20.7x FY11E and 16.8xFY12E earnings. On an EV/EBITDA basis it trades at 12.4xFY11E and 9.9x FY12E respectively. BHEL trades at an 11%premium to the broader market, which has come down from26% over the past two years, due to concerns of order-flowstagnation, competition from other private players like L&Tand BHELs' ability to garner and maintain its market share inthe supercritical BTG sets in the Twelfth Plan. We reiterateBuy with a target price of Rs2,934, based on 20x FY12Eearnings.

2,000

2,200

2,400

2,600

2,800


BHEL Sensex - Rebased


61September 2010

BHEL: strong credentials, difficult to replicate

Only established Indian manufacturer of size; capacity to go to 20GWBHEL increased its capacity to 15GW, from 10GW and will expand it to 20GW by FY12.BHEL has a large servicing network, which is becoming critical in the power industry dueto requirements of high PLFs and frequent breakdowns because of inferior coal. Despiteprice undercutting by Chinese manufacturers, BHEL has strong relationships with centraland state utilities. BHEL's growing market share in the private sector vindicates our beliefthat increasingly power developers will focus on life-cycle costs, rather than upfront capitalcosts.

PRIVATE SECTOR ORDERS: GAINING MARKET SHARE

ORDER DATE OWNER CAPACITY (MW) VALUE (RS M) RS M/MW

Dec 2009 Indiabulls 2,700 57,780 21

Nov 2009 Pipavav 1,200 24,860 21

24-Nov-09 Jaiprakash, UP (Bara) 1,980 56,000 28

21-Aug-09 Monnet Power Company Limited, Orissa 1,050 26,300 25

7-Aug-09 Jindal India Thermal Power, Orissa 1,200 26,000 22

14-Jul-09 Adhunik Power and Natural Resources, Jharkhand 270 6,400 24

25-May-09 Ideal Energy Projects , Maharashtra 270 7,030 26

14-May-09 Korba West Power (Avantha), Chhattisgarh 600 14,750 25

29-Dec-08 Jindal Power, Chhattisgarh 2,400 50,400 21

22-Dec-08 Jaiprakash, UP (Bina) 500 11,750 24

29-Aug-08 GVK, Punjab (Goindwal Sahib) 540 11,500 21

22-Nov-07 JV of DVC and Tata Power, Maithon 1,050 21,080 20


Established quality, high level performanceIn FY09 out of BHEL's 191 coal-based thermal power sets, 77 operated at PLF of over90% and 56 achieved PLF of 80-90%. In FY07, out of 191 coal-based thermal power setsof BHEL, 141 sets posted Operating Availability (OA) of more than 90%.

PERFORMANCE OF BHEL SETS V/S THE NATIONAL AVERAGE

(%) 500MW 250MW 210/200/195 MW OVERALL NATIONAL AVERAGE

PLF 89.2 90 81.6 80.5 77

OA 92.7 92.6 90.3 88.4 -

Source: Company

The aggregate PLF of BHEL-supplied sets is among the highest in the world, due to lowdown-time (despite poor coal quality), high spares and service availability. This makesBHEL sets attractive in terms of life-cycle costs.

STRONG TECHNICAL COLLABORATIONS

TECHNOLOGY TIE-UPS COLLABORATORS

Supercritical boilers Alstom, France

Supercritical steam turbines-generators Siemens AG, Germany

Variable pitch axial flow fans Turbo Lufftechnik, Germany

Boiler feed pump & CEP Mitshubishi Heavy Industries, Japan

C&I automation platforms Metso Automation MAX Controls, US

Source: Company

BHEL

BHEL posted private sector

inflows in excess of Rs368b in

FY10, accounting for more

than 60% of overall inflows

of Rs590b

Proven quality, reasonable

pricing, local services drive

power developers to BHEL

62September 2010

TECHNOLOGY DEALS RESTRICT CHINESE PLAYERS FROM COMPETING IN INDIA

TECHNOLOGY TIE UPS BOILER TURBINE GENERATOR

Dong Fang 600MW Babcock-Hitachi Hitachi, Japan Hitachi, Japan

1,000MW Babcock-Hitachi Hitachi, Japan Hitachi, Japan

Shanghai 600MW Alstom, France Westinghouse - Siemens Westinghouse - Siemens

1,000MW Alstom, France Siemens, Germany Siemens, Germany

Harbin 600MW Babcock, USA MHI, Japan Siemens, Germany

1,000MW MHI, Japan Toshiba, Japan Toshiba, Japan

Alstom and Siemens have technological tie ups with BHEL; MHI with L&T and Toshiba with JSW

Source: Company

Vendor base: BHEL strength; competition disadvantagedFrom a small group of about 50 vendors in the late 1970s to 400-plus vendors today,BHEL's efficiency in developing and managing such a supply chain is a key competitiveadvantage. The strict adherence to engineering and design standards, timely and continuousmonitoring of execution timelines at the vendor end and efficient pricing mechanism reflectsin BHEL's strong revenue and profit growth over the years. From outsourcing about100,000 tons of boiler production in FY06, BHEL's target for outsourcing for FY11 is over250,000 tons. We believe the competition will require a reasonably long time to scale upsuch a vendor base in India.

Encouraging order flow outlook: BHEL to maintain over 55% share

With annual demand of over 25GW, demand for power plant equipment has been verystrong in the Eleventh Plan. We believe ordering in FY11 and FY12 will be good, withnearly 570GW of power projects due to be commissioned in the Twelfth Plan and orderedout in 1-2 years.

The cumulative power capacity addition for the Twelfth and the Thirteenth plans is over200,000MW, out of which 160-170GW will be ordered out in five years, implying annualdemand of over 35GW.

INDICATIVE PROJECT PIPELINE STATUS IN THE TWELFTH PLAN (MW)

CENTRAL STATE PRIVATE CBT TOTAL

Thermal 19,320 13,315 38,190 23,680 94,505

Hydro 8,122 10,341 10,965 - 29,428

Nuclear 6,500 - 2,000 - 8,500

Total 33,942 23,656 51,155 23,680 132,433

Source: Company

GROWING SHARE OF SUPERCRITICAL ORDERS

PROJECT CONFIGURATION (MW) CAPACITY (MW) STATE

North Karanpura 660 1,980 Jharkhand

Tanda-II 660 1,320 Uttar Pradesh

Meja (JV with State Govt) 660 1,320 Uttar Pradesh

New Nabinagar (JV with State Govt) 660 1,980 Bihar

Solapur 660 1,320 Maharashtra

Darlipalli 800 4,800 Orissa

Marakkanam 800 4,000 Tamil Nadu

Gajmara 800 3,200 Orissa

Total 19,920

Source: NTPC

BHEL

Having technology tie-ups

with global partners similar

to that of the Indian ones

makes it difficult for them to

compete in India

BHEL's increasing share

in supercritical projects

allays concerns on

technical capability

63September 2010

Source: Company

Order book strong, BTB at over 4x TTM sales

Despite accelerated execution in recent years, the order book is strong due to healthyorder intake. We expect BTB to be robust at over 4x sales in two years due to healthyorder intake.

BOOK/BILL (X, TTM) REMAINS STEADY DUE TO STABLE ORDER INFLOWS

BHEL

BHEL has over 55% market share in projects under construction. We believe that giventhe momentum in the power market and limited domestic capacity, BHEL will maintainover 50-55% market share.

BHEL TO MAINTAIN ~55% MARKET SHARE

ORDER INFLOWS TO START GROWING (RS B)

SEPCO, 8% Doosan, 2%

SCMEC, 5%

BHEL, 55%

SEC, 15%

Dongfang, 15%

4.2

4.2

4.2

2.32.1

4.24.6

2.7

2.83.2

3.13.3

3.0 2.7

2.6

4.3

4.23.9

3.7

3.6

3.2

2.92.8

2.7

2.6

2.62.5

4.3

4.2

1QF

Y04

3QF

Y04

1QF

Y05

3QF

Y05

1QF

Y06

3QF

Y06

1QF

Y07

3QF

Y07

1QF

Y08

3QF

Y08

1QF

Y09

3QF

Y09

1QF

Y10

3QF

Y10

1QF

Y11

0

50

100

150

200

250

1QF

Y04

2QF

Y04

3QF

Y04

4QF

Y04

1QF

Y05

2QF

Y05

3QF

Y05

4QF

Y05

1QF

Y06

2QF

Y06

3QF

Y06

4QF

Y06

1QF

Y07

2QF

Y07

3QF

Y07

4QF

Y07

1QF

Y08

2QF

Y08

3QF

Y08

4QF

Y08

1QF

Y09

2QF

Y09

3QF

Y09

4QF

Y09

1QF

Y10

2QF

Y10

3QF

Y10

4QF

Y10

1QF

Y11

Source: Company

Expanded capacity of 20GW

by FY12 will help the

company face competition

effectively on both pricing

and delivery

BTB at 4.2x will help

to enable a 22% revenue

CAGR over FY10-12

For 1QFY11 inflows were

Rs108b down 15% YoY; For

FY11 we expect overall

inflows to be Rs628b, up 5%

Market share to be

maintained over 50-55%

64September 2010

Margins to remain strong

EBITDA MARGINS (%)

BHEL

EXECUTION IS IMPROVING; PROVIDING REVENUE VISIBILITY

Source: Company

PRICING ON SUPERCRITICAL PROJECT AWARDS IMPROVE (RS M/MW)

CAPACITY VALUE (RS M/MW) ORDER

(MW) AWARD BOI- TUR- TOTAL DESCRIPTION

YEAR LER BINE

Sipat Stage 1 NTPC Chhattisgarh Doosan/Power Machines 3 x 660 1,980 2004 16.9 BTG Package

Barh Stage 1 NTPC Bihar Power Machines 3 x 660 1,980 Feb-05 19.7 BTG Package

Mundra UMPP Tata Power Gujarat Doosan / Toshiba 5 x 800 4,000 May-07 13.9 4.6 18.5 BTG Package

Mundra Ph III Adani Power Gujarat Sepco III 2 X 660 1,320 Sep-07 32.4 All equipments

Mundra Ph IV Adani Power Gujarat Sepco III 3 X 660 1,980 Jan-08 33.0 All equipments

Tiroda Ph 1 & 2 Adani Power Maharashtra Sichuan Machinery 3 X 660 1,980 Feb-08 19.2 BTG package

Krishnapatnam AP Genco AP BHEL / L&T 2 x 800 1,600 Aug-08 15.6 9.7 25.4 BTG Package

Barh Stage 2 NTPC Bihar BHEL 2 x 660 1,320 Oct-08 11.4 11.0 22.3 BTG Package

TNEB TNEB - Tamil Nadu BHEL 2 x 800 1,600 Nov-08 54.4 Project cost,

BHEL JV incl IDC

Sasan UMPP Reliance Power MP Chinese 6 x 660 3,960

Nigrie Jaiprakash MP L&T-MHI 2 x 660 1,320 Aug-09 16.9 13.4 30.3 BTG package

Bara Jaiprakash UP BHEL 3 x 660 1,980 Oct-09 28.3 BTG package

Mahagenco Mahagenco Maharashtra L&T-MHI 3 x 660 1,980 Oct-09 34.8 BTG package,

incl substantial

BOP, electricals,

controls,

instrumentation,

and civil works

Raichur KPCL - BHEL JV BHEL 1,600 Apr-10 39.4 BTG incl BOP

Total 27,000

Source: Company


19.6

19.6

22.121.6

14.113.8

16.217.0

18.920.4

17.318.2

13.314.5

21.721.2 20.4

17.3

14.0 14.2

16.2 15.7

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E

EBITDA Margin (%) Staff Cost (%)

32 40 50

72

43 53 60

105

56 66 71 65

13614

2124

18

29

16

3534

46

2219

29

41Q

FY

08

2QF

Y08

3QF

Y08

4QF

Y08

1QF

Y09

2QF

Y09

3QF

Y09

4QF

Y09

1QF

Y10

2QF

Y10

3QF

Y10

4QF

Y10

1QF

Y11

Revenues (Rs b)Revenue Grow th (% YoY)

The full benefit of capacity

expansion of 15GW will

reflect in 2HFY11

Higher sales, lower

provisioning and stable

commodity prices should be

margin accretive for BHEL

65September 2010

EARNINGS CAGR AT 24% OVER FY10-12E

FY07 FY08 FY09 FY10 FY11E FY12E VARI, BP

(FY10-12)

Revenues 176,427 197,652 267,879 334,757 402,601 495,098

% Growth 28.9 12.0 35.8 25.4 20.1 23.1

Staff Cost 24510 31197 41127 64492 57230 64424

% Revenues 13.9 15.8 15.4 19.3 14.2 13.0 -625.3

Manufacturing / Other Costs 115,866 129,041 184,563 211,065 258,416 321,316

% Revenues 65.7 65.3 68.9 63.1 64.2 64.9

Reported EBITDA 36,051 37,414 42,189 59,200 86,954 109,358

% Revenues 20.4 18.9 15.7 17.7 21.6 22.1 440.4

Adjusted EBITDA 36,051 34,214 48,788 65,546 86,954 109,358

% Revenues 20.4 17.3 18.2 19.6 21.6 22.1 250.8

Reported PAT 24,148 28,594 31,382 43,106 58,407 71,837

Adjusted PAT 24,144 25,095 35,670 46,839 58,407 71,837

% Growth 44.0 3.9 42.1 31.3 24.7 23.0


Rise in NWC due to sharp increase in retention money For BHEL, working capital improved from 31.2% of revenue in FY03, to -6.2% of

revenue in FY09. A large part of this improvement was driven by increased customeradvances, which improved from 26% of revenue in FY03 to 63% of revenue inFY09.

The increase is also driven by a 5.5x increase in order intake during the period, asnew orders entail customer advances of 10-15%. Going forward, the order intake isexpected grow moderately. Consequently we expect customer advances to fall to59% of revenues in FY10 and to 38% in FY12.

This will result in working capital increasing to 13% of revenue in FY12 v/s -6.2% inFY08. However, a large part (40%) of receivables will be due to retention money.

BHEL

WORKING CAPITAL CYCLE HIGHLY SENSITIVE TO CUSTOMER ADVANCES CUSTOMER ADVANCES HAVE LARGELY REMAINED IN A RANGE



BHEL trades at 20.7xFY11E and 16.8x FY12E earnings. It trades at EV/EBITDA of12.4x FY11E and 9.9x FY12E. BHEL also trades at an 11% premium to the broadermarket, which has come down from 26% over the past two years. Over the past twoyears, the premium has significantly shrunk due to concerns about order-flow stagnation,competition from other private players like L&T and BHEL's ability to garner and maintainits market share in supercritical BTG sets during the Twelfth Plan. We reiterate Buy witha target price of Rs2,934, based on 20x FY12E earnings.

39%

30%

16% 17%13%

4%-2% -6.2%

2% 3%9%

28% 26%

39%48%

41%45%

59% 63%58% 58%

52%

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10E

FY

11E

FY

12E

NWC (excluding cash), % salesClient advances, % sales

11%

12%

13%

14%

15%

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10E

FY

11E

FY

12E

Client advances, % Order book

66September 2010

BHEL

1 YEAR FORWARD P/E

1 YEAR FORWARD P/BV


BHEL VS SENSEX PE PREMIUM / DISCOUNT (%)


18.5

0

12

24

36

48

Mar

-94

Apr

-95

Apr

-96

May

-97

May

-98

May

-99

Jun-

00

Jun-

01

Jun-

02

Jul-0

3

Jul-0

4

Jul-0

5

Aug

-06

Aug

-07

Aug

-08

Sep

-09

Sep

-10

Average of 14.2x

Peak of 40.9x

Bottom of 4.6x

5.4

0

3

6

9

12

Mar

-94

Apr

-95

Apr

-96

May

-97

May

-98

May

-99

Jun-

00

Jun-

01

Jun-

02

Jul-0

3

Jul-0

4

Jul-0

5

Aug

-06

Aug

-07

Aug

-08

Sep

-09

Sep

-10

Average of 3.1x

Peak of 10.7x

Bottom of 0.6x

11.0

-80

-40

0

40

80

120

Mar

-94

Jun-

95

Aug

-96

Oct

-97

Dec

-98

Feb

-00

Apr

-01

Jun-

02

Aug

-03

Nov

-04

Jan-

06

Mar

-07

May

-08

Jul-0

9

Sep

-10

-10

5

20

35

Mar

-95

Apr

-96

Apr

-97

May

-98

May

-99

May

-00

Jun-

01

Jun-

02

Jul-0

3

Jul-0

4

Jul-0

5

Aug

-06

Aug

-07

Aug

-08

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-09

Sep

-10

Valuations

Long-period Trend

67September 2010


BHEL


Y/E MARCH 2009 2010 2011E 2012E

Total Income 267,879 334,757 402,601 495,098

Change (%) 35.8 25.4 20.1 23.1

Staff Cost 41,127 64,492 57,230 64,424

Mfg. Expenses 147,777 173,946 214,280 264,814

Selling Expenses 36,785 37,119 44,137 56,502

EBITDA 42,189 59,200 86,954 109,358

Change (%) 12.8 40.3 46.9 25.8

% of Net Sales 15.7 17.7 21.6 22.1

Depreciation 3,343 4,580 6,123 7,880

Interest 307 335 482 482

Other Income 9,829 11,549 9,508 10,379

Extra-ord. Items (net) 119 73 0 0

PBT 48,488 65,907 89,857 111,375

Tax 17,106 22,800 31,450 39,538

Rate (%) 35.3 34.6 35.0 35.5

Reported PAT 31,382 43,106 58,407 71,837

Adjusted PAT 35,670 46,839 58,407 71,837

Change (%) 42.1 31.3 24.7 23.0


Y/E MARCH 2009 2010 2011E 2012E

Share Capital 4,895 4,895 4,895 4,895

Reserves 124,492 154,278 193,552 241,855

Net Worth 129,387 159,174 198,447 246,750

Loans 1,494 1,278 1,278 1,278

Differed Tax Liability -18,403 -15,272 -15,272 -15,272




Net Fixed Assets 14,704 24,154 29,464 58,373

Capital WIP 11,570 15,296 15,000 5,000

Investments 523 798 798 798

Curr. Assets 369,011 429,348 516,245 597,873

Inventory 78,370 92,355 113,513 139,768

Debtors 159,755 206,888 237,837 292,848


Loans & Advances 24,237 28,137 32,432 39,934

Other Current Assets 3,502 4,069 4,475 4,923

Curr. Liab. & Prov. 283,329 324,417 377,055 429,290

Creditors 58,529 75,798 82,189 101,573


Provisions 49,756 44,180 50,113 55,922


Appli. of Funds 112,479 145,179 184,452 232,755

E: MOSL Estimates

RATIOS

Y/E MARCH 2009 2010 2011E 2012E

Basic (Rs)

EPS 72.9 95.7 119.3 146.7

Change (%) 42.1 31.3 24.7 23.0

Cash EPS 79.7 105.0 131.8 162.8

Book Value 264.3 325.2 405.4 504.1

DPS 17.0 23.3 33.4 41.1


Valuation (x)

P/E 20.7 24.9 20.7 16.8

Cash P/E 19.0 22.7 18.7 15.1

EV/EBITDA 15.1 18.1 12.4 9.9

EV/Sales 2.4 3.3 2.7 2.2


Dividend Yield (%) 0.7 0.9 1.4 1.7

Return Ratio (%)

RoE 30.1 32.5 32.7 32.3

RoCE 46.9 51.4 54.8 53.6

Turnover Ratios

Debtors (Days) 208 221 220 220



Asset Turnover (x) 17.8 13.6 13.4 8.3

Leverage Ratio

Debt/Equity (x) 0.0 0.0 0.0 0.0


Y/E MARCH 2009 2010 2011E 2012E

PBT bef. EO Items 48,369 65,834 89,857 111,375

Add: Depreciation 3,343 4,580 6,123 7,880

Interest 307 335 482 482

Less: Direct Taxes Paid 17,106 22,800 31,450 39,538

(Inc)/Dec in WC 12,443 -24,495 -4,172 -36,981


EO Income 119 73 0 0

CF fr. Op. Incl. EO Items 47,474 23,526 60,839 43,218

(Inc)/dec in FA -13,223 -17,756 -11,137 -26,790

CF from Investments -13,663 -18,031 -11,137 -26,790

(Inc)/Dec in Net Worth -5,024 3,131 0 0

(Inc)/Dec in Debt 542 -216 0 0

Less: Interest Paid 307 335 482 482

Dividend Paid 9,736 13,321 19,134 23,534

CF from Fin. Activity -14,525 -10,741 -19,616 -24,015

Inc/Dec of Cash 19,286 -5,245 30,087 -7,587


Closing Balance 103,146 97,901 127,988 120,400

68September 2010

ORDER framework


O


D



Crompton Greaves Bloomberg: CRG IN CMP: Rs309 Neutral

Power business to provide earnings upside

YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/


3/09A 46,107 5,599 8.7 53.2 35.4 5.5 36.6 52.9 1.4 10.0

3/10A 52,840 8,098 12.6 44.6 24.5 7.2 38.4 55.0 2.3 14.2

3/11E 62,965 9,055 14.1 11.8 21.9 8.7 34.2 50.2 3.0 18.3

3/12E 75,644 11,126 17.3 22.9 17.8 6.8 32.9 49.0 2.4 14.5



1,6,12 Rel. Perf. (%) 0/9/55

M.Cap. (Rs b) 198.2

M.Cap. (US$ b) 4.2


Crompton is among the key beneficiaries of the global T&Dspend. The company derives nearly 45% of its consolidatedrevenue from overseas markets through its subsidiaries,mainly Pauwels and Ganz, and will benefit from its growingfootprint in the US and Europe. The company has a strongpresence in the Indian power T&D space and is the marketleader in the 765kV transformer/reactor segment. Cromptonis also a leading player in industrial and consumer electricalproducts, which account for 13% and 18% of consolidatedsales, respectively, and the company stands to benefit from apick up in the manufacturing and housing sectors.

Crompton's consolidated order backlog at the end of 1QFY11was Rs68b, up 8% YoY with a BTB of 0.7x. The internationalorder book was Rs30b, down 14% YoY. FY10 revenue fromthe international business declined by 7.4%, loweringconsolidated sales growth to 5%. We estimate Cromptonwill post consolidated revenue of 12% CAGR over FY10-12,despite marginal 2% growth in international business. Weexpect domestic sales will post 20% CAGR over FY10-12. Anearly recovery in the international distribution transformerbusiness can provide upside to growth estimates in FY12.

With an objective of lowering its dependence on the Indianpower equipment market, Crompton Greaves entered theglobal transformer industry by acquiring Europe-basedcompanies like Pauwels and Ganz. The acquisitions havepaid off, with the companies' consolidated revenue and profitposting 22% and 36% CAGR respectively, over FY06-10. Webelieve Crompton is aggressively pursuing inorganic growthopportunities, which can boost growth. It invested Rs2.27bon the acquisition of 31% in Avantha Power & Infrastructure, agroup company.

Crompton delivered better operational results than its peersover the past 12 quarters mainly due to a higher proportion ofproduct revenue, cost-efficiency and value engineering. Weexpect Crompton to post consolidated revenue and PAT CAGRof 12% and 16% respectively over FY10-12. For the standalonebusiness, we expect EBITDA margins to be stable at 16.5%for FY11 (up 30bp) and 16.8% (up 30bp) respectively. Weexpect scope for improved profitability of the internationalbusiness (EBITDA of 10% in FY10), with a pick up in volumes.

The stock trades at 18x FY12E earnings, at a 26% discount toSiemens and a 45% discount to ABB and is a good long-terminvestment. We maintain Neutral with a target price of Rs329.Our SOTP target price is based on 18x FY12E earnings andRs17/share for the company's stake in Avantha Power. Anylarge acquisition will be a key re-rating catalyst.

* Consolidated nos, pre exceptionals

150

200

250

300

350


Crompton Greaves Sensex - Rebased


69September 2010

Crompton Greaves

Standalone business to drive consolidated revenue over FY10-12

Adverse economic conditions in the US and Europe impacted the performance of CromptonGreaves' overseas subsidiaries, which posted a 10% decline in revenue (in euros), andnow contribute 42% and 29% to consolidated revenues and profit respectively. Decliningdemand for distribution transformers in Europe and the US has resulted in the internationalorder backlog declining by 14% YoY in 1QFY11. Crompton's international business postedrevenue declines of 8.5%, 4.4%, 19.3% and 6.3% over the past four quarters and isunlikely to revive soon. But with growth in wind turbines starting to pick up in Europe, webelieve the international business division will pick up by the end of FY11.

In FY11, earnings growth will largely be driven by the domestic business. We expect thedomestic power business to grow by 17% in FY11, from 13% in FY10, driven by strongT&D capex in India by PGCIL. Industry and consumer products will continue to maintainstrong momentum, growing by 20% and 22%, respectively.

We expect 17% growth in consolidated revenue in FY12, led by 20% growth in domesticsales and 10% growth in international sales.

SUBSIDIARY REVENUE (RS B) WILL FALL 7.3% IN FY11, TO PICK UP IN FY12

Subsidiary revenue will

decline 7.3% in FY11 to

revive in FY12

Standalone revenue will

drive the consolidated

business by posting 20%

CAGR over FY10-12

STANDALONE REVENUE (RS B) TO BE DRIVEN BY ALL SEGMENTS

CONSOLIDATED REVENUE (RS B) IMPACTED DUE TO DECLINE IN SUBSIDIARY SALES IN FY11


16

23

30

41 3835

40

FY06 FY07 FY08 FY09 FY10 FY11E FY12E

16 17 2025

3439

4653

6376

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

41

5668

87 9198

115


70September 2010

Crompton Greaves

Consolidated order backlog Rs68b; 1QFY11 standalone intake up 40% YoY

In 1QFY11 consolidated order backlog was Rs68b. Domestic orders accounted for 55%of total orders and international subsidiaries accounted for the rest 45%. The consolidatedorder book grew by 7.7% YoY and 6.3% QoQ. The 1QFY11 consolidated order intakewas Rs27.3b, up 30% YoY. Domestic intake grew by 40% and the international orderbook grew 14% YoY to Rs18b and Rs9.14b respectively. A pick up in overseas orders wasdriven mainly by higher demand for wind energy transformers in Europe and the USthough demand for distribution transformers is weak.

ORDER INTAKE TREND/BACKLOG (RS B)

ORDER INTAKE FY08 FY09 FY10 FY11

2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

Standalone 10 10 12 15 15 11 15 13 17 14 21 18

International Subsidiary 9 6 8 15 14 9 6 8 8 6 8 9

Consolidated 19 16 20 29 28 20 21 21 25 20 28 27

Domestic intake grew by 36% while international order book grew 14% YoY respectively, to Rs18b and 9.14b

ORDER INTAKE TREND/BACKLOG (RS B)

ORDER BOOK FY08 FY09 FY10 FY11

2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

Standalone 22 22 21 24 27 27 28 27 31 30 34 37

Intl.Subsidiary 30 29 30 36 40 39 38 36 33 31 30 31

Consolidated 52 51 51 60 68 66 66 63 64 61 64 68

Consolidated order backlog during 1QFY11 stood at Rs68b. Domestic orders accounted for 55% of the orders, while international

subsidiaries accounted for remaining 45%. Consolidated order-book grew by 7.7% YoY and 6.3% QoQ


Pick up in overseas sales key to Crompton's growth

In FY10, exports from the standalone business were worth Rs23b, a 23% contribution tostandalone revenue or 11.7% of consolidated revenue. International subsidiaries, withrevenue of Rs38b accounted for 42% of consolidated revenue. Revenue from overseasoperations contributed 53% of consolidated revenue in FY10. EBIT contribution ofinternational operations was 35% of consolidated EBIT of Rs11b in FY10. This includesEBIT from standalone exports, which constitute 9-10% of overall EBIT. Hence Crompton'searnings are equally leveraged to international and domestic demand environments.

FY10 SHARE OF OVERSEAS REVENUE, EBIT (%)

REVENUE (%) EBIT (%)

Power 67.9 59.6

Standalone 27.5 35.8

Overseas 40.4 23.8

Industrial 13.8 21.4

Consumers 17.6 17.8

Others 1.1 1.2


Overseas subsidiaries

account for 41% of

Crompton's consolidated

revenue and 24% of its

consolidated profits

71September 2010

Crompton Greaves

STANDALONE REVENUE COMPOSITION (RS M)

FY08 FY09 FY10

Domestic 31,114 35,207 42,403

% Proportion 80.3 76.4 80.2

International 7,626 10,900 10,437

% Proportion 19.7 23.6 19.8

Asia 4,000 4,488 5,122

Africa 658 2,429 2,070

North America 926 700 316

South America 999 2,139 2,233

Europe 762 845 642

Australia 281 297 55

Total Revenue 38,740 46,107 52,840


Competitive edge in the 765kV transformers space

Over FY03-10 Crompton posted revenue of 19% CAGR and EBITDA margins grewfrom 9.6% to 16.2%. Crompton maintained a 35% market share in FY09 and FY10 in the400kV transformer awards by PGCIL. It is also the only Indian company to have received765kV transformer-reactor orders from PGCIL, valued at Rs9.86b, amounting to 44% oforders placed.

Crompton was the first Indian company to supply 765kV transformers to NTPC's plant atSipat 18 months ago. This has given considerable track record of manufacturing, testingand commissioning of such EHV products to Crompton's Bhopal plant. We believeCrompton stands to gain most from future PGCIL 765kV orders.

ABOUT A THIRD OF ADDITION IN THE 765KV SEGMENT IN THE ELEVENTH PLAN

SUB-STATIONS UNITS PLANNED FOR THE ELEVENTH PLAN PERIOD

HVDC Terminal Capacity MW 6,000

765kV MVA 51,000

400kV MVA 52,058

230/220kV MVA 73,500

Total AC Substation Capacity MVA 176,558


CGL A DOMINANT PLAYER IN THE 765KV TRANSFORMER REACTOR RANGE

For CGL, consolidated

overseas revenues occupy a

60% share of revenue

Crompton enjoys a lead time

of 18 months for 765kV

transformers v/s the

competition


Crompton & Ganz, 36%

TBEA, 19%

Hyosung, Korea, 33%

ABB, 3%Baoding, China,

9%

72September 2010

Crompton Greaves

Expect FY11 consolidated EBITDA margins of 14%

In its standaone India business Crompton posted FY10 EBITDA margins of 16.2%, whichwere up 240bp mainly due to 70bp lower raw material costs and 150bp lower otherexpenditure. Considering that most of the orders in the domestic order book of Rs37b willbe in the power systems segment where orders carry PVC clauses, we expect FY11margins to be stable at 16.5% (up 30bp) and 16.8% (up 30bp) in FY12.

For the international business, in spite of pressure on volume growth, we expect Cromptonto maximize operational leverage through global sourcing and lower production costs tomaintain FY11 margins at 10.3% (up 30bp) and 10.8% (up 50bp) in FY12.

GAP IN MARGINS LEAVES SCOPE FOR EFFICIENCIES, MARGIN SURPRISES

Substantial gap in margins

leaves ample scope for

further efficiencies and

margin surprises in the

overseas subsidiaries


32% stake in APIL gives Crompton window to unlock value

Avantha Power and Infrastructure (APIL) has filed a draft red herring prospectus withSEBI for a proposed IPO to part finance phase-1 of two power projects aggregating1.2GW (total planned capacity of 2.4GW) in Chhattisgarh and Madhya Pradesh. Thecompany plans to raise Rs10b through the IPO, which will be used as equity investment inprojects. Recently, Crompton awarded BTG contracts to BHEL for a unit with 2.4GWplanned capacity.

Crompton's stake in Avantha is 31%, which is lower than its initial stake of 41%. InNovember 2009, Avantha had issued 203.6m shares to Salient Financial Services Ltd(SFSL), a promoter group company, at Rs11/share (31.2% of the current equity capital).This is similar to an issue of 206.4m shares to Crompton Greaves at Rs11/share, and led tolower equity stake for Crompton. In February 2010, 19.6m shares of a total 203.6m sharesissued to SFSL was acquired by Gautam Thapar at Rs11/share (representing 3% of thecurrent equity). BILT Graphic Paper Products Ltd, a promoter group company acquired30.2m shares (4.6% of the equity) from BILT at Rs10.94/share in tranches during Octoberand December 2009.

9.210.2

7.15.9

7.5 8.1

10.0 10.3 10.8

12.513.8 16.816.516.2


CG India EBITDA Margins (%) CG Global EBITDA Margins (%)

73September 2010

Crompton Greaves

WE VALUE AVANTHA'S STAKE AT RS16.8 PER SHARE

INVESTMENT P/BV EQUITY VALUE VALUE/CGL SHARE

(RS M) (X) (RS M) (RS M)

Net Worth 918 2.5 2,295 1.1

Under Implementation

Amount Infused 2,951

IPO Raised 10,000

Total Money Invested 12,951 2.5 32,378 15.6

Total Value 34,673 16.8


Rating: Neutral with a price target of Rs329 (18x FY12)

The stock trades at a P/E of 21x FY11E and 17x FY12E. We factor in consolidatedearnings CAGR of 17% over FY10-12 and consolidated EPS is Rs14 (up 12%) for FY11and Rs17.3 (up 23%) for FY12.

The stock trades at 17x FY12E earnings, a 26% discount to Siemens and a 45% discountto ABB, and it is a good long-term investment. We maintain Neutral with a target price ofRs329. Our SOTP target price is based on 18x FY12E earnings and Rs17/share for thecompany's stake in Avantha Power. A large acquisition would be a key re-rating catalyst.

74September 2010

Crompton Greaves

1 YEAR FORWARD P/E

1 YEAR FORWARD P/BV


CROMPTON GREAVES VS SENSEX PE PREMIUM / DISCOUNT (%)


19.9

0

14

28

42

56

Mar

-94

Apr

-95

Apr

-96

May

-97

May

-98

May

-99

Jun-

00

Jun-

01

Jun-

02

Jul-0

3

Jul-0

4

Jul-0

5

Aug

-06

Aug

-07

Aug

-08

Sep

-09

Sep

-10

Average of 16.7x

Peak of 53.9x

Bottom of 4.7x

Negative Earnings Cycle

7.7

0.0

4.0

8.0

12.0

16.0

Mar

-94

Apr

-95

Apr

-96

May

-97

May

-98

May

-99

Jun-

00

Jun-

01

Jun-

02

Jul-0

3

Jul-0

4

Jul-0

5

Aug

-06

Aug

-07

Aug

-08

Sep

-09

Sep

-10

Average of 3.2x

Peak of 13.7x

Bottom of 0.3x

19.1

-120

0

120

240

360

Mar

-94

May

-95

Jun-

96

Jul-9

7

Aug

-98

Sep

-99

Oct

-00

Nov

-01

Jan-

03

Feb

-04

Mar

-05

Apr

-06

May

-07

Jun-

08

Jul-0

9

Sep

-10


16.4

0

7

13

20

Mar

-01

Feb

-02

Dec

-02

Nov

-03

Sep

-04

Jul-0

5

Jun-

06

Apr

-07

Feb

-08

Jan-

09

Nov

-09

Sep

-10

Peak of 16.4x

Average of 6.5x

Bottom of 1.7x

Valuations

Long-period Trend

75September 2010


Crompton Greaves


Y/E MARCH 2009 2010 2011E 2012E

Net Sales 46,107 52,840 62,965 75,644

Change (%) 19.0 14.6 19.2 20.1

Raw Materials 31,964 36,230 43,131 51,438

Staff Cost 2,291 2,558 2,865 3,201


EBITDA 6,380 8,578 10,358 12,684

% of Net Sales 13.8 16.2 16.5 16.8


Amortization 0 0 0 0

Interest 286 200 25 25

Other Income 500 844 895 1,166

EO Items (as rep.) 0 404 0 0

PBT 6,143 9,105 10,659 13,197

Tax 2,172 2,933 3,731 4,619

Rate (%) 35.4 32.2 35.0 35.0

Reported PAT 3,971 6,172 6,928 8,578

Extra-ordinary Inc.(net) 0 404 0 0

Adjusted PAT 3,971 5,768 6,928 8,578

Change (%) 44.3 45.3 20.1 23.8

Consolidated PAT 5,599 8,098 9,055 11,126

Change (%) 53.2 44.6 11.8 22.9


Y/E MARCH 2009 2010 2011E 2012E

Share Capital 733 1,283 1,283 1,283

Reserves 11,686 16,364 21,560 27,994

Net Worth 12,419 17,647 22,843 29,277

Loans 537 268 100 100

Deffered Tax Liability 639 834 834 834




Net Fixed Assets 5,161 5,338 6,099 6,671

Capital WIP 130 330 100 100

Investments 2,655 6,881 6,881 6,881

Curr. Assets 18,986 22,202 28,693 37,901

Inventory 2,813 3,035 3,605 4,331

Debtors 10,123 12,128 14,422 17,326


Loans & Advances 1,325 1,554 1,803 2,166


Creditors 8,475 9,589 10,816 12,994


Provisions 1,407 1,536 1,803 2,166



E: MOSL Estimates

RATIOS

Y/E MARCH 2009 2010 2011E 2012E

Basic (Rs)

Adjusted EPS 6.2 9.0 10.8 13.4

Growth (%) 44.3 45.3 20.1 23.8

Consolidated EPS 8.7 12.6 14.1 17.3

Growth (%) 53.2 44.6 11.8 22.9

Cash EPS 12.1 9.8 11.7 14.4

Book Value 19.4 27.5 35.6 45.6

DPS 1.1 1.3 2.3 2.9


Valuation (x)

P/E (standalone) 17.1 22.1 28.6 23.1

P/E (consolidated) 12.1 15.7 21.9 17.8

Cash P/E 15.4 20.2 26.4 21.5

EV/EBITDA 10.0 14.2 18.3 14.5

EV/Sales 1.4 2.3 3.0 2.4


Dividend Yield (%) 0.4 0.4 0.7 0.9


RoE 36.6 38.4 34.2 32.9

RoCE 52.9 55.0 50.2 49.0

Turnover Ratios

Debtors (Days) 75 80 80 80




Leverage Ratio

Debt/Equity (x) 0.0 0.0 0.0 0.0


Y/E MARCH 2009 2010 2011E 2012E



Interest 286 200 25 25


(Inc)/Dec in WC 1,108 209 -1,119 -646


(Inc)/Dec in FA -589 -899 -1,100 -1,200

(Pur)/Sale of Investments -712 -4,225 0 0


(Inc)/Dec in Net Worth 115 195 0 0

(Inc)/Dec in Debt -339 -269 -168 0


Dividend Paid 858 944 1,732 2,144


Inc/Dec of Cash 3,149 760 3,379 5,215


Closing Balance 4,725 5,485 8,864 14,079

76September 2010

ORDER framework

ROPPORTUNITY & COMPETITIVE ADVANTAGE REVENUE AND ORDERS

O

EDE-RISKING STRATEGY EARNINGS OUTLOOK

D



Cummins India Bloomberg: KKC IN CMP: Rs748 Buy

Exports to treble by FY12



3/09A 33,043 4,145 20.9 47.7 35.7 10.8 33.7 41.8 4.4 30.2

3/10A 28,449 4,439 22.4 7.1 33.4 9.6 30.4 39.5 4.9 26.6

3/11E 39,095 6,096 30.8 37.3 24.3 7.9 35.7 46.3 3.5 16.9

3/12E 52,499 8,314 42.0 36.4 17.8 6.3 39.3 49.5 2.6 12.2



1,6,12 Rel. Perf. (%) -3/36/83

M.Cap. (Rs b) 148.1

M.Cap. (US$ b) 3.2


Cummins India Ltd (CIL), India's largest engine maker, withover 50% market share, derives about 70% of sales from thedomestic market and 30% from exports. India's acute powershortage is driving demand for DG sets, from which Cumminswill benefit significantly. Investment in the construction andmining segments is boosting growth. CIL is among CumminsInc's leading manufacturing bases and meets its requirementfor key products and components. Given the quality standardsand cost-advantage that Cummins India has, outsourcing isthe biggest catalyst for the company in the long-term.

After sluggish demand in FY09 and in 1HFY10, the domesticengine market rebounded in the past 6-8 months. As thepower shortage grows, demand for diesel engines for power-generation will strengthen. We expect domestic sales to post27% CAGR over FY10-12 and we project exports to be worthRs15b by FY12, from Rs4.8b in FY10, buoyed by a strongrecovery in US and Asian markets. Cummins Inc has alsoraised its guidance and targets to end CY10 with sales ofUS$13b, with higher margin.

We expect the company to expand its export product portfolio.Given quality standards and cost benchmarks that CumminsIndia has established, Cummins Inc will enhance the productportfolio it outsources from India. To meet domestic demandand export requirements, Cummins India will spend aboutUS$300m at a mega-site near Pune over five years, whichwill enhance capacity by over 20% CAGR. This is positive forthe company's growth. Cummins also periodically undertakescost-cutting exercises like ACE and TRIMS, which improveoperational efficiencies, margins and cashflows.

Cummins India surprised markets by a sharp improvementin margins over the past two years. In FY10 EBITDA marginsrose 410bp to 18.5%. The company has maintained a strongmargin momentum, posting 21.3%, up 290bp YoY in 1QFY11.We believe a better product mix, healthy pricing environment,stable commodity prices and continuous cost-cuttinginitiatives will keep margins strong. Cummins posted 25%earnings CAGR over the past four years despite an uncertainglobal business environment. We expect the company to post37% earnings CAGR by FY12.

Cummins is among the best performing stocks in the capitalgoods sector, outperforming the Sensex over the year. Thestock trades at 24.3x FY11E and 17.8x FY12E earnings. Webelieve that despite the run-up, Cummins offers a goodinvestment opportunity with a long-term investment objective.A 37% earnings CAGR, near-term earnings upsides due tothe likelihood of faster revenue growth and growing exportsopportunity will keep valuations at a premium to the broadmarket. We recommend a Buy on the stock with a target priceof Rs840, based on 20x FY12E earnings.

200

350

500

650

800


Cummins India Sensex - Rebased


77September 2010


#2. Industrial (15% of sales)

Key users sectors include construction, mining, compressors, oilfields, marine, defense,railways and water-well rigs. Infrastructure investment will create strong demandfrom construction and mining industries.

India stage III emission norms based on EU stage IIIA are likely to be implementedfrom April 2011 on off-highway wheeled construction equipment. This will provideadditional growth opportunity to Cummins as it offers mechanical and electronic engines,meeting emission norms.

IIP GROWTH AND DIESEL ENGINES

#1. Power generation (45% of sales)

Cummins offers power generation solutions. With a mounting power deficit, demand fordiesel engines will continue to be strong as back-up supply.

BASE DEFICIT(%)/PEAK DEFICIT (%)


#3. Automotive engines (10% of sales)

CIL supplies 'C' series engines with 300HP ratings to Tata Motors for its Tata Novusheavy trucks. Given strong growth in high HP trucks, the segment is expected to poststrong growth. From a small base of Rs963m in FY07, auto engines sales grew to Rs2.6bin FY10, also boosted by demand from the CNG bus segment for the CommonwealthGames.

Cummins India

0

300,000

600,000

900,000

1,200,000

FY

93

FY

94

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FT

DF

Y11

FY

12

-25

-20

-15

-10

-5

0Requirement (MU) Availability (MU)Base Deficit (%) Peak Deficit (%)

-5

0

5

10

15

20

Apr

'06

Jul '

06

Oct

'06

Jan

'07

Apr

'07

Jul '

07

Oct

'07

Jan

'08

Apr

08

July

08

Oct

08

Jan

09

Apr

il 09

July

09

Oct

09

Jan

10

Apr

il 10

-20

0

20

40

60IIP Grow th (%) Diesel Engines-IPP-Grow th (%)

Well diversified product

range to cater to power,

industrial and auto segments

78September 2010

#4. Gas opportunity seen at 1,000MW in five years

With new gas discovery, the gas-based distributed power generation market is estimatedat about 200MW a year. The cost of power generation, based on gas is significantly lowerthan that of diesel. Cummins has a strong lean-burn natural gas product line and stands tobenefit from the opportunity.

#5. Cummins Sales & Services (CSS)

CSS offers after-sales service to Cummins engines. It also replaces, re-powers andreconditions old engines. The segment has maintained a growth of over 15% in recentyears and is expected to grow on similar lines in next few years. Given the rise in dieselprices, average running hours of large engines is declining. But increasing engine populationprovides the segment with the required growth stimulus.

Exports to increase 3x by FY12, parent raises guidance

Cummins Inc has identified India as a key outsourcing destination for its global markets.Most of Cummins India's exports is for power generation applications. The companysupplies K and N series engines of various displacements like 28, 38 and 50 liters. Italso supplies gen-sets to its parent.

FY10 exports fell sharply, due to the global economic slowdown. But over the past sixmonths, the company posted over 125% YoY growth in exports. We expect exports togrow to over Rs15b by FY12. Growth will be driven by the existing portfolio and newproducts.

Cummins India will also supply <200kVA DG sets to its parent for their globalrequirements. The company is spending Rs1.5b to set up a factory at an SEZ, part ofits Phaltan mega-site (Pune). The eventual capacity at the facility will be 40,000 unitsby FY13. Initial capacity, on commissioning in FY11, will be 15,000 units. This willboost exports.

We believe new product additions will be a key growth driver. New products mayinclude engines for industrial applications besides power-generation applications.

EXPORTS TO INCREASE THREE-FOLD BY FY12


Cummins Inc raises guidance; positive for Cummins India

Columbus, Indiana-based Cummins Inc is among the world's largest engine makers, withan extensive product portfolio, both for on and off-highway application. Cummins Indiameets part of its global power-generation demand.

Cummins India

2.71.7 2.2

4.05.3

6.17.2

9.5

15.2

4.9

13.1

36.9

20.9 23.9

33.336.3

32.9 31.1 39.7

17.224.3

29.0


Exports (Rs b) Exports (% of Revenues)

Exports mainly to powergen

application; huge

opportunity

79September 2010


Better product mix, cost cuts to boost margins

Over the years Cummins India has significantly improved margins. Despite a 14% fall insales in FY10, the company improved EBITDA margins by 410bp. We expect margins toimprove by 246bp in FY11. Margins are expected to be maintained in FY12.

POWERGEN ACCOUNTS FOR 19% OF CUMMINS INC SALES INDIA AND CHINA GROWING IN SIZE FOR THE COMPANY


CUMMINS (INDIA EXPORTS AS PERCENTAGE OF GLOBAL POWER-GENERATION REVENUE)


Cummins Inc. has also raised its guidance and targets to end CY10 with sales of US$13b,with improved margins. To achieve the targets, the company aims to leverage itsmanufacturing base in developing countries like India. This augurs well for exports fromIndia.

SALES (US$B) CAGR OF 13% EBIT (%) TO JUMP BY >500BP

Cummins India

Distribution, 14

Engines, 49

Pow er-Gen, 19

Components, 18

30

2113

12

8

88

US/ Canada

Europe

Africa / ME

India

Latin America

Asia Pacif ic

China

2.0

2.4

3.1

2.4

0.1 0.1 0.2 0.30.1

3.5

4.4

8.0

5.05.4

5.7

CY05 CY06 CY07 CY08 CY09

Pow er-Gen Sales (USD) India Exports (USD) India Exports (% of Global Sales)

10.8

20.0

2009 2014

7.2

12.5

2009 2014

80September 2010


Favorable pricing environment: While business is competitive, the pricingenvironment is favorable in the mid and high HP segments.

With migration to new emission norms, value per engine will rise: Migration tohigher emission norms requires significant value addition of components per engine.With the introduction of new emission norms in April 2011 for off-highway wheeledequipment, we expect Cummins to increase its value-add to engines for industrial andinfrastructure equipment. This will help it to boost margins.

Cummins capex US$300m, indicating strong growth outlook

Cummins India will spend US$300m on its new mega-site at Phaltan near Pune. In FY11the company will commission four facilities, including a parts distribution centre andreconditioning factory at the megasite, on which it began work about two year ago.

Cummins will also spend about Rs1.5b on a unit to make generators with capacities of200kVA (kilovolt-ampere) and less, entirely for export. The plant will have a capacity of40,000 units a year by 2013. The investment will be made in three phases, the first ofwhich will be complete by April 2011. In phase I, the plant will have a capacity of 10,000-15,000 units. Cummins' existing generator facility at Pirangut near Pune has capacity toproduce 15,000 units a year.

Earnings of 37% CAGR

We expect Cummins India to post earnings of 37% CAGR over FY10-12 after posting26% earnings CAGR over the past four years. Earnings will be driven by strongrevenue growth and a 260bp margin improvement.

Key arguments in favor of strong margin outlook include: Accelerated cost cutting programs: In 2005, the company initiated an accelerated

cost-cutting exercise (ACE), one of whose targets were to cut direct material spendsby 30% in three years. It then started another cost-cutting program, TRIMS, to reducethe total cost of ownership. This aims to reduce indirect material spends and servicesby 30% in three years. We expect the company will make substantial savings,particularly in terms of cutting direct material costs.

GROSS MATERIAL REDUCTION HELPING MARGIN IMPROVEMENT

Cummins India

309

423

611

751

572

12.3

10.5

14.4

12.212.6

FY06 FY07 FY08 FY09 FY10

Material Cost Reduction (Rs m) Material Cost Reduction (% of PBT)

Margin expansion aided by

cost cutting programmes like

ACE and TRIMS

81September 2010

Revenue will grow at a compounded rate of 36% over FY10-12. Exports will leadgrowth with a CAGR of 76%. Domestic sales will grow at 26%.

Working capital is under control. Cummins India generates healthy cash from operations.Cash and investments were Rs8b as at 31 March 2010, up 82% YoY.

In FY10, RoCE and RoE were 39.5% and 30% respectively. We expect RoCE willrise to 50% and RoE to 39% by FY12.

REVENUES TO GROW AT 36% CAGR

PAT GROWTH IN LINE WITH REVENUE AT 37%

STEADY IMPROVEMENT IN ROE AND ROCE


Cummins India

1720

2428 28

3430

3639

2125

31

38 35

42 39

4650

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

RoE (%) RoCE (%)

7 8 912

1518

23

3328

52

39

41.8

34.3

37.4

-13.9

26.625.822.7

27.8

12.112.3

-13.9


Revenues (Rs b) Revenue Grow th (% YoY)

1 1 1 22 3

4 4

8

6

1

19.1

54.5

36.4

37.3

2.416.0

37.8

28.025.6

6.3



82September 2010

Entering a new growth cycle

CUMMINS INDIA: STRONG TAILWINDS

260BP IMPROVEMENT IN MARGIN BY FY12

TO POST EARNINGS CAGR OF 37% BY FY12

DOMESTIC SALES TO POST 26% CAGR


Cummins India

7 8 912

1518

23

3328

39

5241.8

34.3

37.4

-13.9

26.625.822.7

27.8

12.112.3

-13.9


Revenues (Rs b) Revenue grow th (% YoY)

1.1 1.0 0.9 1.42.0

2.9 3.1

8.2

11.1

5.34.8

21.1

21.018.5

14.413.2

16.013.9

12.010.0

12.614.7


EBITDA (Rs b) EBITDA Margin (%)

1 1 1 22 3

4 4

8

6

1

19.1

54.5

36.4

37.3

2.416.0

37.8

28.025.6

6.3



6.6 7.1 8.0 9.3 12.416.1

19.9

29.637.3

4.7

23.6

26.025.618.323.9

30.032.717.112.17.9

40.7

-22.3


Domestic Sales (Rs b) Revenue Grow th (%)

Domestic sales to grow at

26%; exports to treble

by FY12

Higher outsourcing, better

product-mix will aid

margin improvement

83September 2010


Cummins is among the best performing stocks in the capital goods sector, outperformingthe Sensex. At current prices, the stock trades at 24.3x FY11E and 17.8x FY12E earnings.

We believe that despite the run-up, Cummins offers a good investment opportunity and isdue for re-rating. This is due to: Strong earnings of 37% CAGR over FY10-12; Near-term earnings upsides, due to possible margin expansion and faster-than-expected

growth in exports; Long-term export opportunities due to increasing preference by Cummins Inc for an

Indian manufacturing base to meet global demand for engines for non-automotibileapplications.

We recommend a Buy on the stock with a target price of Rs840, based on 20x FY12Eearnings, in line with other large-cap engineering companies like BHEL and L&T.

Cummins India

84September 2010

1 YEAR FORWARD P/E

Cummins India

1 YEAR FORWARD P/BV


CUMMINS INDIA VS SENSEX PE PREMIUM / DISCOUNT (%)


20.1

0

10

20

30

Mar

-03

Sep

-03

Mar

-04

Aug

-04

Feb

-05

Aug

-05

Jan-

06

Jul-0

6

Dec

-06

Jun-

07

Dec

-07

May

-08

Nov

-08

May

-09

Oct

-09

Apr

-10

Sep

-10

Average of 15.2x

Peak of 24.5x

Bottom of 6.9x

6.8

0.0

3.0

6.0

9.0

Mar

-03

Sep

-03

Mar

-04

Aug

-04

Feb

-05

Aug

-05

Jan-

06

Jul-0

6

Dec

-06

Jun-

07

Dec

-07

May

-08

Nov

-08

May

-09

Oct

-09

Apr

-10

Sep

-10

Average of 4.0x

Peak of 7.0x

Bottom of 1.5x

20.3

-60

-30

0

30

60

Mar

-03

Jun-

04

Sep

-05

Dec

-06

Mar

-08

Jun-

09

Sep

-10

14.6

0

9

18

27

Mar

-01

Feb

-02

Dec

-02

Nov

-03

Sep

-04

Jul-0

5

Jun-

06

Apr

-07

Feb

-08

Jan-

09

Nov

-09

Sep

-10

Peak of 21.7x

Average of 12.6x

Bottom of 5.8x

Valuations

Long-period Trend

85September 2010


Cummins India


Y/E MARCH 2009 2010 2011E 2012E

Total Revenues 33,043 28,449 39,095 52,499

Change (%) 40.6 -13.9 37.4 34.3

Raw Materials 22,338 18,552 25,021 33,862

Staff Cost 2,130 1,953 2,343 2,812

Other Expenses 3,803 2,670 3,519 4,725

EBITDA 4,772 5,275 8,213 11,100

% of Total Revenues 14.4 18.5 21.0 21.1


Other Income 1,507 1,216 972 1,216

Interest 26 21 20 20

PBT 5,798 6,109 8,709 11,709

Tax 1,654 1,670 2,613 3,396

Rate (%) 28.5 27.3 30.0 29.0

Adjusted PAT 4,145 4,439 6,096 8,314

Extra-ordinary Income (net) 192 0 0 0

Reported PAT 4,337 4,439 6,096 8,314

Change (%) 54.5 2.4 37.3 36.4

Adj. Consolidated PAT 4,438 4,439 6,096 8,314

Change (%) 36.7 0.0 37.3 36.4


Y/E MARCH 2009 2010 2011E 2012E


Reserves 13,551 15,214 18,530 23,369

Net Worth 13,947 15,610 18,926 23,765

Loans 213 87 100 100

Deferred Tax Liability -231 -170 -170 -170




Net Fixed Assets 3,090 3,337 3,880 4,294

Capital WIP 0 0 0 0

Investments 3,993 7,329 7,329 7,329

Curr. Assets 14,247 12,113 17,238 22,394

Inventory 4,680 4,097 5,891 7,911

Debtors 6,821 5,229 8,033 10,787

Cash & Bank Balance 323 559 2,191 5,500

Loans & Advances 2,663 2,695 3,213 3,596

Other Assets 83 93 100 100


Creditors 4,762 3,768 5,891 7,911


Provisions 1,732 2,634 3,749 5,034



E: MOSL Estimates

RATIOS

Y/E MARCH 2009 2010 2011E 2012E

Basic (Rs)

Adj EPS 20.9 22.4 30.8 42.0

Cash EPS 23.2 24.2 33.1 45.0

Book Value 69.3 78.0 94.7 119.2

DPS 9.0 12.0 12.0 15.0

Valuation (x)

P/E 35.7 33.4 24.3 17.8

Cash P/E 32.2 30.9 22.6 16.6

EV/EBITDA 30.2 26.6 16.9 12.2

EV/Sales 4.4 4.9 3.5 2.6


Dividend Yield (%) 1.2 1.6 1.6 2.0


RoE 33.7 30.4 35.7 39.3

RoCE 41.8 39.5 46.3 49.5

Turnover Ratios





Leverage Ratio

Debt/Equity (x) 0.0 0.0 0.0 0.0

CASHFLOW STATEMENT (Rs Million)

Y/E MARCH 2009 2010 2011E 2012E





(Inc)/Dec in WC (2,341) 2,238 (1,154) (1,117)


EO Income 192 0 0 0

CF from Op. Incl. EO Items 2,478 7,057 5,418 7,803

(Inc)/Dec in FA (981) (623) (1,000) (1,000)

(Pur)/Sale of Investments 329 (3,337) 0 0

CF from Investments -652 -3,960 -1,000 -1,000

(Inc)/Dec in Net Worth 578 61 0 0

(Inc)/Dec in Debt -75 -126 13 0


Dividend Paid 2,102 2,775 2,780 3,475

CF from Fin. Activity (1,625) (2,861) (2,786) (3,495)

Inc/Dec of Cash 200 236 1,632 3,308

Add: Beginning Balance 123 323 559 2,191

Closing Balance 323 559 2,191 5,500

86September 2010

ORDER framework


O


D


Larsen & Toubro Bloomberg: LT IN CMP: Rs1,995 BuyBest play on capex 'Dhoom'


YEAR NET SALES PAT* EPS* EPS P/E* P/BV ROE ROCE EV/ EV/


3/09A 339,385 30,046 51.5 31.1 40.0 9.6 24.5 26.2 3.6 32.0

3/10A 370,348 37,110 61.6 20.1 32.4 6.6 19.8 23.1 3.3 26.2

3/11E 443,970 45,675 75.8 23.1 26.3 5.7 19.4 22.1 2.8 21.7

3/12E 565,145 56,436 93.7 23.6 21.3 4.9 20.3 22.2 2.2 17.3


52-Week Range (Rs) 2,075/1,371

1,6,12 Rel. Perf. (%) -2/9/1

M.Cap. (Rs b) 1,201.4

M.Cap. (US$ b) 26.4


L&T is continuously developing new skill sets / entering newsegments and geographies. We believe that entry into newareas like Power Equipment, Nuclear Power Plants, Defense,Shipbuilding, etc will help L&T to sustain order flows. Someof these business segments could contribute meaningfullyto consolidated revenue and profitability, going forward. Inthe Power BTG segment, L&T has witnessed initial success,with project wins of 3.3GW BTG in the supercritical segmentand additional 1.6GW for turbine generators. Thisdemonstrates the management's ability to successfullyidentify high growth segments and implement projects.

In 1QFY11, L&T's order book was Rs1,078b (up 50% YoY),book-to-bill ratio was 2.9x TTM revenue. The management isconfident of achieving 25% growth in FY11, as it expects largeorders like the Hyderabad Metro (Rs128b) and otherdevelopment projects in the road sector (Rs20b) to beawarded during 2HFY11. In 1QFY11, L&T received an in-houseorder worth Rs52b for EPC work of the 1,320MW RajpuraTPS. The MHI JV has started production at its plant in Gujaratand will book the APGenco (1,600MW) order worth Rs15b inthe next two years. We expect revenue CAGR of 24% and PATCAGR of 23% over FY10-12.

L&T has presence in Financial Services (L&T Finance / InfraFinance) and IT/ITES (L&T Infotech). In the last few years,these businesses have attained critical scale. With L&T'splan to grow these businesses to 40% of group level revenuesby FY14, we see substantial organic and inorganic scalingup of these two verticals in the next 2-3 years. It has forayedinto thermal and hydropower project development, andcurrently has a portfolio of 1.32GW thermal power and 728MWhydro power projects under development. In various mediaarticles, the management has stated its intent of setting up~5GW of power capacity as developer by 2015.

We expect L&T to post 25% earnings growth over FY10-13.L&T is best positioned to capitalize on a strong revival in thecapex cycle in India, because of its strength across multiplesectors of the economy. Since there are very few engineeringcompanies of L&T's size in India, L&T will continue to leadthe market and have healthy margins over five years. Weexpect EBITDA margins to stay stable at 12.5-13%. L&T hasinvested in building capacities and portfolio of developmentalprojects in the past four years, depressing returns on capital,but with improving asset utilization, return ratio will stabilizegoing forward.

The stock trades at 26.3x FY11E and 21.3x FY12E earningsand EV of 21.7x FY11E and 17.3x EBITDA. Given earningsCAGR of 25% and order-intake CAGR of 23% over FY10-FY13E, valuations will remain superior to the broader market.We believe the company will unlock value in some of its largesubsidiaries like L&T Infotech, L&T Finance and L&T IDPL inthe next couple of years, providing the stock with reratingcatalysts. We recommend a Buy on the stock with a targetprice of Rs2,356 (25x FY12E earnings and Rs427 per sharefor subsidiaries).

Consolidated; EPS is fully diluted

1,300

1,500

1,700

1,900

2,100


Larsen & Toubro Sensex - Rebased


87September 2010

Exciting long-term growth opportunities

Unlike several of its peers, L&T is continuously developing new skill sets / entering newsegments and geographies. We believe that its entry into new areas like Power Equipment,Nuclear Power Plants, Defense, Shipbuilding, Power Development Projects, and Forgings(thermal and nuclear), increased presence in the Middle East, and its ability to take newPPP projects (due to strong balance sheet) will help L&T to sustain order flows. Some ofthese business segments could contribute meaningfully to consolidated revenue andprofitability, going forward. Business segments like Nuclear Power Plants, Shipbuilding and Defense have

witnessed strong support and initial action from the government, which entails that thefirst few orders could be received over the next 12-18 months. In the Nuclear Powersegment, L&T has tied up with four global nuclear equipment suppliers to cater toIndia's planned addition of 16GW of nuclear power by 2020. This will entail investmentsof Rs1.6t over the next 8-10 years; orders for these projects are expected from FY11.

In the Power BTG segment, L&T has witnessed initial success, with project wins of3.3GW BTG in the supercritical segment and additional 1.6GW for turbine generators.This demonstrates the management's ability to successfully identify high growthsegments, to tie-up technological partners and implement projects.

L&T has presence in Financial Services (L&T Finance / Infra Finance) and IT/ITES(L&T Infotech). In the last 2-3 years, these businesses have attained critical scale.With L&T's plan to grow these businesses to 40% of group level revenues by FY14,we see substantial organic and inorganic scaling up of these two verticals in the next2-3 years. L&T is also exploring opportunities to grow inorganically in the IT Servicessegment.

The company has forayed into thermal and hydropower project development, andcurrently has a portfolio of 1.32GW thermal power and 728MW hydro power projectsunder development. In various media articles, the management has stated its intent ofsetting up ~5GW of power capacity as developer by 2015. Mr Ravi Uppal has beenappointed as Managing Director and Chief Executive Officer of L&T Power (MrUppal was previously the Head of Global Markets and a Member of the GroupExecutive Committee of the ABB Group). The foray will attempt to leverage L&T'sexpertise and skill sets in manufacturing supercritical BTG equipment (in JV withMitsubishi), balance of plants (ash handling, coal handling, etc), electricals (control,instrumentations, switchgears, transmission towers, etc) and civil construction.

FY11/12 intake to be driven by nuclear, ship building, etc, entailing longgestation

Shipyard: Ennore Shipyard is expected to receive all statutory clearances and achievefinancial closure in 1HFY11. Order booking is expected in FY11. Capital outlay is Rs35b.The shipyard will cater to defense ship building and commercial ship repairs.

Nuclear: In November 2009, L&T formed a JV with NPCIL to produce special steelsand ultra heavy forgings. The JV will supply finished forgings for nuclear reactors,pressurizers and steam generators, in addition to heavy forgings for critical equipment inthe hydrocarbon sector, as well as for thermal power plants. The project cost will beRs17.25b and will be funded on DER of 3:1. The plant is scheduled for completion in April2011, and will commence exports by FY13.

Larsen & Toubro

88September 2010

Increased share of manufacturing will also lead to increased working capital requirementsand fixed costs in the medium term, leading to limited margin expansion.

INTAKE AND REVENUE GROWTH (%, YOY); BTB (X)


Power equipment JVs with Mitsubishi to report initial losses till FY12

In the Power BTG segment, L&T has witnessed initial success, with project wins of3.3GW BTG in the supercritical segment and additional 1.6GW for turbine generators.This demonstrates the management's ability to successfully identify high growth segments,to tie-up technological partners and implement projects.

We expect the power equipment JVs to report losses of Rs2.2b in FY11 and Rs2.7b inFY12 (L&T's share at Rs1.2b and Rs1.4b respectively, 51% stake), given that projectsare expected to cross margin recognition threshold of 25% completion in FY13. Due tolimited margin recognition, the charge of interest, depreciation and non-production relatedcosts like marketing, administration, etc to the profit and loss account will result in initiallosses.

We believe that the inflexion point in terms of earnings contribution from subsidiaries willbe in FY13/FY14. We expect earnings contribution from subsidiaries and associatecompanies to increase from Rs6b in FY09, to Rs12b in FY10 (up 109%), Rs8.6b in FY11(down 31%) and Rs11b in FY12 (up 27%). Also, we believe that profit breakeven in otherventures like shipbuilding, defense, nuclear forging, etc will be in phases over FY13-15, asprojects cross the margin recognition threshold.

Order intake driven by Power segment; order backlog at end-1QFY11 atRs1,078b

Order inflow during FY10 was up 21% (ex-power) for L&T. Order awards fromInfrastructure (including roads, railways, urban infrastructure, etc) declined 7%, ProcessIndustries (fertilizer feedstock conversion, metals, etc) grew 13%, Hydrocarbons(upstream, clean fuel projects, etc) grew by a robust 125%. Order intake excluding thePower segment grew 21% in FY10 while overall order intake growth was 36%. Weexpect intake CAGR of 23% to drive revenue CAGR of 28% over FY10-13.

Larsen & Toubro

Large part of the incremental

revenues in FY11/12 may not

contribute much to margins

28%

21%

14%

37%

37%

23% 35

%

28%

21%28

% 34%

13% 20

%

41%

36%

9%

20% 27

%

49%

32%1.7

2.72.6

2.42.0

2.12.1

1.7

1.4

1.9


Intake (% YoY) Revenues (% YoY) BTB (x)

89September 2010

ORDER INTAKE EX-POWER GREW 22% IN FY10; INFRA SEGMENT REMAINED WEAK (RS B)

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 YOY %

Process Industries 19 21 22 43 63 63 80 90 13.1

Oil & Gas 32 28 58 46 105 43 62 139 124.7

Power 19 22 22 37 59 83 129 230 78.0

Infrastructure 36 45 67 129 130 173 201 188 -6.7

Others 24 33 54 52 63 31 41 49 18.0

Total 131 149 223 306 420 393 513 696 35.5

Total-Ex Power 111 127 201 269 361 311 384 466 21.3


In 1QFY11, L&T's order book was Rs156b, up 63% YoY. Hydrocarbons (a high marginsegment) contributed 7% to order intake (v/s 12% in 1QFY10). Power contributed 52%v/s 30% in 1QFY10 and 33% in FY10 mainly due to the Rajpura TPS order (Rs52b).Excluding Power, L&T's intake during 1QFY11 was up 9% YoY, which indicates lessvisible traction in industrial capex.

ORDER INTAKE GROWTH DURING 1QFY11 (RS B)

Larsen & Toubro


Excluding Power, the BTB ratio was 1.9x as at June 2010, 1.9x as at March 2010, 1.8x asat December 2009, and 1.6x as at March 2009. The reported BTB ratio was 2.9x as atJune 2010 and 2.7x as at March 2010. Excluding Power, L&T's BTB ratio has remainedrange-bound; execution of BTG orders and incremental order inflows in this business willbe the key factors to watch out for.

BTB EX-POWER IN THE RANGE OF 1.6-1.9X OVER THE LAST SIX QUARTERS

Excluding Power, L&T's

intake during 1QFY11

was up 9% YoY

7560

9577

9975

130 120 122 125147

126

96

184 178

238

156

1QF

Y07

2QF

Y07

3QF

Y07

4QF

Y07

1QF

Y08

2QF

Y08

3QF

Y08

4QF

Y08

1QF

Y09

2QF

Y09

3QF

Y09

4QF

Y09

1QF

Y10

2QF

Y10

3QF

Y10

4QF

Y10

1QF

Y11


2.1 2.2 2.2 2.2 2.1 2.1 2.1 2.2 2.1 2.12.4

2.7 2.7 2.9

1.8 1.9 1.9 2.0 1.8 1.7 1.7 1.8 1.6 1.6 1.8 1.8 1.9 1.9

4QF

Y07

1QF

Y08

2QF

Y08

3QF

Y08

4QF

Y08

1QF

Y09

2QF

Y09

3QF

Y09

4QF

Y09

1QF

Y10

2QF

Y10

3QF

Y10

4QF

Y10

1QF

Y11

BTB (X) BTB (X), Ex-Pow er

90September 2010


EBITDA margin to be range-bound; long gestation projects restrictexpansion

We expect L&T's EBITDA margin to be 13% for FY11 and FY12. Margins will remainflat due to long gestation projects leading to staggered booking of costs and revenues, andas newer businesses restrict efficient fixed cost absorption. Since 33-35% of the orderbook is fixed price contracts, the recent increase in commodity prices will also impactmargins during FY11/FY12.

Further, as power equipment projects entail a gestation period of 54 months, we expectlimited revenue booking in FY11 and FY12. Also, given the accounting practice whereinmargins are accounted post 25% project completion for execution of 24+ months, weexpect initial margins on these projects to be accounted from FY13. Thus, increased orderintake in FY10 will not entail increased revenue and margin recognition in FY11/FY12.Higher competitive intensity in process industries, hydrocarbons, etc and tilt in medium-term revenue mix towards infrastructure / new business segments will again entail marginpressure in the medium-term.

COMMODITY PRICE INCREASES AND NEWER BUSINESSES WILL LEAD TO FLAT MARGINS IN FY11 AND FY12

ORDER BOOK MIX (%): 1QFY11 ORDER BOOK STOOD AT RS1,078B (UP 51% YOY), BTB OF 2.9X TTM REVENUE

Larsen & Toubro

12 11 12 11 13 12 14 15 17 16 16 16 15 15 16

23 24 25 19 22 20 20 23 22 20 14 12 15 12 15

6 9 17 16 14 12 1116 19 20 18 22 24 26 32 30 33

34 37 30 39 36 36 3736 34 34 39 41 39 38 35 33 32

24 18 17 14 17 19 20 11 10 9 10 7 9 6 6 6 6

1513

14171Q

FY

07

2QF

Y07

3QF

Y07

4QF

Y07

1QF

Y08

2QF

Y08

3QF

Y08

4QF

Y08

1QF

Y09

2QF

Y09

3QF

Y09

4QF

Y09

1QF

Y10

2QF

Y10

3QF

Y10

4QF

Y10

1QF

Y11

Process Industries Oil &Gas Pow er Infrastructure Others


8.0 11

.5

12.8

12.9

13.6

14.5

13.8

12.517

.0

13.2 15

.7

15.5

15.0

14.018

.9 22.1

22.0

22.0

20.0

17.3

16.7 20

.1

14.7 18

.0

13.113.1

11.610.5

8.3

11.512.6 12.1

FY06 FY07 FY08 FY09E FY10E FY11E FY12E FY13E

E&C EBG MIP Aggregate EBITDA

91September 2010

PROJECTS WITH GESTATION PERIOD OF 24 MONTHS+ NOW ACCOUNT FOR 27% OF THE ORDER BOOK

PROJECT AMOUNT (RS B)

Mumbai Airport 33.0

AP Genco (1,600MW) 2QFY09 15.6

Bhutan Hydro 1QFY10 12.5

Nigrie (1320MW) 2QFY10 17.7

GMR Gas (768MW) 2QFY10 20.5

Mahagenco (1,980MW) 3QFY10 69.0

Road/Shipyard projects (BOT) 59.1

Kakrapur Atomic Power (1,400MW) 3QFY10 12.1

Malwa Power, BoP 3QFY10 16.4

ONGC Mangalore Petchem Refinery 4QFY10 20.4

IOC Paradip Refinery 4QFY10 14.0

Total 290.3

% of Order Book 27


Decline in yield on treasury book; investments in subsidiaries at Rs51b (28% of net worth)L&T has a treasury book of Rs90b (as at March 2010), which has increased from Rs56bin September 2009 and Rs49b in March 2009. The recent increase in treasury book islargely being driven by fund raising of US$600m through a QIP and FCCB issue. Weunderstand that the treasury book has been invested in a combination of equity and debtinstruments. Given decline in market yields for both equity and debt, the yield on treasurybook now stands at 6-6.5%. This compares with cost of debt of 6.5-7% (debt of Rs68b asat March 2010). There is a negative carry of 50-100bp. In FY09 and also in 1HFY10, weestimate that L&T had a positive spread of ~250bp; the decline in yield on investmentbook will impact reported profits in FY11 and FY12.

TREASURY BOOK OF RS90B HAVING YIELD OF 5.5%, RESULTING IN NEGATIVE CARRY OF 100-150BP ON AN

AVERAGE (RS M)

FY09 FY10 FY10 FY11

1Q 2Q 3Q 4Q 1Q

Operational Income

Recovery from S&A/JV Cos/ 665 90 126 149 295 660

Interest on Advances

Commercial leadership fee/ 648 89 33 28 550 700

Technical Fees/IJV Profits

Other Operational Income 1,485 277 367 321 1,275 2,240 502

Total 2,798 456 526 498 2,120 3,600 502

Other Income

Interest Income 1,718 300 352 240 388 1,280 650

Dividend from S&A Companies 720 110 80 0 890 1,080 500

Income from Other Investments 2,626 640 475 820 855 2,790 560

Profit on Sale of Investments 947 820 61 786 -267 1,400 10

Miscellaneous Income 1,387 380 1,186 361 623 2,550 540

Total 7,398 2,250 2,154 2,207 2,489 9,100 2,260

Other Income 5,291 1,760 888 986 976 5,470 1,220

Yield on Cash Balance (%) 10.8 10.8 6.4 4.3 4.9 6.9 5.6

Average Cost of Borrowing (%) 7.3 6.4 7.0 6.9 8.0 7.4 7.2


Larsen & Toubro

92September 2010

INVESTMENTS IN SUBSIDIARIES HAVE INCREASED TO RS51B (20% OF CAPITAL EMPLOYED, 28% OF NET WORTH)

FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E

L&T Finance 2,410 4,910 4,910 - - - - -

L&T Infotech 150 150 150 1,343 1,343 1,343 1,343 1,343

L&T IDPL 3,834 3,834 3,834 6,284 9,415 12,195 15,343 15,343

L&T International FZE 1,804 5,168 10,498 11,474 12,974 14,474 15,974 17,474

L&T Infra Finance 2,430 5,000 5,000 9,250 - - - -

L&T Capital Holdings - - 21 13,536 13,536 13,536 13,536 13,536

L&T Realty - 472 472 472 722 722 722 722

L&T Valdel Engg - 252 252 239 239 239 239 239

L&T Power Development - 290 860 1,810 11,348 14,150 22,688 28,410

L&T Turbine Generators - 52 256 - 250 1,693 1,693 1,693

L&T Boilers - 52 256 - 1,530 1,530 1,530 1,530

Shipping - - 1 1 5,740 11,640 11,640 11,640

Forging Nuclear - - - - 1,110 2,250 3,191 3,191

Defence EADS - - - - 1,000 1,000 1,000 1,000

BOT Projects * - - - - 7,024 12,771 12,771 12,771

Others 1,473 1,366 2,024 6,719 2,915 3,498 4,198 5,037

Reported Investments 12,101 21,545 28,533 51,127 69,144 91,040 105,866 113,928

% CE 15.3 16.3 15.0 20.3 22.6 24.7 25.2 23.6

*(Directly in books of L&T) Source: Company/MOSL

Maintaining cash / treasury book is a conscious decision by the management to havesufficient liquidity for financing project investment, capex and other business requirementsover the next 2-3 years. Incremental opportunities in infrastructure would be mostly throughthe PPP route, particularly for transportation, ports, airports, thermal power and T&D.Given that L&T has a very strong balance sheet, it will have an edge over smaller peers inparticipation in large projects. Large part of the current investment commitment is towardsequity commitment in BOT projects, ship building, forging, power equipment JVs, andpower development projects (thermal, nuclear, etc). Also, the company has capex plans ofRs7b-8b for FY11 v/s Rs15b-20b in FY10; FY11 capex would be largely maintenance.

HIGHER INTEREST COST TO IMPACT MARGINS IN FY10-13

Larsen & Toubro

We expect net interest cost

plus depreciation to increase

given substantial capex,

investments in subsidiaries

and deterioration in

working capital

3,806

232

-151

6,837

10,037

-1,513

1,7962,461

1,086

-977 -908

7.48.1

4.4

5.44.3

5.3

7.78.3 7.9

11.4

8.6

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY13E

(Net Interest Cost + Depreciation) PAT Margin (%)


93September 2010

Larsen & Toubro

L&T: SUM OF PARTS VALUE

BUSINESS METHOD VALUATION VALUE VALUE RATIONALE

SEGMENT (X) (RS M) (RS/SH)

L&T Standalone Engineering, FY12E PER (x) 25 1,161,891 1,929 Premium to industry average

Construction,

& Electricals

L&T Infotech Infotech FY12E PER (x) 15 47,253 78 At par to niche second tier IT companies

(100% stake)

L&T Infrastructure Infrastructure 49,400 82 Road portfolio Rs15b (P/BV 1.56x), Ports

Dev.Projects Ltd. Rs3.4b (P/BV 1.3x), Urban Infra Rs6b

(P/BV 1.2x), Cash Rs7b

L&T Finance Hire Purchase, Book Value 2.0 29,008 48 BV of investments till Mar 10; L&T has

Leasing, advantage of catering to in house

Bill Discounting requirement of L&T's dealers / vendors /

customers, etc

L&T Infrastructure Infrastructure Book Value 1.5 13,550 23 BV of investments till Mar 10

Finance Finance

International Ventures FY12E PER (x) 16 43,665 73 Discount to L&T's valuations

(L&T FZE)

Manufacturing Ventures

- Power Equipments Thermal BTG FY14E PER (x) 12 49,426 82 At par with industry average; FY14 to be

the year of meaningful revenue and margin

ramp up

- L&T Komatsu Excavators FY12E PER (x) 16 26,167 22 In line with industry average

and Hydraulic System

- Audco India Industrial FY12E PER (x) 16 17,608 15 Revenue growth and margins have shown

Valves strong consistency

- EWAC Alloys Welding FY12E PER (x) 16 5,500 5 In line with industry average

Total 2,356

Source: MOSL


The stock trades at 26.3x FY11E and 21.3x FY12E earnings and EV of 21.7 x FY11E and17.3 x EBITDA. Given earnings CAGR of 25% and order-intake CAGR of 23% overFY10-FY13E, valuations are not expensive. We believe the company will unlock value insome of its large subsidiaries like L&T Infotech, L&T Finance and L&T IDPL in the nextcouple of years, providing the stock with rerating catalysts. We recommend a Buy on thestock with a target price of Rs2,356 (25 x FY12E earnings and Rs427 per share forsubsidiaries).

94September 2010

1 YEAR FORWARD P/E

1 YEAR FORWARD P/BV


L&T VS SENSEX PE PREMIUM / DISCOUNT (%)


Larsen & Toubro

22.8

0

20

40

60

80

Mar

-94

Apr

-95

Apr

-96

May

-97

May

-98

May

-99

Jun-

00

Jun-

01

Jun-

02

Jul-0

3

Jul-0

4

Jul-0

5

Aug

-06

Aug

-07

Aug

-08

Sep

-09

Sep

-10

Average of 21.5x

Peak of 68.5x

Bottom of 6.9x

5.1

0.0

3.0

6.0

9.0

12.0

Mar

-94

Apr

-95

Apr

-96

May

-97

May

-98

May

-99

Jun-

00

Jun-

01

Jun-

02

Jul-0

3

Jul-0

4

Jul-0

5

Aug

-06

Aug

-07

Aug

-08

Sep

-09

Sep

-10

Average of 2.9x

Peak of 11.1x

Bottom of 0.8x

36.7

-60

0

60

120

180

240

Mar

-94

May

-95

Jun-

96

Jul-9

7

Aug

-98

Sep

-99

Oct

-00

Nov

-01

Jan-

03

Feb

-04

Mar

-05

Apr

-06

May

-07

Jun-

08

Jul-0

9

Sep

-10

18.9

0

9

18

27

36

Mar

-95

Feb

-96

Dec

-96

Oct

-97

Sep

-98

Jul-9

9

May

-00

Apr

-01

Feb

-02

Dec

-02

Nov

-03

Sep

-04

Jul-0

5

Jun-

06

Apr

-07

Feb

-08

Dec

-08

Nov

-09

Sep

-10

Peak of 31.1x

Average of 8.9x

Bottom of 3.2x

Valuations

Long-period Trend

95September 2010


Larsen & Toubro

INCOME STATEMENT (STANDALONE) (RS MILLION)

Y/E MARCH 2010 2011E 2012E 2013E

Net Revenues 370,348 443,970 565,145 789,255

Growth Rate (%) 9.1 19.9 27.3 39.7

Manufacturing Expenses 284,536 328,936 421,114 602,224

Staff Cost 23,791 28,550 34,260 41,112

S G &A Expenses 14,627 28,212 35,913 50,154

EBITDA 47,393 58,272 73,859 95,765

Change (%) 21.6 23.0 26.7 29.7

EBITDA Margin (%) 12.6 13.1 13.1 12.1

Depreciation 3,797 5,155 6,455 7,755

EBIT 43,597 53,116 67,404 88,010

Net Interest 5,053 5,690 7,669 9,069

Other Income 7,416 8,384 7,287 6,787

Non-recurring Other Income 12,834 0 0 0

Profit before Tax 58,806 55,824 67,035 85,741

Tax 16,409 17,584 21,116 27,008

Effective Tax Rate (%) 27.9 31.5 31.5 31.5

Reported Profit 54,902 38,239 45,919 58,733

Extra-ordinary Adjustments 12,504 0 0 0

Adjusted Profit 42,398 38,239 45,919 58,733

Growth (%) 57.2 -9.8 20.1 27.9

Consolidated Profit (Adj) 37,110 45,675 56,436 71,708

Growth (%) 23.5 23.1 23.6 27.1


Y/E MARCH 2010 2011E 2012E 2013E

Equity Capital 1,204 1,204 1,204 1,204

Reserves and Surplus 181,912 209,114 241,780 283,561

Net Worth 183,116 210,319 242,984 284,765

Debt 68,008 94,557 124,557 134,557

Deferred Tax Liability 774 774 774 774



Less : Depreciation 17,841 22,996 29,452 37,207

Add : Capital WIP 8,742 4,500 4,500 4,500

Net Fixed Assets 63,802 80,647 99,191 116,436

Investments 137,054 129,938 129,164 118,990

Inventory 14,154 83,429 106,199 148,313

Sundry Debtors 111,637 139,866 182,725 255,185

Cash & Bank 14,319 19,404 33,493 6,852

Loans & Advances 59,975 89,985 110,077 150,405

Other Current Assets 63,532 0 0 0

Current Assets 263,616 332,684 432,495 560,756

Current Liabilities 212,429 237,618 292,534 376,085


Capital Deployed 252,043 305,650 368,315 420,096

E: MOSL Estimates

RATIO

Y/E MARCH 2010 2011E 2012E 2013E

Basic (Rs)

Adjusted EPS 50.5 63.5 76.3 97.5

Con. EPS (Fully Diluted) 61.6 75.8 93.7 119.1

Growth (%) 19.7 23.1 23.6 27.1

Cash Earning per Share 57.4 72.1 87.0 110.4

Book Value 304.1 349.3 403.5 472.9

Dividend Per Share 12.6 15.9 19.1 24.4

Div. Payout (Incl. Div Tax ) % 20.7 28.9 28.9 28.9

Valuation (x)

P/E (Standalone) 39.5 31.4 26.2 20.5

P/E (Consolidated) 32.4 26.3 21.3 16.8

P/E (Cons.) (Fully Diluted) 32.4 26.3 21.3 16.8

Price / CEPS 34.8 27.7 22.9 18.1

EV/EBITDA 26.2 21.7 17.3 13.8

EV/ Sales 3.3 2.8 2.2 1.7

Price / Book Value 6.6 5.7 4.9 4.2

Dividend Yield 0.6 0.8 1.0 1.2

Return Ratio (%)

RoE 19.8 19.4 20.3 22.3

RoCE 23.1 22.1 22.2 24.0

Turnover Ratios

Debtors (Days) 109.1 114.0 117.0 117.0

Inventory (Days) 13.8 68.0 68.0 68.0


Leverage Ratio

Current Ratio (x) 1.2 1.4 1.5 1.5

CASHFLOW STATEMENT (RS MILLION)

Y/E MARCH 2010 2011E 2012E 2013E


Add: Depreciation 4,159 5,155 6,455 7,755

Interest 5,053 5,690 7,669 9,069


(Inc)/Dec in WC 11,579 -38,937 -30,806 -71,351


(Inc)/Dec in FA -16,015 -22,000 -25,000 -25,000

(Pur)/Sale of Investments -54,416 7,116 774 10,173


(Inc)/Dec in Net Worth 25,185 0 0 0

(Inc)/Dec in Debt 2,448 26,549 30,000 10,000

Less: Interest Paid 5,053 5,690 7,669 9,069

Dividend Paid 8,771 11,037 13,253 16,952

CF from Fin. Activity 13,809 9,822 9,078 -16,021

Inc/Dec of Cash 6,566 5,086 14,089 -26,641


Closing Balance 14,319 19,404 33,493 6,852

96September 2010

ORDER framework


O


D



Siemens Bloomberg: SIEM IN CMP: Rs787 BuyMultiple growth drivers in place



9/09A 84,502 6,539 19.4 39.5 40.6 9.1 38.6 60.1 2.9 23.7

9/10E 90,202 8,095 24.0 23.8 32.8 7.5 38.7 40.8 2.7 19.2

9/11E 120,643 10,186 30.2 25.8 26.0 6.2 25.6 41.3 2.0 15.8

9/12E 153,522 13,071 38.8 28.3 20.3 5.1 26.2 43.5 1.6 12.3



1,6,12 Rel. Perf. (%) 3/-6/23

M.Cap. (Rs b) 265.2

M.Cap. (US$ b) 5.8


A diversified Engineering company, with exposure to Power(40% of its revenues), Industry (40% of sales), Transportation(14% of sales), Healthcare, etc, Siemens is one of the biggestbeneficiaries of the revival in the capex cycle in India. It standsto benefit significantly from the Rs2.4t investment in the T&Dspace under the Twelfth Five-Year Plan. Siemens is also akey partner in Siemens AG's global network, creating asignificant export opportunity (25% of sales in FY09). Webelieve that the company will continue to be Siemens AG'sgrowth vehicle in the Middle East and North African marketsdue to cost advantage.

Siemens' cumulative order intake in the last 12 months (June2009 - June 2010) has been Rs120b, a growth of 41%. Orderintake was boosted by a large order, valued at Rs24.91b,from Kahramaa, Qatar. Currently, the company has an orderbook of Rs135b, up 34%. In the current quarter (endingSeptember 2010), Siemens in consortium with Siemens AG,has received another large order from Torrent Power to setup two combined-cycle power plants. We expect the companyto end FY10 (September-ending) with an order-book ofRs154b, up 51%. Order flow momentum is likely to remainstrong in the near term, with possibility of more mega orders.

Siemens India is investing meaningfully in building newcapacities to cater to the domestic and export markets. Thecompany has invested more than Rs6b in the past four yearsand intends to spend another Rs16b in the next 3-4 years. Alarge part of the exports will be aimed at the renewable energysector. The company is also likely to make India a hub forvalue-priced products. We believe investments will lead tobetter market opportunities as well as higher degree ofindigenization, thus boosting margins.

Siemens' margins suffered in FY07 and FY08 on account oflosses on two large orders. Profitability is now back on track,with EBITDA margin improving to 12.1% in FY09. We expectEBITDA margin to expand further to 13-14% in the next twoyears due to higher indigenization, better product mix, andbetter project management. We expect strong pick-up insales, as execution on mega-orders accelerates in the nextfew quarters and demand in short-cycle industrial productsgrows. We expect Siemens to post earnings CAGR of 26%over FY09-12.

The stock trades at 26x FY11E earnings. We believe it isattractively priced and expect it to outperform due to thefollowing: (1) With an estimated earnings CAGR of 26% overFY10-12, Siemens India is among the fastest growingengineering companies. (2) Siemens is ideally positioned tocapitalize on opportunities in several sectors like powergeneration, wind power, and transportation. (3) Siemens islikely to be a key beneficiary of Siemens AG's widening footprintin the Middle-East. Any large orders from Qatar can result in asubstantial improvement in earnings outlook.

* Standalone

450

550

650

750

850


Siemens Sensex - Rebased


97September 2010

Strong pick-up in order flows, order book up 34% to Rs135b

We expect Siemens to post a strong 60% growth in order intake in FY10, after a lull ofnearly three years. After bagging a large order from Qatar in October 2005 and subsequentrepeat orders in 2006, Siemens India failed to win large orders until 4QFY09, when itreceived a Rs7.4b order (Siemens India's part) from Adani Power to set up a 765kV lineto evacuate power from Adani's under-execution 6,600MW power plant in Gujarat. Thiswas followed by two large orders from Kahramaa, Qatar, valued at Rs6.08b and Rs24.91bin the last few months.

Delays in Power Grid related orders have also led to stagnation in order book. However,order book outlook is improving now, with orders from Power Grid starting to acceleratenow. Order flow momentum is likely to remain strong in the near term.

ORDERS GROWING AT BRISK PACE AFTER TWO YEARS

Siemens

QUARTERLY ORDER INTAKE (RS B)

BTB AT HIGHEST LEVEL IN LAST FOUR YEARS

1730

41

82

10187 88

141 148

177

20.05.0

60.0

0.9-14.0

23.6

98.9

36.8

79.9

45.1

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E

Order intake (Rs b) Grow th (%)

42

1612 12

51

19 1813

1923

2124

20 1923 26

52

22 20

1QF

Y06

2QF

Y06

3QF

Y06

4QF

Y06

1QF

Y07

2QF

Y07

3QF

Y07

4QF

Y07

1QF

Y08

2QF

Y08

3QF

Y08

4QF

Y08

1QF

Y09

2QF

Y09

3QF

Y09

4QF

Y09

1QF

Y10

2QF

Y10

3QF

Y10

921

35

7594 98 102

153

206

181

0.6

1.21.3 1.2 1.2 1.2

1.51.7

1.7

1.3


Order Book (Rs m) BTB (x)


Multiple sectors and exports

boosting order book

1QFY10 order intake was

boosted by one large order

from Qatar

98September 2010

Siemens

BTB IMPROVING CONSISTENTLY IN RECENT QUARTERS


RECEIVED TWO MEGA-ORDERS IN 2010

CLIENT VALUE DATE EXECUTION PROJECT

(RS M)

Torrent Power NA 2-Ju-10 36 Months Two CCPP with total 1600 MW

capacity

Gurgaon Metro NA 11-May-10 30 Months Total rail Solutions for 6.1 km stretch

of line

PGCIL, India 1,000 2-Feb-10 11 months 1 unit of 765 KV Substation job.

Kahramaa, Qatar 24,910 19-Jan-10 36 months Total order Rs. 29,560 million, with

Siemens AG, substation works.

Kahramaa, Qatar 6,080 10-Nov-09 24 months Cables works.

Ezdan, Qatar 3,420 8-Oct-09 15 months Ezdan Real Estate QSC, substation

jobs, with SAG (Rs 610 million).

PGCIL, India 3,600 30-Sep-09 27 months 2 units of 765 KV substation jobs.

PGCIL 1,090 22-Jul-09 24 months I unit of 765 KV substation job.

Vedanta Alumunium 1,120 22-Jun-09 - HV distribution system at Smelter

plant at Jharsuguda, Orissa

Kahramaa, Qatar 790 4-May-09 24 months Air insulated Circuit breakers.

Adani Power 7,200 30-Apr-08 - With SAG (6,600 million), EPC contract

to set up a bipolar 500 KV HVDC line,

transmission capacity of 2,500 MW.

PGCIL: Power Grid Corporation of India, Kahramaa: Qatar General Electricity & Water Corporation


EBITDA margin up sharply

Siemens' margins have been stable at 9-10% over FY02-08. However, there has beenconsiderable volatility on quarterly basis. The company incurred losses on EPC contract toexecute Torrent's combined cycle power project (1,350MW) bagged in FY05. It provideda significant amount for 'anticipated losses' on this project during 3QFY07 (quarter endedJune 2007) and again in 2QFY08 (quarter ended June 2008). 2QFY08 earnings wereparticularly impacted, as the company made a provision of Rs1.09b against anticipatedlosses and made a sales reversal of Rs1.17b. Profitability has improved sharply in FY09,as margins expanded across segments.

71 76 77 75

109 10894 94 96 98 98 103 97 102 103

136 134 136

110

1.61.61.61.21.21.21.21.21.21.21.2

1.31.7

2.1

2.4

1.92.2

2.52.6

1QF

Y06

2QF

Y06

3QF

Y06

4QF

Y06

1QF

Y07

2QF

Y07

3QF

Y07

4QF

Y07

1QF

Y08

2QF

Y08

3QF

Y08

4QF

Y08

1QF

Y09

2QF

Y09

3QF

Y09

4QF

Y09

1QF

Y10

2QF

Y10

3QF

Y10

Order Book (Rs b) BTB (x,TTM)

Profitable exports push

margins up

99September 2010

EBITDA MARGIN IS IMPROVING (%)


Aggressive capex - to invest Rs16b in the next three years

Siemens India has invested more than Rs6b in the past four years to build fresh capacities.It has announced its intent to invest Rs16b over the next three years. A large part of itsexports will be aimed at the renewable energy sector. The company is also likely to makeIndia as a hub for value-priced products. Higher localization should boost margins.

The company has also made mid-sized acquisitions in core product areas of buildingtechnologies, electrical products like switchgear, and medical diagnostics.

AGGRESSIVE INVESTMENTS ACROSS T&D VALUE CHAIN

PRODUCTS DATE CAP P.A. COST (RS M) LOCATION COMMENTS

Industrial steam Jan-07 Na 300 Vadodara Capacity being trippled,

turbines cost Rs. 2750 mn, by 2010.

Transformer factory Dec-07 15,000 MVA 2,000 Thane 800 KV, HVDC, Furnace

applications

Instrument Aug-08 3000 units 250 Aurangabad SF6 insulated CT, PT, etc.

Transformer

Gas Insulated Apr-09 N.A. 400 Aurangabad Wide voltage range - 72.5,

switchgear 145, 245, 400 kv range


INCREASING LOCALIZATION IMPROVING PROJECT MARGINS

Siemens

14.0

12.912.712.1

9.19.48.9

10.29.99.1

8.6


6 15 39 40 3432

16% 19% 23%

40%49%50%

33%

84%88%97%93%91%

119%

93%

FY03 FY04 FY05 FY06 FY07 FY08 FY09

Project Sales (Rs b) Projects (% of Total Rev) Project Boughtout (% of Project Sales)


EBITDA margins expected to

settle at 12.5-13%

100September 2010

Transmission investment keeps pace under Eleventh Plan

The transmission sector has invested ~Rs550b during FY08-10, amounting to nearly 40%of planned investments. Transmission investment, being back-ended, should accelerateover the next two years. To facilitate inter-regional transfer of power, inter-regionaltransmission capacity is being expanded to 38,650MW by the end the Plan from 20,750MWas at March 2009, at an investment of ~Rs550b by Power Grid (total 11th Plan). Further,an investment of Rs414b will be required to evacuate power generated from nearly 35GWof power capacity to be commissioned in the next five years by private developers.

IR CAPACITY PLANNED (GW)

Source: Ministry of Power, CEA

Multi-fold jump in demand for 765kV transformers and substations

With growing emphasis on large-scale power projects based on super critical technology,extra-high voltage (EHV) transmission segment will see increased activity, particularly inthe 765kV transformer range. The 765kV system will account for 29% of totaltransformation capacity addition proposed in the Eleventh Plan, at 51,000MVA. This numberis expected to increase by 2x to 110,000MVA, 39% of the planned capacity addition duringthe Twelfth Plan. 78% of the transformer ordering by PGCIL in FY09 and FY10 has beenin the 765kV/500MVA range (333MVA in a few cases). Companies in this segmentare likely to benefit on account of technological barriers to entry and limitedcompetition compared to other growing transformer segments.

Expect Siemens to gain market share

T&D is a core area of growth for Siemens. The company has the capability to set upExtra High Voltage Transmission Systems like HVAC (High Voltage Alternating Current)and HVDC (High Voltage Direct Current). It has set up a large advanced transformerfactory, with a capacity of 15,000 MVA, which was commissioned in December 2007. Weexpect Siemens to become a key player in 765kV transformer market in the next coupleof years (no order as yet). Siemens has already bagged a third of PGCIL's 765kV substationorders.

Siemens

20.8

38.7

75.8

150


Siemens will be a key

beneficiary of investment in

high voltage transmission

systems

101September 2010

PGCIL: 765 KV SUBSTATION MARKET SHARE


Qatar: boosting Siemens India's growth

Over the last five years, Siemens India has bagged several projects in consortium withSiemens AG. With a total value of Rs95b, these projects account for ~20% of SiemensIndia's order intake since FY06. Its key client in Qatar is Qatar General Water and ElectricityCorporation (Kahramaa), the country's sole power and water distribution company. Siemenshas also received an order from Ezdan Real Estate QSC. We believe that Siemens willcontinue to be among the biggest beneficiaries of the infrastructure investments in theMiddle East, particularly Qatar.

Expect more orders from Middle East

Qatar is setting up three large power projects with aggregate capacity of 6,730MW, whichwill raise the installed capacity to 10,000MW by 2012. Kahramaa, to meet the transmissionrequirement, is engaged in an 'Electricity Network Expansion Programme' comprising ofseveral phases. Phase-VII of the project was completed in 2QCY09, involving totalinvestment of US$2b. Even as Phase-VIII is under progress, the company has startedordering out various packages under Phase-IX. Phase IX will cost over US$2b and will becompleted by 2012. This phase will involve construction of 22 substations, 3 undergroundsubstations, 375km of cables and 62km of overhead lines.

Siemens AG is has a strong presence in the country and is likely to be a key partner ininfrastructure development. This will include transmission lines, transportation, aviation,etc. The company's recent successes in Phase-IX of Kahramaa Transmission Grid Projectaugers well. We believe that given the manufacturing and services capability that SiemensIndia has, it will be the key beneficiary of Siemens AG's widening footprint in the region.

Qatar orders yield good margins

Profitability for Kahramaa orders has been impressive and broadly in line with domesticorders. Having already established the basic infrastructure for project implementation inQatar, Siemens will continue to enjoy good margins from ongoing and future projects.

Siemens

Areva T&D, 50%

ABB, 14%

Siemens, 36%

Qatar accounts for 25%

of order book

Margins supported by good

pricing and declining

material costs

102September 2010


AUTOMATION BUSINESS: STRONG INDUSTRY PRESENCE ACROSS SECTORS

INDUSTRY SEGMENTS % OF SEGMENT KEY PRODUCTS KEY COMPETITORS

SALES

Industry Automation 22 Automation products ABB, Honeywell

and solutions

Drive Technologies 27 Motors, drives, turbines, ABB, Crompton, BHEL

drive systems, panels.

Building Technologies 2 Building management Solutions Honeywell

Industry Solutions 24 Large industrial projects ABB, Honeywell

Mobility (Railway) 25 Railways- Traction motors, BHEL, Alstom, Bombardier

signalling equip; Aviation

products and solutions


Mobility: huge potential

Siemens' mobility division is a key player in rail transport solutions. Its units at Kalwa(Thane) and Nashik have advanced manufacturing capacity to produce railway propulsionequipment. The division has bagged several key projects in the past from Indian Railways.Recently, it received an order from Delhi Metro for electrification of the metro line fromthe airport as also the baggage check-in facility at the airport. Despite slowdown in thegeneral industrial environment, the mobility division has posted strong growth in FY09.With investment pipeline that the Indian Railways has and likely progress on the DedicatedFreight Corridor (Rs570b), coupled with growing expenditure on modernisation on Indianairports, Siemens' mobility business will be among its fastest growing businesses.

The mobility business has been incurring losses for the past two years due to cost and timeover-run on a large project. The division reported a profit in 1QFY10. With larger projectportfolio and higher localization, this business should remain profitable.

Siemens

0

8

16

24

32

1QF

Y08

2QF

Y08

3QF

Y08

4QF

Y08

1QF

Y09

2QF

Y09

3QF

Y09

4QF

Y09

1QF

Y10

2QF

Y10

3QF

Y10

Transmission (%) Distribution (%)

STRONG PROFITABILITY ON EXPORTS, BOOSTING TRANSMISSION EBIT MARGIN

103September 2010

EARNINGS CAGR OF 26% OVER FY09-12E

KEY EARNINGS ASSUMPTIONS FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E

Order Intake (Rs b) 41.2 82.0 101.4 87.2 88.0 140.7 147.8 177.3

Growth (%) 36.8 98.9 23.6 (14.0) 0.9 60.0 5.0 20.0

Order Book (Rs b) 35.1 75.3 94.1 98.3 102.3 153.4 181.3 206.0

Revenues (Rs b) 27.5 45.1 77.3 83.0 83.9 89.7 119.8 152.7

Execution Ratio (%) 0.36 0.29 0.40 0.45 0.44 0.30 0.36 0.40

Book to Bill (x) 1.28 1.67 1.22 1.19 1.22 1.71 1.51 1.35

Cost assumptions (%)

RM/Sales 70.1 73.5 76.2 74.8 68.2 66.8 69.0 70.0

Employee Cost/Sales 7.4 6.2 5.1 5.2 6.5 7.1 6.4 6.0

Other Expenses/Sales 12.3 11.4 9.2 10.8 13.2 12.1 11.9 11.1

Total Cost/Sales 89.8 91.1 90.6 90.9 87.9 86.0 87.3 87.1

EBITDA Margin 10.2 8.9 9.4 9.1 12.1 14.0 12.7 12.9


STRONG ORDER INTAKE IN FY10

Siemens

BTB AT ALL-TIME HIGH

1730

41

82

10187 88

141 148

177

20.05.0

60.0

0.9-14.0

23.6

98.9

36.8

79.9

45.1


Order intake (Rs b) Grow th (%)

Highest ever order book


921

35

7594 98 102

153

206

181

0.6

1.21.3 1.2 1.2 1.2

1.51.7

1.7

1.3


Order Book (Rs m) BTB (x)

104September 2010

3-YEAR SALES CAGR OF 22%

MARGINS STRUCTURALLY AT HIGHER LEVELS

PAT CAGR OF 26%



With an estimated 26% earnings CAGR over FY10-12, Siemens is one of India'sfastest growing engineering companies. Strong order book and continuing momentumprovides earnings visibility.

The company is ideally positioned to capitalize on opportunities in several sectors likepower generation, wind power and transportation. We believe that growth can besustained for a much longer timeframe.

We expect Siemens to be a key beneficiary of the parent's outsourcing needs. Anylarge order from Qatar can result in a substantial upgrade in our earnings estimates.

Maintain Buy with a target price of Rs907 (30x FY11E EPS).

Siemens

13.1 14.6 18.327.7

45.5

78.785.6 84.5 90.2

120.6

153.5

11.1 11.2

25.1

51.4

8.7

-1.36.7

33.727.3

72.964.5


Net Sales (Rs b) Sales Grow th, YoY (%)

1,124 1,333 1,8042,826

4,041

12,649

15,336

19,729

10,232

7,400 7,791

8.6 9.1 9.9 10.28.9 9.4 9.1

12.1

14.0

12.912.7


EBITDA (Rs m) EBITDA Margin (%)

0.8 1.1 1.42.5

5.2 4.7

6.5

8.1

10.2

13.1

3.621.9 26.4

36.8

75.9

41.4

-9.5

28.325.823.839.543.9


Net Profit (Rs b) Net Profit Grow th (% YoY)

105September 2010

Key risks

Business restructuring: During the last three years, Siemens India has divestedbusinesses such as Information & Communication, Telecom, Automotive andInformation Technology to its parent. Though we do not see any meaningful businessrestructuring in the foreseeable future, any change in Siemens AG's global strategywill impact Indian operations and hence Siemens India's valuations.

Slowdown in economy, exchange rates and interest rates: (1) A substantial hikein interest rates can derail capex plans of corporates, thereby impacting capital goodsmanufacturers like Siemens. (2) Siemens reported foreign exchange gain of Rs1.1b inFY08 and Rs2.1b in FY09. In the first three quarters of FY10, the company hasposted forex loss Rs1.8b. Sharp movement in exchange rates can adversely impactreported profits.

Siemens

106September 2010

1 YEAR FORWARD P/E

1 YEAR FORWARD P/BV

SIEMENS VS SENSEX PE PREM / DISC (%)


Siemens

68.2

-60

0

60

120

180

Sep

-98

Aug

-99

Jun-

00

Apr

-01

Mar

-02

Jan-

03

Nov

-03

Sep

-04

Aug

-05

Jun-

06

Apr

-07

Mar

-08

Jan-

09

Nov

-09

Sep

-10

26.7

4

20

36

52

68

Mar

-94

Apr

-95

Apr

-96

May

-97

May

-98

May

-99

Jun-

00

Jun-

01

Jun-

02

Jul-0

3

Jul-0

4

Jul-0

5

Aug

-06

Aug

-07

Aug

-08

Sep

-09

Sep

-10

Average of 25.5x

Peak of 63.7x

Bottom of 10.4x


6.2

0.0

5.0

10.0

15.0

20.0

Mar

-94

Apr

-95

Apr

-96

May

-97

May

-98

May

-99

Jun-

00

Jun-

01

Jun-

02

Jul-0

3

Jul-0

4

Jul-0

5

Aug

-06

Aug

-07

Aug

-08

Sep

-09

Sep

-10

Average of 5.6x

Peak of 15.4x

Bottom of 1.3x

Valuations

Long-period Trend

107September 2010


Siemens


Y/E SEPTEMBER 2009 2010E 2011E 2012E

Total Revenues 84,502 90,202 120,643 153,522

Change (%) -1.3 6.7 33.7 27.3

Raw Materials 57,600 60,255 83,244 107,465

Staff Cost 5,499 6,396 7,675 9,211

SGA Expenses 11,172 10,902 14,388 17,117

EBITDA 10,232 12,649 15,336 19,729

Change (%) 31 24 21 29


Depreciation 778 842 965 1,069

Interest 59 60 0 0

Other Income 635 900 1,300 1,450

EO Items (net) 4,289 0 0 0

PBT 14,319 12,648 15,671 20,110

Tax 3,870 4,553 5,485 7,038

Rate (%) 27.0 36.0 35.0 35.0

PAT 10,449 8,095 10,186 13,071

Adjusted PAT 6,539 8,095 10,186 13,071

Change (%) 39.5 23.8 25.8 28.3

Consolidated PAT 7,046 8,095 10,186 13,071

Con.Adjusted PAT 5,545 8,095 10,186 13,071

Change (%) 16.5 46.0 25.8 28.3


Y/E SEPTEMBER 2009 2010E 2011E 2012E


Reserves 28,492 34,618 42,044 51,172

Net Worth 29,166 35,292 42,718 51,847

Loans 6 30 30 30

Net Deferred Tax Liab -1,119 -1,119 -1,119 -1,119




Net Fixed Assets 6,295 7,053 7,988 8,519

Capital WIP 1,057 650 400 400

Investments 4,770 4,770 4,770 4,770

Curr. Assets 69,212 80,971 105,127 131,715

Inventory 9,722 9,885 13,221 16,824

Debtors 34,583 38,305 51,232 65,194


Loans & Advances 10,458 10,000 10,000 10,000


Creditors 40,585 44,483 59,495 76,130


Provisions 12,695 14,758 17,161 18,517



E: MOSL Estimates

RATIOS

Y/E SEPTEMBER 2009 2010E 2011E 2012E

Basic (Rs)

EPS 19.4 24.0 30.2 38.8

Growth (%) 39.5 23.8 25.8 28.3

Consolidated EPS 16.5 24.0 30.2 38.8

Cash EPS 21.7 26.5 33.1 42.0

Book Value 86.5 104.7 126.8 153.8

DPS 5.0 5.0 7.0 10.0


Valuation (x)

P/E (Standalone) 40.6 32.8 26.0 20.3

Cash P/E 36.2 29.7 23.8 18.8

EV/EBITDA 23.7 19.2 15.8 12.3

EV/Sales 2.9 2.7 2.0 1.6


Dividend Yield (%) 0.6 0.6 0.9 1.3


RoE 26.2 25.1 26.1 27.6

RoCE 60.1 40.8 41.3 43.5

Turnover Ratios

Debtors (Days) 149 155 155 155


Creditors. (Days) 175 180 180 181


Leverage Ratio

Debt/Equity (x) 0.0 0.0 0.0 0.0


Y/E SEPTEMBER 2009 2010E 2011E 2012E


Add: Depreciation 778 842 965 1,069

Interest 59 60 0 0

Less: Direct taxes paid 3,870 4,553 5,485 7,038

(Inc)/Dec in WC -2,500 2,533 1,152 425


EO Income 4,289 0 0 0

CF from Op. incl. EO Items 8,785 11,529 12,303 14,566

(Inc)/dec in FA -1,688 -1,193 -1,650 -1,600

(Pur)/Sale of Investments 467 0 0 0


(Inc)/Dec in Net Worth -210 3 0 0

(Inc)/Dec in Debt -5 24 0 0


Dividend Paid 1972 1971 2760 3943


Inc/Dec of Cash 5,318 8,332 7,893 9,023


Closing Balance 14,449 22,781 30,674 39,697

108September 2010

ORDER framework


O


D

R


RATING & STOCK PERFORMANCE

Thermax Bloomberg: TMX IN CMP: Rs789 Neutral

Power equipment next big opportunity



3/09A 34,580 2,876 24.1 -0.4 32.7 9.3 32.9 48.0 2.6 21.1

3/10E 33,703 2,592 21.8 -9.9 36.3 8.6 25.0 38.2 2.5 21.1

3/11E 46,535 3,622 30.4 39.8 26.0 6.9 29.9 45.2 1.9 15.9

3/12E 61,054 4,842 40.6 33.7 19.4 5.4 31.5 47.9 1.4 11.9



1,6,12 Rel. Perf. (%) -5/4/23

M.Cap. (Rs b) 94.0

M.Cap. (US$ b) 2.1


Thermax has a JV with Babcock & Wilcox for supercriticalboilers, with Thermax holding 51% stake in the venture.Thermax's strong engineering skills and the JV couldsignificantly alter the pace of order inflows for the Powerdivision. Also, there is renewed buoyancy in the Environmentsegment. Order backlog at end-1QFY11 was up 104% YoY atRs70b with a BTB ratio of 2x , while intake was at 40% YoY atRs15b. The management expects two large utilities ordersof Rs8b-10b each to come through in FY11. We expect atleast one JV order for supercritical boilers by FY12, whichcould push our order book estimates upwards.

Thermax's consolidated order backlog at the end of 1QFY11was up 104% YoY at Rs70b, with a BTB of 2x. The orderbacklog is divided into Power (80%) and Environment (20%).We expect revenue CAGR of 35% over FY10-12, with a backlogCAGR of 32% over the period. Our estimates do not take intoaccount orders from the supercritical JV. We expect Thermaxto close FY11 with an order backlog of Rs84b. TheEnvironment business, which will have JV operations withSPX and GE Water, will find fresh growth avenues in watertreatment, air pollution control systems and industrial wastetreatment.

Thermax has entered into JVs with SPX Corporation (airpollution control systems), Georgia Pacific Chemicals(technology and manufacturing license agreements forperformance-enhancing chemicals for the paper industry),GW Water (for membrane Bio-reactor technology in sewagetreatment) and with a German company, Whirle (for difficult-to-treat effluents). The Environment segment contributes 20%of Thermax's consolidated revenue. The increasing thrust onwaste treatment and pollution control techniques will driverevenue for Thermax in the near future.

We expect Thermax to post revenue CAGR 35% and PAT CAGRof 37% over FY10-12. We expect consolidated PAT of Rs3.6bin FY11 (up 40%) and Rs4.8b in FY12 (up 34%). We estimateEBITDA margins for the consolidated business at 12% forFY11 (up 20bp) and 12% for FY12. Upsides to our estimatescould be in the form of higher-than-expected order executionas we have assumed 75-77% of order conversion in FY11and FY12. We factor in 34% CAGR in order backlog overFY10-12. We expect Thermax to end FY11 with a backlog ofRs84b (up 40%) and FY12 with Rs103b (up 24%).

Thermax trades at 26x FY11E EPS of Rs30.4 and 19.4x FY12EEPS of Rs40.6. On an EV/EBITDA basis it trades at 15.9xFY11E and 11.9x FY12E earnings. We rate Thermax Neutralwith a price target of Rs813 (20x FY12E EPS). Upsides to ourearnings estimate could be in the form of breakthrough ordersin the supercritical JV in late FY11 or a better-than-expectedexecution run-rate in FY11. We understand that most of theupsides are priced into Thermax's valuations. We await furtherupdates on the supercritical business. 450

550

650

750

850


Thermax Sensex - Rebased


109September 2010

Supercritical JV to provide huge opportunity

In March 2010, Thermax announced a JV with US-based Babcock & Wilcox (B&W), apower generation group, to make supercritical 600-800MW boilers. B&W has an installedbase of 90GW worldwide and its 1,300MW boilers have been running successfully forover 30 years. We understand several Chinese companies such as Dongfang and Harbinhave sourced boiler technology from Babcock.

Therrmax holds 51% in the B&W JV with an initial equity contribution of Rs1.78b. Projectcapex is Rs7b, to be financed by a 50:50 DER. The JV will have peak capacity of 3GW tobe set-up over 18 months and will start operations by late FY12. Thermax has amanufacturing capacity of 1.5GW for subcritical boilers (including captive power projects).With the JV, Thermax's boiler capacity will increase to 4.5GW by FY13-14. The sub-critical boiler capacity has been set up in Baroda, Gujarat at a capex of Rs4.5b. The JVwill initially employ 500 people in engineering and quality control and blue-collar recruitmentcould reach four digits as the plant reaches peak capacity.

XIITH PLAN: RATING WISE BREAK-UP OF THERMAL CAPACITY IN THE XIITH PLAN

THERMAL UNIT SIZE (MW) NO OF UNITS CAPACITY (MW) % SHARE

Coal 250/255 9 2,275 3.0

270 4 1,080 1.4

300 14 4,200 5.5

334 2 668 0.9

350 17 5,950 7.8

500 17 8,500 11.1

600 13 7,800 10.2

660 54 35,640 46.5

800 10 8,000 10.4

Sub-total 140 74,113 96.7

Lignite 125 4 500 0.7

500 4 2,000 2.6

Sub-total 8 2,500 3.3

Total thermal capacity addition 148 76,613 100.0


XIIITH PLAN: ADDITION OF 64GW ON SUPER-CRITICAL BASIS

PLAN PERIOD SUB-CRITICAL 660MW 800MW SUPERCRITICAL TOTAL % OF

(MW) (NOS) (NOS) (MW) (MW) SUPER-CRITICAL

10th 9,620 0 0 0 9,620 0

11th 44,490 9 2 7,540 52,030 14

12th 30,473 54 10 43,640 74,113 59

13th 0 54 23 64,100 64,100 100


Although the opportunity is fairly large in the supercritical space, several private playershave been trying to enter the market, which will stiffen competition and make price animportant factor in securing orders.

India will have a boiler and turbine manufacturing capacity of 34-35GW by FY14. Indiawill add generation capacity of 15GW a year, making the competitive landscape challengingfor new players like Thermax.

Thermax

58% (43GW) of thermal

capacity in the Twelfth Plan

will have supercritical

parameters

The XIIIth plan provides for

100% thermal capacity to be

on supercritical basis

thereby making a strong

case for the JV

110September 2010

Thermax

BOILER AND TURBINE CAPACITY (GW)

FY11E FY12E FY13E FY14E FY15E FY16E FY17E

BHEL 15 20 20 20 20 20 20

L&T-MHI 4 4 4 4 4 4 4

Cethar Vessels 3 3 3 3 3

JSW-Toshiba 3 3 3 3 3 3

Bharat Forge-Alstom 5 5 5 5 5

Thermax-B&W 3 3 3 3 3

Ansaldo-Caldie-GB Eng 4 4 4 4 4 4

Total turbine capacity 19 27 35 35 35 35 35

Total boiler capacity 19 28 34 34 34 34 34


Thermax, being the only player with a large presence in captive boilers, has a strongengineering and design pedigree and a long execution track record with the private andgovernment sectors. This should help Thermax in forging a comfort level with clientscompared with some of the new players. Pricing in the market will depend on the timelycommissioning of announced capacities by other private players. A delay in plantcommissioning by other players could boost order inflows and keep up margins for Thermaxin the medium term.

Import content to be 18-30%; target margins in low double digits

Import content will be high initially, given that the B&W supply chain will largely be used.As the transfer of technology covers all components of supercritical boilers, includingparts, the eventual import content is estimated at 18-30%, involving import mainly ofcomponents like alloy steels, tubes and pressure parts. Initially, margins, which are expectedto be in low double digits, will be impacted by poor fixed cost absorption and higher importcontent. The pricing/realization differential between sub and supercritical boilers is 20%per MW, assuming import content is minimal. The company will eventually make most ofthe pressure parts, coal mills and boiler systems locally, which will enable speedy projectexecution. The vendor base used to make sub-critical boilers will be grown and supportedto make them adapt to supercritical supplies, especially relating to fabrication jobs.

Business to show strong execution trend

Since the start of FY10, Thermax has had strong order inflows. Order inflows in FY10rose 58% to Rs64b and in 1QFY11 they grew 40% YoY to Rs15b. Some of the sectorsthat showed good traction in enquiries/orders are ferrous metals, cement, refineries andpower utilities. Thermax expects to complete a major portion of its Essar order (Rs3.9b)and more than half of the Meenakshi Power order (Rs10b) in FY11. Work on the BrahmaniSteel order (Rs2.9b) has been put on hold, while the company expects to start executionon the Rs5.8b combined cycle gas-based power project in 2HFY11.

The order backlog at the end 1QFY11 was Rs69b (up 104% YoY) and the BTB was 2x.Thermax expects to execute 70-75% of the orders in FY11, translating into tentativerevenue of Rs48b-52b. Our FY11 revenue assumptions are Rs46b (up 38%) and for FY12,Rs61b (up 31%). Our estimates do not factor-in inflows due to the supercritical JV withB&W and are conservative on the execution front.

India will have a total boiler

and turbine manufacturing

capacity of 34-35GW by

FY14E while the country will

add generation capacity of

just 15GW per annum

111September 2010

Thermax

We expect revenue to post 35% CAGR over FY10-12 as the BTB of 2x supports strongrevenue growth and there has been inflow traction in FY10 and 1QFY11.

ORDER-BOOK (RS B) AND BTB (X)

NET SALES (RS B) AND SALES GROWTH (%, YOY)


Margins of 12% in FY11, FY12

Thermax's ability to expand margins in the light of the increasing share of large-scaleutility boilers in its revenue mix will be limited. In the supercritical JV the import contentwill account for 18-30% of order value, limiting efficient fixed cost absorption, given limitedpricing benefits due to competition from BHEL and other private players. We thereforemaintain FY11 and FY12 EBITDA margins of 12% (up 20bp), given limited cost passthrough clauses in some utility based orders.

EBITDA (RS M) AND EBITDA MARGIN (%)

Order backlog CAGR of 32%

through FY10-12E; BTB of

2x leaves ample scope for

speedy execution

Huge order inflows in FY10

with a current BTB of 2x will

support revenue CAGR of

35% in FY10-12E

11.016.8

31.0 26.4 30.8

59.7

83.6

103.7

1.7

1.81.8

0.9

0.8

1.3

1.00.9

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E


7.2 8.012.7

16.3

23.2

34.8 34.6 33.7

46.5

61.1

49.7

31.238.1

-2.5-0.6

43.0

28.1

58.0

12.0


Net Sales (Rs b) Sales Grow th (%)


Constant EBITDA margins of

12% over FY11-12E due to

revenue mix having large

utilities orders

710 766 1,0481,767

2,889

4,267 4,219 3,972

5,584

7,326

12.0

12.0

11.812.212.312.4

10.9

8.39.5

9.9


EBITDA (Rs m) EBITDA Margin (%)

112September 2010

Thermax

Environment business

The Environment business will be a new growth driver for the company as segments likewater, air pollution control and ESPs provide long term clean energy solutions to governments,municipalities, utilities, SEZs and urban townships. Growth will be driven by increasingindustrialization and urbanization, which will augur well for the division. Thermax hasentered various joint ventures/technological agreements to gain a first mover advantageand capture growth in the clean energy segment. We expect the business to post revenuegrowth of 20% CAGR over FY10-12 as Thermax is a market leader in each of thesegments.

Air pollution control: Thermax-SPX Corp venture

Thermax has signed a joint venture agreement with SPX Netherlands BV, a wholly ownedsubsidiary of US-based SPX Corporation, a global leader in providing pollution controlservices to power plants. The venture will operate on a license agreement with Balcke-Durr, Germany, a wholly-owned subsidiary of SPX Corporation. The initial planned equitycapital of the venture is Rs250m of which Thermax will hold 51%. In the initial phase, itwill cover air pollution control systems, electrostatic precipitators (ESPs) for high ash coalbased power plants, bag filters and equipment to reduce sulphur and nitrogen oxide emissions.Initially the JV will focus on offering its products to up to 300MW power plants. A studyby Frost and Sullivan estimates the size of the air pollution control market at Rs13b, and itexpects it to become a Rs30b market by 2013, a growth of 23% CAGR.

Waste water treatment: Thermax-GE Water technology sharing deal

Thermax and US-based GE Water signed agreements to share GE's ultra filtration andbioreactor (MBR) technology. Thermax will use it to treat waste water, and reuse andprocess water in India's commercial and institutional sectors. It is estimated that the needfor advanced waste water treatment for India's commercial and institutional needs isgrowing by 50% a year. This demand is driven by new regulations, related to recycling ofwater. Since India treats less than 15% of its waste water, this division has the potential topost 20% CAGR over 3-4 years.

ENVIRONMENT BUSINESS REVENUES (RS M) AND EBIT (%)


Environment business

expected to record revenue

CAGR of 22% (FY03-10);

EBIT margins higher due to

lower competition and

superior technology2 2

34

57

8 912

12

1011

1213

14

12

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Revenues (Rs b) EBIT (%)

113September 2010

Thermax

A study of project-wise allocation of funds under the Jawaharlal Nehru Urban RenewalMission reveals Rs157b will be allotted by state/municipal governments to sewage andwaste management solutions in their respective states/talukas over 4-5 years. Thermax,being one of the largest and best integrated clean energy companies, will be a key beneficiaryof the schemes.

JNURM: SANCTIONED PROJECT COST OF RS582B UNDER VARIOUS SCHEMES (RS M)

SECTOR SANCTIONED PROJECTS ASST FUNDS RELEASED SECTOR

NO % COST COMMITTED RS M (%) WTG (%)

Storm water drainage 71 13.55 84,646 35,765 15,378 18.2 14.52

Roads/flyovers 94 17.94 75,725 30,887 8,743 11.5 12.99

Water supply 151 28.82 195,657 97,572 44,047 22.5 33.57

Sewage 110 20.99 134,764 65,097 23,979 17.8 23.12

Urban renewal 11 2.10 4,879 2,042 715 14.7 0.84

Mass rapid transport 19 3.63 47,710 21,957 11,401 23.9 8.19

Other urban transport 15 2.86 8,059 3,744 1,803 22.4 1.38

Solid waste management 41 7.82 22,360 10,917 4,276 19.1 3.84

Development of heritage areas 5 0.95 2,105 1,321 589 28.0 0.36

Preservation of water bodies 4 0.76 1,167 686 181 15.5 0.20

Parking 3 0.57 5,762 2,378 183 3.2 0.99

Total 582,833 272,367 111,297


Rating and stock performance: Neutral with price target of Rs813

In the past 10 years Thermax has transformed itself into a broad-based engineering companyfrom a boiler and chiller maker. It will derive its future growth from three areas: (1) power,(2) industry, and (3) growing urbanization, while benefiting from demand for ancillaryproducts and services. The company's JV with Babcock and Wilcox has the potential tobecome India's third most respected power equipment maker after BHEL and L&T andcan grow rapidly in early years.

Thermax trades at 26x FY11E EPS of Rs30.4 and 19.4x FY12E EPS of Rs40.6. On anEV/EBITDA basis it trades at 15.9x FY11E and 11.9x FY12E earnings. We rate ThermaxNeutral with a price target of Rs813 (20x FY12E EPS). Upsides to our earnings estimatecould be in the form of breakthrough orders in the supercritical JV in late FY11 or a better-than-expected execution run-rate in FY11. We understand that most of the upsides arepriced into Thermax's valuations. We await further updates on the supercritical business.

Water and waste

management solutions under

the JNURM schemes occupy

a 25% share of projects

representing an opportunity

of Rs150b over the

next two-three years

114September 2010

Thermax

1 YEAR FORWARD P/E

1 YEAR FORWARD P/BV


THERMAX VS SENSEX PE PREMIUM / DISCOUNT (%)


27.3

0

10

20

30

40

May

-95

Jul-9

6

Aug

-97

Sep

-98

Oct

-99

Nov

-00

Dec

-01

Jan-

03

Mar

-04

Apr

-05

May

-06

Jun-

07

Jul-0

8

Aug

-09

Sep

-10

Average of 14.6x

Peak of 36.6x

Bottom of 2.4x


8.0

0.0

3.5

7.0

10.5

14.0

May

-95

Jul-9

6

Aug

-97

Sep

-98

Oct

-99

Nov

-00

Dec

-01

Jan-

03

Mar

-04

Apr

-05

May

-06

Jun-

07

Jul-0

8

Aug

-09

Sep

-10

Average of 3.1x

Peak of 12.2x

Bottom of 0.3x

63.6

-90

-45

0

45

90

135

Mar

-95

Apr

-96

Apr

-97

May

-98

May

-99

May

-00

Jun-

01

Jun-

02

Jul-0

3

Jul-0

4

Jul-0

5

Aug

-06

Aug

-07

Aug

-08

Sep

-09

Sep

-10


35.4

0

15

30

45

60

75

Mar

-01

Feb

-02

Dec

-02

Oct

-03

Sep

-04

Jul-0

5

May

-06

Apr

-07

Feb

-08

Dec

-08

Nov

-09

Sep

-10

Peak of 59.1x

Average of 19.6x

Bottom of 1.9x

Valuations

Long-period Trend

115September 2010


Thermax


Y/E MARCH 2009 2010 2011E 2012E

Total Revenues 34,580 33,703 46,535 61,054

Change (%) -0.6 -2.5 38.1 31.2

Raw Materials 20,802 20,271 28,852 37,853

Staff Cost 2,882 3,300 3,955 5,190

Other Expenses 6,677 6,161 8,144 10,684

EBITDA 4,219 3,972 5,584 7,326



Other Income 404 519 552 728


PBT 4,233 4,028 5,573 7,450

Tax 1,357 1,432 1,951 2,607

Rate (%) 32.1 35.5 35.0 35.0

Adjusted PAT 2,876 2,592 3,622 4,842

Extra-ordinary Income (net) 14 -1,149 0 0

Reported PAT 2,890 1,443 3,622 4,842

Change (%) -0.6 -50.1 151.0 33.7


Y/E MARCH 2009 2010 2011E 2012E


Reserves 9,675 10,544 13,190 17,057

Net Worth 10,073 10,926 13,573 17,439

Loans 41 80 90 100

Deferred Tax Liability 160 144 144 144




Net Fixed Assets 4,911 5,369 6,526 6,641

Capital WIP 177 115 1,510 2,286

Investments 1,433 3,703 3,703 3,953

Curr. Assets 17,316 24,306 20,423 28,094

Inventory 5,267 5,744 6,757 9,033

Debtors 5,719 7,984 8,287 11,374


Loans & Advances 2,224 3,282 3,187 4,182

Other Assets 410 594 637 836

Current Liab. & Prov.

Creditors 4,199 7,583 5,737 6,691


Provisions 957 985 1,288 1,690


Miscellaneous Expenses 1 0 0 0


E: MOSL Estimates

RATIOS

Y/E MARCH 2009 2010 2011E 2012E

Basic (Rs)

EPS 24.1 21.8 30.4 40.6

Cash EPS 27.1 25.5 35.0 45.6

Book Value 84.5 91.7 113.9 146.4

DPS 5.0 6.0 7.0 7.0


Valuation (x)

P/E 32.7 36.3 26.0 19.4

Cash P/E 29.1 31.0 22.6 17.3

EV/EBITDA 21.1 21.1 15.9 11.9

EV/Sales 2.6 2.5 1.9 1.4


Dividend Yield (%) 0.6 0.8 0.9 0.9


RoE 32.9 25.0 29.9 31.5

RoCE 48.0 38.2 45.2 47.9

Turnover Ratios





Leverage Ratio

Debt/Equity (x) 0.0 0.0 0.0 0.0

CASHFLOW STATEMENT (RS MILLION)

Y/E MARCH 2009 2010 2011E 2012E





(Inc)/Dec in WC (1,874) 4,687 (5,160) (1,621)

CF from Operations 1,392 7,746 -974 3,827

EO Income 14 -1,149 0 0

CF from Op. Incl. EO Items 1,405 6,597 -974 3,827

(Inc)/Dec in FA (1,954) (838) (3,095) (1,476)

(Pur)/Sale of Investments 4,169 (2,271) 0 (250)

CF from Investments 2,215 (3,109) (3,095) (1,726)

(Inc)/Dec in Net Worth 190 335 (93) 0

(Inc)/Dec in Debt 41 39 10 10



CF from Fin. Activity (504) (483) (1,079) (985)

Inc/Dec of Cash 3,116 3,006 (5,148) 1,115

Add: Beginning Balance 580 3,696 6,702 1,554

Closing Balance 3,696 6,702 1,554 2,669

116September 2010

N O T E S


117September 2010

N O T E S


118September 2010

N O T E S


This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal OswalSecurities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solelyfor your information and should not be reproduced or redistributed to any other person in any form.

The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt orany of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the informationcontained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matterpertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients ofthis report should rely on their own investigations.

MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement ABB BGR Energy BHEL Cummins India Crompton Greaves L&T Siemens Thermax

1. Analyst ownership of the stock No No No No No No No No2. Group/Directors ownership of the stock No No No No No No Yes No3. Broking relationship with company covered No No No No No No No No4. Investment Banking relationship with company covered No No No No No No No No

This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be requiredfrom time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provideinformation in response to specific client queries.

For more copies or other information, contactInstitutional: Navin Agarwal. Retail: Manish Shah

Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: [email protected]

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