ess public sector hopes

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MARKETUPDATE

India | Capital Goods | 31-July-2013

Capital GoodsPublic sector will not save the day

The Finance Ministers budget promise to rein in the fiscal deficit

doesnt leave the government with much firepower to make up for a

shortfall in capex as the private sector stays on the sidelines,

weighed down by overleveraged balance sheets. The governments

unimpressive track record in project execution and order awards

does not inspire much confidence either. Almost half the public

sector projects are behind schedule the highest in the last 15

years. Moreover, we are not enthused by governments FY14 targets

for project awards, as these do not take into account the issues

facing various sectors, e.g. land acquisition, environmental hurdles,

new bidding guidelines and lack of private sector interest. With

elections set for 2014, new project announcements and decision

making could slow down further, as was seen in 2004 and 2009.

Time overruns in government projects the highest over past 15 years

A recent study by the Ministry of Statistics and Programme Implementation

has reinforced our belief that government capex will remain muted in the near

term. Of the total 566 projects analysed (costing Rs1.5bn or above) as on April

2013, almost half were behind schedule (Figure 2) the highest in the last 15

years. Coal, steel, hydro power and roads sectors have seen significant delays

and are the worst affected. Delays are not merely on account of sluggish

execution, but more attributable to land acquisition and environmental hurdles

and therefore may not be easy to reverse. While only a quarter of railway

projects are running behind schedule, cost overruns are massive, with 84% of

projects facing cost overruns and expenditure expected to be 3x the

sanctioned cost. We also note that projects in the North East and J&K are

most susceptible to time and cost overruns. This is partly on account of the

higher concentration of hydro power projects. Tougher topography and the

relatively poorer law and order scenario could have also played a part.

Project award trends not very encouraging either

While the government has announced aggressive targets for infrastructure

project awards in FY14, we dont think they take into account the structural

issues facing various sectors (land acquisition, environmental hurdles for

highways and airport sectors, new UMPP bidding guidelines requirement, lack

of private sector interest in BOT awards). In any case, the governments track

record of meeting its targets does not infuse much confidence (Figure 17).

Impact of elections: slower decision making, lower awards

We also see a risk of order placement by public sector entities slowing down

further a few months before the general elections. This trend was visible in the

last two elections (Figure 18 and 19). We note that order inflow at L&T and

BHEL also slowed in 2009 (Figure 21 and 22). Thermaxs Chairman has already

cautioned investors of this risk in the companys FY13 annual report.

We do not expect a quick capex cycle recovery

As we argued in our recent capital goods sector thematic U-shaped recovery

(link), the capex cycle recovery seems at least 18 months away from here. Webelieve private sector investments are moderating due to overleveraged

balance sheets and the government is in no position to pick up this slack. We

maintain our SELL stance on BHEL and Thermax. We prefer L&T (should

emerge stronger from the downturn) and Voltas (strong room AC franchise;

the business should account for >40% of revenues over FY13E-16E).

Figure 1 GFCF as a % of GDP: Public Sectorspending more stablethan private sector, household

Source: Espirito Santo Investment Bank Research, RBI

Figure 2 Government infra projects status: Close tohalf are delayed (Apr-13)

Source: Espirito Santo Investment Bank Research, Ministry of Statistics andProgramme Implementation

Figure 3 Proportion of public sector infra projects

facing time overruns: the highest in last 15 years

(March year ends)

Source: Espirito Santo Investment Bank Research, Ministry of Statistics andProgramme Implementation

6.9

9.1

12.7

7.9

12.5

10.9

8.5

10.3

13.5

7.4

9.7

13.7

6

7

8

9

10

11

12

13

14

15

Pub lic se ctor Private corporates Households

FY05 FY07 FY09 FY12

(%)

Ahead1%

On Schedule26%

Delayed

48%

No date22%

Date finalisedlater3%

63

58 58

47

53

45

38

32

39

3739 39

34

42

48 48

5452

55

30

35

40

45

50

55

60

65

FY95 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13

% of projects delayed

AnalystsAditya Bhartia+91 22 4315 [email protected] Santo Securities India Private Limited
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Page 2 of 20

: i i I

Private sector weak; public sector unlikely to pick-up the slack

In our recent capital goods sector thematic (U-shaped recovery, 5 July 2013,

link), we had argued that it will take at least 18 months for any meaningfulsigns of capex cycle recovery to emerge. Our key concern was that private

sector investment is moderating due to overleveraged balance sheets and the

government is in no position to pick up this slack.

Figure 4 Instances of private sector players walking away from planned investments

Source: Espirito Santo Investment Bank Research, Company data, media articles.

Our belief that government spending is highly unlikely to drive a capex cycle

recovery was underpinned by two reasons. First, the governments

contribution to GFCF does not change materially in response to economic

cycles it has remained largely stable over the last 10 years, unlike private

corporates and households. Even in the last few quarters, the governments

GFCF as a proportion to GDP has stayed at its normal level of 7-8%, and its

share in overall GFCF has ranged between 24% and 26%.

Figure 5 GFCF as a % of GDP: public sector spending largely stable Figure 6 Public sector has accounted for 22-26% of Indias GFCF

Source: Espirito Santo Investment Bank Research, RBI Source: Source: Espirito Santo Investment Bank Research, RBI

Second, the government is under pressure to rein in the fiscal deficit and thus

is not in a position to sanction any massive investment surge. For instance, the

government has spent 12.3% of its FY14 plan expenditure targets in April and

May alone (versus 8.6% in FY13) and 13.1% of overall expenditure target

(versus 12.8% in FY13). Conversely, revenues in April and May have been only

3.3% of FY14 projections (5% in FY13). Consequently, the fiscal deficit has

ballooned to Rs1.8tn in the first two months, already 33.3% of FY14 projections

(27.6% in first two months of FY13).

Company Project/ order Comments

GMR Krishangarh-Udaipur-

Ahmedabad highway

This is the larget highway project in India. GMR emerged as the L1 for this project in Jul-2011, quoting an annual

premium of Rs6.4bn (12% of the project cost). This was 23% higher than the L2 bidder (GVK-Balfour Betty). GMR now

has walked out of this project, citing NHAI's inability to acquire complete land and secure environmental clearances.

GVK Shivpuri-Dewas

highway

GVK had won this project in 2011 on a seemingly aggressive bid. It served a termination notice to NHAI in Jan-2012, as

Madhya Pradesh High Court had reportedly quashed the land acquisition done by NHAI for this project.

Ashoka

Buildcon

Cuttak-Angul highway Ashoka Buildcon walked out of this c.Rs11bn project, citing land acquisition and environmental approval delays from

NHAI. It had already reportedly tied-up debt for this project from Axis Bank.

BGR NTPC's Darlipalli TG

order

BGR had won the order in Sep-2011, quoting an extremely aggressive price (Rs9m/MW, 10% lower than the L2). It

cancelled this project earlier this year as NTPC was unable to acquire land.

PSA-ABG JNPT Container

Terminal IV

Pricing bids were opened in Jun-2011, but the concession agreement was not signed until a year later with the highest

bidder, ABG Infra-PSA. There was a dispute on who would bear the stamp duty. Subsequently, JNPTdecided to

terminate the contract due to delay in signing the concession agreement.

Reliance

Infra

Delhi Airport Metro R-Infra has expressed its inability to run the Delhi Airport Link metro to DMRC. The company had earlier suspended

service in July 2012 for about six months, and media articles indicate that ridership had almost halved on resumption in

service.

6.9

9.1

12.7

7.9

12.5

10.9

8.5

10.3

13.5

7.4

9.7

13.7

6

7

8

9

10

11

12

13

14

15

Public sector Private corporates Households

FY05 FY07 FY09 FY12

(%)

15

17

19

21

23

25

27

FY02 FY03FY04FY05FY06 FY07FY08FY09 FY10 FY11 FY12

(%)
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Page 3 of 20

The government has spent 13% of its

targeted total FY14 expenditure

while revenues are only 3.3% of FY14

projections

Consequently, fiscal deficit in the first

two months is already a third of FY14

target

We believe that government will have

to cut on its Plan Expenditure to come

close to achieving its fiscal deficit

target of 4.8%.

Almost half of public sector projects

are running behind schedule

This is the highest proportion in the

last 15 years

In this context, we believe that the government will have to incur lower plan

expenditure compared to its Budgeted Estimates (BE) in FY14 if it has to

come even close to achieving its fiscal deficit target of 4.8%. Thus, the public

sectors scope of increasing its infrastructure spending in FY14 is limited. We

note that government had pruned its Plan Expenditure (compared to initial

budgets) in FY13 as well, evident from Revised Estimates (RE) being sharply

lower than initially Budgeted Estimates (BE).

Figure 8 Governments expenditure over years: Plan expenditure was cut in FY13 to meet fiscal deficit target; a repeat is likely in FY 14

Source: Espirito Santo Investment Bank Research, Planning Commission

Time overruns in government projects at highest level in last 15 yearsA recent study by the Ministry of Statistics and Programme Implementation

further reinforces our belief that government capex will remain muted, with

new project announcements hampered by procedural delays, environmental

and land acquisition hurdles, and execution on already-awarded projects

significantly delayed. Of the total 566 projects analysed (costing Rs1.5bn or

above), 273 projects (48%) were running behind schedule as at the end of

April 2013. Only three projects are ahead of schedule, while 149 (26%) are on

schedule. Interestingly, 124 projects do not yet have fixed dates of

commissioning while for 17 projects dates of completion were finalised only

subsequent to their sanction by relevant authorities. This is shown in Figure 9

below.

Figure 9 Status of government infra projects: roughly half of governmentprojects are delayed (Apr-13)

Figure 10 Break-up of delayed projects (number of months of delay):

more than half of delayed projects are running at least two years behindschedule

Source: Espirito Santo Investment Bank Research, Ministry of Statistics and Programme Implementation Source: Espirito Santo Investment Bank Research, Ministry of Statistics and Programme Implementation

Worryingly, time overruns in government projects (costing Rs1.5bn or above)

now stand at the highest level in the last 15 years. We though note that there

has been some improvement in controlling cost overruns over the last decade.

(Rsbn) FY12 FY13 (BE) FY13 (RE) FY14 (BE) % growth over

FY13 BE (% YoY)

% growth over

FY13 RE (% YoY)

Plan expenditure 4,124 5,210 4,292 5,553 6.6 29.4

Non-plan expenditure 8,920 9,699 10,016 11,100 14.4 10.8

Total expenditure 13,044 14,909 14,308 16,653 11.7 16.4

Fiscal deficit (Rsbn) 5,160 5,140 5,209 5,425

Fiscal deficit (% of GDP) 5.8 5.1 5.2 4.8

Ahead1%

On Schedule26%

Delayed48%

No date22%

Date finalisedlater3%

1-12 month25%

13-24 month24%

25-60 month29%

60+ month22%

Figure 7 Governments accounts for April and May 2013

Source: Espirito Santo Investment Bank Research, Controller General of Accounts

FY14 budget

estimates (Rsbn)

Actuals upto May

2013 (Rsbn)

FY14 FY13

Revenue receipts 10,563 360 3.4 5.1

Non-debt capital receipts 665 6 1.0 3.4

Total receipts 11,228 367 3.3 5.0

Plan Expenditure 5,553 683 12.3 8.6

Non-Plan Expenditure 11,100 1,490 13.4 15.1

Total expenditure 16,653 2,174 13.1 12.8

Fiscal deficit 5,425 1,807 33.3 27.6

% of budget estimates in the first

two months


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Page 4 of 20

Coal, steel, power, road projects are

seeing significant execution delays

Massive cost overruns in railway

projects

Projects in the North East and Jammu

and Kashmir are the most susceptible

to time and cost overruns

Figure 11 Proportion of public sector infra projects facing time overruns Figure 12 Extent of cost overruns in public sector infra projects

Source: Espirito Santo Investment Bank Research, Ministry of Statistics and Programme Implementation Source: Espirito Santo Investment Bank Research, Ministry of Statistics and Programme Implementation

Coal, steel, power, road projects see significant execution delays; railways

susceptible to cost overruns

Sectors that have seen the most significant delays are coal, steel, power

(mainly hydro projects) and roads. Delays in these sectors are not merely onaccount of sluggish execution, but more attributable to land acquisition and

environmental hurdles and therefore may not be easy to reverse.

Figure 13 Sector-wise overview of time and cost overruns in public sector projects

Source: Espirito Santo Investment Bank Research, Ministry of Statistics and Programme Implementation

Surprisingly, only a quarter of railway projects are running behind schedule.

However, cost overruns are massive, with 84% projects facing cost overruns

and expenditure on projects under execution now expected to be 3x the

sanctioned cost. Further, amongst the projects that are delayed, most are

running significantly behind schedule.

Has it got to do something with geography?

Another interesting observation is that projects in the North East and Jammu

and Kashmir are the most susceptible to time and cost overruns. This is partly

on account of hydro power projects being concentrated in these areas which

have seen significant delays. Also, tougher topography and the relatively

poorer law and order could have possibly played a part.

6358 58

47

53

45

38

32

39

3739 39

34

42

48 48

5452

55

30

35

40

45

50

55

60

65


% of projects delayed

5147

45

3741

36 36

2622 22

18 1715

12 1315

19 18 17

0

10

20

30

40

50

60


Cost overrun as a % oforiginal approved cost (%)

Sector # of projects

Time overrun

projects (#)

% of total

projects

Avg time

overrun (month)

Cost overrun

projects (#)

% of total

projects

Cost overrun

(%)

Atomic energy 4 2 50 3 - 11 2 50 38

Civil aviation 6 2 33 13 - 35 2 33 16

Coal 52 29 56 12 - 72 7 13 24

Fertilizers 1 0 0 0 0 0 0

Steel 17 15 88 4 - 44 6 35 26

Petrochemicals 1 1 100 20 1 100 63

Petroleum 70 40 57 1 - 120 18 26 36

Power 100 51 51 1 - 102 18 18 34

Railways 129 33 26 3 - 235 108 84 228

Roads, highways 149 88 59 2 - 111 11 7 64

Shipping, ports 19 7 37 5 - 87 9 47 30

Telecom 13 5 38 27 - 55 2 15 15

Urban development 4 0 0 0 2 50 81

Water resources 1 0 0 0 1 100 119

Total 566 273 48 187 33 71

Time overrun Cost overrun


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Page 5 of 20

CCI so far not been able to solve

sector-specific issues

The CCI ended up becoming a watered

down NIB

Figure 14 State-wise overview of time and cost overruns in public sector projects

Source: Espirito Santo Investment Bank Research, Ministry of Statistics and Programme Implementation

CCIs powers diluted; it cannot be a game changer

The Cabinet Committee on Investments (CCI) has been advertised by the

government as a remedy to all execution hurdles. Whilst we do believe that

the CCI has shown intent and has smoothed some procedural bottlenecks, it

has so far not been able to solve sector-specific issues.

We recall that the CCI was initially conceptualised as the National Investment

Board (NIB). It was perceived to have powers to overrule decisions of other

ministries (including the environment ministry) and thereby expedite

execution on stalled mega-projects (project value >Rs10bn).

However, this was not to be. The CCI ended up becoming a watered-down

NIB. Its role was limited to reviewing projects facing delays and facilitating the

removal of bottlenecks in the process by co-ordinating with various ministries.

It can prescribe time limits for decisions on approvals and clearances and will

subsequently monitor the process to ensure that those deadlines are met. It

cannot overrule the decisions of other ministries. Interestingly, it replaces the

Cabinet Committee on Infrastructure, which had a similar role.

Sector # of projects

Time overrun

projects (#)

% of total

projects

Avg time

overrun (month)

Cost overrun

projects (#)

% of total

projects

Cost overrun

(%)

Andhra Pradesh 34 13 38 4 - 44 14 41 68

Arunachal Pradesh 4 3 75 25 - 87 2 50 72

Assam 34 31 91 12 - 120 12 35 128

Bihar 30 11 37 2 - 98 15 50 1

Goa 1 1 100 13 0 0 64

Gujarat 22 5 23 9 - 15 5 23 0

Haryana 8 4 50 4 - 50 2 25 20

Himachal Pradesh 5 5 100 26 - 102 4 80 130

Jammu and Kashmir 10 7 70 10 - 201 6 60 34

Karnataka 27 10 37 6 - 106 10 37 253

Kerala 7 5 71 5 - 58 3 43 106

Madhya Pradesh 20 9 45 9 - 69 3 15 33

Maharashtra 48 25 52 2 - 144 15 31 45

Manipur 1 1 100 72 1 100 52

Meghalaya 2 0 0 0 0 0 512

Mizoram 2 2 100 7 - 35 1 50 0

Nagaland 1 1 100 24 1 100 285

Odisha 30 16 53 3 - 136 12 40 188

Punjab 6 2 33 7 - 64 2 33 22

Rajasthan 14 7 50 3 - 59 3 21 177

Sikkim 2 2 100 15 - 35 1 50 25

Tamil Nadu 32 11 34 5 - 87 14 44 152

Tripura 3 2 67 10 - 21 2 67 39

Uttar Pradesh 28 14 50 8 - 84 10 36 43

West Bengal 27 12 44 3 - 141 15 56 113

Delhi 4 0 0 0 0 0 58

Chhatisgarh 24 9 38 12 - 59 5 21 0

Jharkhand 23 10 43 5 - 60 7 30 78

Uttarakhand 5 4 80 5 - 50 2 40 197

Multi-state 112 51 46 1 - 235 20 18 138

Total 566 273 48 187 33 71

Time overrun Cost overrun


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Page 6 of 20

CCI has shown urgency and removed

some procedural bottlenecks

fresh investments attracted by CCI

approvals limited only to US$10bn

CCI has failed to ease environmental

and land acquisition hurdles for

highway projects and consequently

execution continues to be delayed

Indias FY14 infrastructure award

targets are aggressive

These do not take into account the

structural issues facing various sectors

FY13 targets were missed by a wide

margin

Figure 15 Details of projects reviewed and cleared by CCI since inception

Source: Espirito Santo Investment Bank Research, PIB, CCI

To its credit, the CCI has shown some urgency, clearing 31 oil blocks (mainly

relates to resolving objections raised by the Ministry of Defence). It also

discussed how the issues in the power and highways sectors can be

addressed, and cleared NTPCs North Karanpura power project (resolving the

dispute with Ministries of Coal). Overall, it has cleared projects involving

US$30bn investment in six months since its inception.

Whilst prima facie this looks very impressive, we note that the new investment

as a result of these clearances will be sharply lower than the project value of

US$30bn. This is because a significant proportion of investment has already

been made in the last few years. For instance, investment of c.US$16bn has

already been made in the oil and gas blocks approved by CCI. Similarly, SAIL

had already spent US$7.3bn in the Gua Iron ore mines in Jharkhand (total

investment: US$7.8bn), for which forest clearance was pending. Thus, fresh

investments attracted by CCI approvals would be limited to only c.US$10bn.

We also note that whilst the CCI has managed to de-link environment and

forest clearances for linear highway and power transmission projects, it has

not been able to otherwise ease environmental and land acquisition hurdles

for highway projects and consequently execution continues to be delayed.

Also, not much progress has been made in expediting slow-moving power

projects. Thus, while CCI can help smoothe procedural bottlenecks and bring

about better coordination between ministries, but it cannot resolve sector-

specific issues. In this sense, a watered down version of NIB, whilst still helpful,

does not come with a magic wand.

Project award trends are not very encouraging either

The Prime Minister Office (PMO) has come up with aggressive targets for

award of infrastructure projects in FY14. We believe the PMOs office in

coming up with these targets did not take into account the structural issues

facing various sectors, like land acquisition and environmental hurdles for

highways and airport sectors, requirement of new bidding guidelines for ultra-mega power projects and lack of private sector interest for BOT awards etc.

This is discussed in more detail in Figure 16 below. In any case, governments

track record of meeting its infrastructure targets does not infuse much

confidence and we recall that FY13 targets were missed by a wide margin, see

Figure 17 below.

Particulars Projects

reviewed (#)

Projects

cleared (#)

Project value

(US$bn)

Investment

made (US$bn)

New investment

(US$bn)

Comment

Oil and gas blocks 40 31 15.9 13.4 2.5 Bulk of the investment has already been made.

Power T&D 19 12 3.3 3.3 CCI cleared transmission networks which needed clearances mainly

from the environment ministry. The remaining seven projects that have

not been cleared are facing delays over land acquisition, fuel supply

and environmental clearances.

Power generation 1 1 2.7 0.1 2.6 NTPC's North Karanpura project (3x660MW) was stuck due to

dispute with Ministry of Coal. The CCI decided, in principle, to restore

the original coal linkage granted with certain stipulations.

Iron ore 1 1 7.8 6.0 1.8 SAIL had applied for forest clearance of its Gua iron ore mine. Over

three-fourth of investment had already been made.

Coal mining 40 12 0.2 0.2 Fast tracked environment and forest approvals for 12 coal mining

projects which are expected to contribute 37mtpa coal production.

Total 30.0 19.5 10.5


7/20

Page 7 of 20

Risk of slower decision making and

order awards as we approach elections

Figure 16 Governments FY14 targets do not take into account structural issues facing various sectors

Source: Espirito Santo Investment Bank Research, Press Information Bureau, media articles

Figure 17 Governments track record does not infuse much confidence: FY13 targets were missed by a wide margin

Source: Espirito Santo Investment Bank Research, Press Information Bureau, media articles

Impact of elections: slower decision making, lower awards

We also see a risk of order placements as well as execution by public sector

entities slowing down further a few months before the general elections. This

trend was visible in the last two general elections, according to data collated

by the Centre for Monitoring Indian Economy (CMIE).

Sector Targets Constraints

Airports - To award two new international airports (at Bhubaneswar and

Imphal).

- 50 new low cost small airports will be taken up by Airports

Authority of India.

- 8 Greenfield Airports are to be awarded this year in PPP mode:

Navi Mumbai, Juhu (Mumbai), Goa, Kannur, Pune, Sriperumbudur,

Bellary and Raigarh- Airport operations and maintenance through PPP contracts

will be introduced in AAI airports

- We do not see private sector being very enthusiastic about bidding for airport

projects on PPP basis.

- Navi Mumbai airport is facing land acquisition and environmental hurdles for the

last five-six years and as per media articles, 495 acres still remains to be

acquired.

Roads - To award highway projects aggregating 5,000km in FY14.

- To focus on awarding some expressway projects

- Land acquisition and environmental hurdles are still delaying commencement of

execution on some projects that were awarded 18-24 months back.

- Land acquisition is going to be a major challenge for Expressway projects,

which are greenfield as opposed to all other highway projects (which involve

upgradration of existing highways).

- Private sector has not shown much interest in bidding for PPP projects and

consequently BOT awards in highway sector could get delayed.

Ports - To award port concessions at Sagar (West Bengal) and

Durgarajapatnam (Andhra Pradesh) ports on PPP basis

- Progress on port concession awards have beene xtremely poor in the last 10

years.

Railways - To award two locomotives manufacturing projects (Rs50bn)

- To award the Mumbai Elevated Rail Corridor (Rs300bn)

- To award elevated rail corridor and monitor the progress at

Dedicated Freight Corridor (DFC) and station redevelopment.

- We note that RFQ for the two locomotives facories has been issued.

- However, we are not very hopeful of the award of Mumbai Elevated Corridor.

The RFQ for this project needs to reinvited. The project has seen significant

delays due to differences between the state government and railway ministry.

Power - To resolve issues in the power sector.

- To expedite progress at Rs400bn worth of transmission

projects

- As discussed in our recent capital goods sector thematic (U-shaped recovery,

5th July) , we believe resolving power sector issues will take time.

Sector FY13 Target Achievement

Airports The government was targeting to award three new greenfield

airport projects in FY13, at Navi Mumbai, Goa and Kannur.

Moreover, additional PPP projects were planned to be finalised

for 10-12 existing airports and for 10-12 greenfield airports. PPP

in airport operations was also targeted to be explored in FY13.

No major progress in greenfield airports. Most of the FY13 targets are now the

FY14 targets.

Roads PMO had set a target of awarding highway projects aggregating

9,500km in FY13. This implied 19% growth over FY12, which had

been the strongest year in terms of project awards until then.

Only c.1,300km projects were awarded in FY13. This was the lowest in the last

four years. Moreover, a number of projects awarded in FY11-12 have seen little

progress on execution.

Ports An extremely aggressive target was set for FY13. Capacity

augmentation was aimed at 42 projects (244mtpa). Two new

greenfield major ports were planned at Andhra Pradesh and

West Bengal (116mtpa, Rs205bn project cost).

No progress on greenfield major port projects. Even on brownfield expansions,

progress was very slow and very few concessions were awarded. JNPT Container

Terminal IV and Chennai Mega Container Terminal are yet to be awarded.

Railways The Sonnanagar-Dankuni stretch of DFC, Elevated Road

Corridor in Mumbai and twp locomotive manufacturing units

were planned to be awarded in FY13. Station redevelopment

was also targeted at 4-5 stations on PPP basis.

None of the high-value projects got awarded in FY13 and are now targeted to be

awarded in FY14.

Power 18GW capacity addition target Capacity addition target is a function of projects announced 3-4 years back. This

target was achieved.


8/20

Page 8 of 20

Figure 20 Election calendar (pre Lok Sabha

elections)

Source: Espirito Santo Investment Bank Research

Year States

2 H2 013 Rajasthan, Delhi, MP, Mizoram

2014 pre Lok

Sabha elections

Chhattisgarh, Sikkim

Figure 18 New project announcements by Private and Public sector Figure 19 New project announcements by Public sector

Source: Espirito Santo Investment Bank Research, CMIE Source: Espirito Santo Investment Bank Research, CMIE

Order flow pace for BHEL as well as L&T moderated in 2HFY09 and 1HFY10,

partly due to elections held in 1QFY10. L&Ts management, in its FY10 annual

report, had commented: In the year under review, L&Tweathered the impact

of the global economic slowdown that began in FY08, and whose after effects

continued well into FY10. The past year was also characterised by a period of

political uncertainty due to the General Elections in the first half of the year,

and a prolonged bout of inactivity when orders for infrastructure and

hydrocarbon projects were deferred, and customers slowed down their

ongoing expansion initiatives.

Figure 21 L&Ts domestic E&C order flow growth over years Figure 22 BHELs order flow growth over years

Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data

In Thermaxs FY13 Annual Report, its Chairman Meher Padumjee has also

warned: With elections looming, not many large projects will see the light of

the day in immediate future.

Dont expect a near-term capex cycle recovery. Prefer L&T and Voltasover BHEL and Thermax

The macro capex environment is clearly unfavourable in India. We believe that

order flow growth for engineering companies will remain muted and operating

margins will come under increasing pressure. This is discussed in more detail

in our detailed capital goods sector thematic (U-shaped recovery, 5 July 2013).

Does this mean that investors should ignore this sector altogether? No, wedont think so. Whilst further earnings downgrades cannot be entirely ruledout, the concerns we discussed are also reflected in the valuation of some

stocks.

Moreover, we think this is a good time to build positions in stocks that are

likely to emerge stronger (more diversified business models, more compelling

competitive advantages, weaker competitors) from the downturn. We

highlight L&T (LT IN, Rs850, BUY, FV: Rs1,065,click for our last update) as one

such stock, which should continue expanding its domestic market share and

0

1

2

3

4

5

6

7

8

9

Sep-00

Mar-01

Sep-01

Mar-02

Sep-02

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

Sep-12

Mar-13

Government Private sector 10 year average

(Rs tn)(Rs tn) Electionsheld here

Electionsheld here

0

1

2

3

Sep-00

Mar-01

Sep-01

Mar-02

Sep-02

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

Sep-12

Mar-13

(Rs tn) Electionsheldhere

Electionsheldhere

24

44 42

65

40

86

16 19

(28)

88

25

132

(40)

(20)

0

20

40

60

80

100

120

140

160

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

Electionsheld here

(% YoY)

FY08 FY09 FY10

121

36

70

(9)

38

1

50

(7)(14)

(41)

(1)

62

(90)

(40)

10

60

110

160

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

FY08

Electionsheld here

(% YoY)

FY09 FY10
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Page 9 of 20

improving its geographic presence in the next few years. Moreover, its growth

prospects are not contingent on the health of a particular sector and therefore

we think it is much better positioned than companies that have a higher

sector-concentration (like BHEL).

Figure 23 L&Ts domestic E&C revenues as a % of Indias GFCF Figure 24 Net gearing of L&T and its competitors (FY13)

Source: Espirito Santo Investment Bank Research, Company Data, RBI Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg. Note: standalone entities considered.

Our positive stance on Voltas (VOLT IN, Rs79, BUY, FV: Rs97) is underpinned

by its strong franchise in the room AC market and attractive valuations (12.1x

FY14/ 9.6x FY15 P/E). We believe that while its EMP margins may remain

lumpy in the near term, over a two year period we expect a recovery as client

certifications come through and order flow picks up. Its UCP business is

underpinned by strong structural drivers, thanks to a modest 2% penetration

of room ACs in India, and we argue this business should be valued at multiples

higher than the cyclical projects business.

Figure 25 Voltas market share in the room AC market Figure 26 Voltas FY14 PE comparison with peers

Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data, Factset

Conversely, we retain our SELL recommendations on BHEL and Thermax.BHEL (BHEL IN, Rs153, SELL, FV: Rs162) is facing structural issues and its

reliance on the power sector means that its order inflows are likely to remain

weak. We expect revenues to decline by c.12% CAGR over FY13-15E, which

coupled with intense domestic competition will, we feel, exert further margin

pressure (we model 650bps EBITDA margin contraction by FY16E). While the

valuation looks undemanding at 8.6x FY14E P/E, we expect earnings to fall at

c.23% CAGR over FY13-15E and see downside risks to consensus.

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

(%)

0.3

2.1

1.9

1.3

0.8

2.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

L&T Era Gammon IVRCL NCC Simplex

FY11 FY12 FY13

Net gearing (x)

11

13

14 15

16 17 1717 17

18

6

8

10

12

14

16

18

20


(%)

0

5

10

15

20

25(x)


10/20

Page 10 of 20

Figure 27 BHELs order backlog coverage over years Figure 28 BHELs margins correlation with revenue growth

Source: Espirito Santo Investment Bank Research for estimates, Company Data Source: Espirito Santo Investment Bank Research for estimates, Company Data

In the case of Thermax (TMX IN, Rs588, SELL, FV: Rs534, click for our last

update), whilst we recognise the company as one of the best plays on Indias

capex story, we find its valuation rich and at a sharp premium to its peers.

While a large petrochem order (announced in July beginning) had boosted

order flow in Q1 (+90% YoY), management highlighted order finalisations are

now taking longer than before and there are only a few large orders in thepipeline. With competition intensifying, its margin resilience will also be tested,

while we think the B&W JV is likely to be a drag on its profitability for at least

the next two years.

Figure 29 Split of Thermaxs order inflows over quarters Figure 30 Thermaxs P/E versus Indias GFCF growth

Source: Espirito Santo Investment Bank Research, Company Data. Note: order backlog coverage computed as order

backlog divided by trailing 12 month sales

Source: Espirito Santo Investment Bank Research, Company Data, RBI

Figure 31 Stocks covered in the report

Source: Source: Espirito Santo Investment Bank Research, Bloomberg

1.5

2.0

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3.0

3.5

4.0

4.5

5.0

0

200

400600

800

1,000

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1,400

1,600

1,800

Order backlog Order backlog coverage (RHS)

(Rsbn) (x)

-20

-10

0

10

20

30

40

50

8

10

12

14

16

18

20

FY96 FY99 FY02 FY05 FY08 FY11 FY14E

Revenue growth (RHS) EBITDA margin (LHS)

(%) (% YoY)

0

5

10

15

20

25

30

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

Base orders (Energy) Environment Large orders (Energy)

(Rsbn)

FY10 FY11 FY12 FY13 FY14

(10)

(5)

0

5

10

15

20

25

0

5

10

15

20

25

30

35

Apr-05 Apr-07 Apr-09 Apr-11 Apr-13

India's real GFCF growth (RHS) Thermax's 12m fwd PE

PE (x) India's real GFCFgrowth (% YoY)

Company Ticker Recommendation CMP (Rs/sh) FV (Rs/sh)

BHEL BHEL IN Sell 153 162

L&T LT IN Buy 850 1065

Thermax TMX IN Sell 588 534

Voltas VOLT IN Buy 79 97
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Figure 32 Global valuation matrix EPC companies

Source: Espirito Santo Investment Bank Research estimates, Company Data, Factset. Note: ESIB estimates for BHEL, L&T, Thermax and Voltas. Consensus estimates from Factset used for other companies.

Company Ticker Price M-cap EV

(Local cy) (US$m) (US$m) FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E

Indian EPC/ capital goods

L&T (consol) LT IN 850 13,029 22,962 15.9 15.0 15.0 12.6 13.0 13.1 13.2 12.3 2.7 2.3 2.1 1.9 18.0 16.5 14.8 15.9

BHEL BHEL IN 153 6,207 5,248 5.3 5.7 7.1 9.6 3.4 3.6 4.2 5.0 1.5 1.2 1.1 1.0 30.9 23.7 16.3 11.1

Siemens SIEM IN 501 2,832 2,954 32.7 72.7 39.4 28.2 23.4 32.8 21.1 14.7 7.5 6.1 4.2 3.9 24.5 8.8 10.7 13.7

ABB India ABB IN 502 1,769 1,811 67.0 105.3 37.5 28.9 45.6 51.6 19.9 16.2 4.9 5.7 3.8 3.4 7.4 5.5 10.1 11.9

Cummins KKC IN 416 1,914 1,743 23.3 18.0 16.0 14.2 20.3 17.0 12.9 11.1 6.7 5.8 4.3 3.8 30.7 34.5 26.6 26.5

Reliance Infra RELI IN 338 1,475 4,680 9.8 3.8 5.9 5.5 12.8 9.2 10.2 9.7 0.7 0.3 0.4 0.4 6.8 9. 1 6.8 6.9

Havells HAVL IN 660 1,369 1,462 19.3 13.9 16.5 13.8 11.4 12.1 10.2 8.5 7.5 5.6 4.4 3.6 46.0 48.5 26.7 25.8

Thermax TMX IN 588 1,165 1,122 17.4 21.9 20.4 18.2 10.5 12.6 11.1 9.7 4.3 3.8 3.3 2.9 27.4 18.3 17.2 17.1

Crompton Greaves CRG IN 85 908 1,050 23.7 na 13.4 9.5 11.1 17.7 7.9 6.0 2.5 1.7 1.4 1.3 10.9 (1.0) 10.5 13.3

Voltas VOLT IN 79 435 363 9.6 13.1 11.7 9.3 5.9 7.1 5.9 4.5 1.8 1.6 1.5 1.3 19.3 12.8 13.1 14.9

BGR BGRL IN 77 93 334 10.5 8.4 3.3 3.2 6.8 6.3 5.8 6.4 2.1 1.1 0.4 0.4 21.7 13.8 12.6 11.9

Mean (ex ABB) 16.7 19.2 14.9 12.4 11.9 13 .2 10.3 8.8 3 .7 2.9 2.3 2.0 23 .6 18 .5 15 .5 15 .7Median 17.4 14.5 15 .0 12.6 11.4 12.6 10.2 9.7 2.7 2.3 2.1 1.9 21 .7 13 .8 13 .1 13 .7

Korea EPC

Hyundai Heavy 009540 KS 211,000 11,611 20,936 5.5 13.6 17.9 13.9 4.2 8.7 10.6 9.3 1.0 0.9 0.9 0.8 17.0 5.9 4.9 6.0

Samsung C&T 000830 KS 56,000 7,399 10,962 25.0 20.5 22.2 18.2 31.7 26.6 18.0 15.0 1.1 0.8 0.8 0.7 4.4 4.3 3.4 4.0

Hyundai E&C 000720 KS 59,200 5,919 6,194 12.3 15.3 11.0 9.1 9.7 9.1 6.6 5.4 1.9 1.7 1.3 1.1 16.5 11.7 11.7 12.6

Samsung E&C 028050 KS 77,200 2,562 2,676 14.5 11.7 9.8 10.4 7.6 38.1 6.6 5.5 3.5 1.9 1.7 43.9 33.9 (1.5) 16.8

Daelim 000210 KS 90,900 2,840 3,561 9.5 8.6 7.9 7. 1 9.3 6.1 5.3 4.4 0.7 0.6 0.7 0.6 7.8 7.7 8.5 8.7

Daewoo E&C 047040 KS 7,720 2,848 4,650 24.4 23.1 13.4 11.2 25.3 21.8 11.1 9.6 1.3 1.2 0.9 0.8 5.3 5.3 6.6 7.4

GS E&C 006360 KS 31,150 1,386 2,800 10.8 27.8 13.2 12.6 22.7 11.1 1.2 0.8 0.5 0.5 11.6 2.7 (23.4) 3.8

Mean 14.6 17.2 14.5 11 .8 14.8 14.7 14.9 8 .8 1 .8 1.4 1.0 0.9 1 5 .2 10.2 1.5 8 .5Median 12.3 15 .3 13 .4 11.2 1 0.4 9.1 10.9 9.3 1.2 0.9 0 .9 0.8 11.6 5 .9 4.9 7.4

Japan EPC

JGC 1963 JP 3,500 9,012 6,163 16.6 13.2 17.6 16.5 5.8 4.7 7.4 6.5 2.2 1.8 2.4 2.2 14.1 14.8 13.8 13.4

Chiyoda 6366 JP 1,182 3,123 1,297 19.0 16.9 17.0 16.5 4.1 3.6 5.3 5.3 1.6 1.4 1.6 1.5 8.9 9.0 9.5 9.3

Mean 17.8 15 .0 17.3 16.5 4.9 4.2 6.4 5 .9 1 .9 1.6 2.0 1.9 11.5 11.9 11.6 11.3Median 17.8 15 .0 17.3 16.5 4.9 4.2 6.4 5 .9 1 .9 1.6 2.0 1.9 11.5 11.9 11.6 11.3

Middle East/ Asia EPC

Arabtec ARTC UH 2 1,137 1,152 9.4 24.9 17.0 17.0 4.4 9.8 11.1 10.8 0.8 1.2 1.1 9.2 4.7 6.2

Drake & Scull DSI UH 1 718 865 8.8 16.8 17.9 16.0 7.1 11.3 10.7 9.3 0.6 0.6 0.9 0.9 7.5 3.5 5.1 5.3

Swiber SWIB SP 1 356 1,236 6.7 6.3 6.3 5.5 12.4 9.8 6.4 5.7 0.6 0.6 0.7 0.6 9.1 10.8 10.8 11.2

Depa DEPA DU 0 249 251 17.4 5.5 0.6 0.5 3.3 (7.3)

Mean 10 .5 16.0 13 .7 12.9 7.4 10 .3 9.4 8 .6 0 .6 0 .7 0 .9 0 .7 7.3 2.9 7.4 8 .3Median 9 .1 16.8 17.0 16.0 6.3 9.8 10.7 9.3 0 .6 0.6 0 .9 0 .7 8 .3 4.1 6.2 8 .3

America EPC

Flour FLR US 61 9,833 8,348 14.8 21.7 14.6 13.0 6.0 8.6 5.8 5.2 2.5 2.9 2.5 2.2 17.2 13.5 17.4 16.6

Jacobs JEC US 58 7,578 6,790 12.4 13.8 17.7 15.6 6.2 6.8 8.6 7.3 1.2 1.4 1.8 1.6 10.7 10.8 10.3 10.3

KBR KBR US 31 4,552 3,806 8.8 30.8 11.5 10.1 6.6 6.8 5.6 4.3 1.7 1.7 1.6 1.3 20.2 5.7 13.5 13.3

Foster Wheeler FWLT US 21 2,150 1,849 14.2 19.1 14.8 10.5 6.3 8.8 6.4 4.6 3.0 3.6 2.5 2.0 19.6 19.4 16.7 18.7

McDermott MDR US 9 2,054 1,763 16.9 12.7 21.0 10.1 6.6 4.8 6.6 4.4 1.6 1.4 1.0 1.0 9.7 11.5 4.9 9.5

Mean 13 .4 19 .6 15 .9 11 .9 6 .3 7 . 1 6 .6 5 . 1 2 .0 2 .2 1.9 1 .6 1 5 .5 12 .2 12 .6 13 .7Median 14 .2 19 . 1 14 .8 10 .5 6 .3 6 .8 6 .4 4 .6 1.7 1 .7 1.8 1 .6 1 7 .2 11 .5 13 .5 13 .3

Europe EPC

Technip (France) TEC FP 84 12,297 14,134 15.5 17.7 15.6 12.6 9.3 10.7 7.9 6.3 2.2 2.4 2.2 2.0 14.9 14.1 14.1 15.5

Saipem (Italy) SPM IM 15 8,855 9,048 15.6 14.3 12.0 8.3 7.9 15.1 6.3 3.1 2.4 1.4 1.3 21.0 17.8 (6.5) 10.5

Petrofac (UK) PFC LN 13 6,806 6,522 14.5 13.9 10.5 9.0 8.4 10.0 7.1 6.1 6.9 5.8 3.5 2.8 55.6 47.8 33.5 31.3

Skanska (Sweden) SKAB SS 124 7,771 9,051 6.2 15.3 14.5 13.5 8.8 13.3 8.4 8.1 2.4 2.3 2.5 2.4 37.9 14.8 17.2 17.5

Hochtief (Germany) HOT GR 58 5,707 11,001 20.4 18.1 14.7 4.8 4.8 3.1 2.9 1.3 1.2 1.5 1.4 (5.8) 6.0 8.2 9.6

Bilfinger (Germany) GBF GR 73 4,293 4,900 12.5 11.7 13.0 11.5 6.3 7.7 5.3 4.7 1.6 1.6 1.6 1.5 12.3 14.4 12.0 12.9

AMEC (UK) AMEC LN 11 4,927 5,103 14.3 15.0 12.4 11.1 8.9 9.8 8.2 7.5 2.2 2.8 2.8 2.6 15.7 17.2 22.7 23.6

Tecnicas Reunidas (Spain) TRE SM 37 2,627 1,831 11.5 14.1 14.0 12.8 4.8 8.0 8.0 6.9 4.4 4.4 4.1 3.5 38.4 34.5 29.3 27.6

Strabag (Austria) STR AV 17 2,290 2,725 12.6 35.2 16.0 13.0 5.0 6.5 3.4 3.2 0.8 0.7 0.6 0.6 6.5 2.1 3.7 4.4

Balfour Betty (UK) BBY LN 2 2,627 3,337 9.7 42.8 11.0 9.2 6.3 10.4 6.5 5.8 1.5 1.5 1.3 1.3 15.3 3.5 11.9 13.6

Mean 12.5 20.0 13 .9 11 .9 7.1 8 .9 7.3 5 .8 2.6 2.5 2.1 1.9 2 1 .2 17.2 14.6 16.7Median 12.6 15 .2 14.0 12.3 7.3 8 .9 7.5 6.2 2.2 2.3 1 .9 1 .7 15 .5 14.6 13 .1 14.5

PE (x) EV/EBITDA (x) P/B (x) RoE (%)


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Figure 33 Global valuation matrix capital goods companies

Source: Espirito Santo Investment Bank Research, Company Data, Factset. Note: ESIB estimates for BHEL, L&T, Thermax and Voltas. Consensus estimates from Factset used for other companies.

Company Ticker Price M-cap EV

(Local cy) (US$m) (US$m) FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E

Indian EPC/ capital goods

L&T (consol) LT IN 850 13,029 22,962 15.9 15.0 15.0 12.6 13.0 13.1 13.2 12.3 2.7 2.3 2.1 1.9 18.0 16.5 14.8 15.9

BHEL BHEL IN 153 6,207 5,248 5.3 5.7 7.1 9.6 3.4 3.6 4.2 5.0 1.5 1.2 1.1 1.0 30.9 23.7 16.3 11.1

Siemens SIEM IN 501 2,832 2,954 32.7 72.7 39.4 28.2 23.4 32.8 21.1 14.7 7.5 6.1 4.2 3.9 24.5 8.8 10.7 13.7

ABB India ABB IN 502 1,769 1,811 67.0 105.3 37.5 28.9 45.6 51.6 19.9 16.2 4.9 5.7 3.8 3.4 7.4 5.5 10.1 11.9

Cummins KKC IN 416 1,914 1,743 23.3 18.0 16.0 14.2 20.3 17.0 12.9 11.1 6.7 5.8 4.3 3.8 30.7 34.5 26.6 26.5

Reliance Infra RELI IN 338 1,475 4,680 9.8 3.8 5.9 5.5 12.8 9.2 10.2 9.7 0.7 0.3 0.4 0.4 6.8 9. 1 6.8 6.9

Havells HAVL IN 660 1,369 1,462 19.3 13.9 16.5 13.8 11.4 12.1 10.2 8.5 7.5 5.6 4.4 3.6 46.0 48.5 26.7 25.8

Thermax TMX IN 588 1,165 1,122 17.4 21.9 20.4 18.2 10.5 12.6 11.1 9.7 4.3 3.8 3.3 2.9 27.4 18.3 17.2 17.1

Crompton Greaves CRG IN 85 908 1,050 23.7 na 13.4 9.5 11.1 17.7 7.9 6.0 2.5 1.7 1.4 1.3 10.9 (1.0) 10.5 13.3

Voltas VOLT IN 79 435 363 9.6 13.1 11.7 9.3 5.9 7.1 5.9 4.5 1.8 1.6 1.5 1.3 19.3 12.8 13.1 14.9

BGR BGRL IN 77 93 334 10.5 8.4 3.3 3.2 6.8 6.3 5.8 6.4 2.1 1.1 0.4 0.4 21.7 13.8 12.6 11.9

Mean (ex ABB) 16.7 19.2 14.9 12.4 11.9 13 .2 10.3 8.8 3 .7 2.9 2.3 2.0 23 .6 18 .5 15 .5 15 .7Median 17.4 14.5 15 .0 12.6 11.4 12.6 10.2 9.7 2.7 2.3 2.1 1.9 21 .7 13 .8 13 .1 13 .7

China capital goods

SANY Heavy 600031 CH 7 8,496 12,029 11.0 14.1 8.4 7.4 9.5 11.2 7.0 5.7 4.8 3.5 1.8 1.5 55.8 26.6 22.1 20.4

Shanghai Electric 2727 HK 3 4,299 3,809 11.6 12.7 8.9 8.5 4.5 4.2 2.9 2.3 1.3 1.1 0.8 0.8 11.7 9.0 9.1 9.0

Dongfang 1072 HK 11 2,780 2,521 12.5 11.7 7.5 7.2 8.0 6.6 2.3 2.1 2.7 1.6 0.9 0.8 24.5 14.7 12.6 11.7

Harbin 1133 HK 5 834 15 6.3 5.3 4.8 4.8 0.4 1.2 (1.6) (2.1) 0.7 0.6 0.4 0.4 12.1 12.4 8.3 7.7

China High Speed Transmission 658 HK 4 622 1,367 6.9 24.1 14.3 9.8 5.9 7.1 6.9 5.8 0.5 0.4 0.5 0.5 7.5 1.8 3.5 4.9

Mean 9.7 13 .6 8 .8 7.5 5 .7 6.1 3 .5 2.8 2.0 1.5 0 .9 0.8 22.3 12.9 11.1 10.7Median 11.0 12.7 8 .4 7.4 5 .9 6.6 2.9 2.3 1 .3 1.1 0 .8 0.8 12.1 12.4 9.1 9.0

Japan capital goods

Mitsubishi 7011 JP 543 18,582 26,732 54.9 18.7 16.3 14.5 9.7 9.1 7.7 7.1 1.1 1.3 1.2 1.2 1.9 7.4 7.6 7.9

Kawasaki 7012 JP 364 6,207 10,903 18.1 16.0 15.7 12.5 7.6 10.5 8.8 7.9 1.4 1.5 1.7 1.5 7.8 9.6 10.6 12.0

Hitachi Construction 6305 JP 1,973 4,264 8,358 16.8 18.1 11.9 10.5 7.5 8.8 6.1 5.5 1.2 1.2 1.1 1.0 7.3 6.8 9.3 9.8

Sumitomo 6302 JP 454 2,842 3,483 14.5 38.8 16.1 13.0 4.8 5.8 6.2 5.3 1.0 0.8 0.9 0.9 7.1 2.1 5.8 6.8

Toshiba 1983 JP 1,585 1,575 937 13.3 10.9 3.0 3.1 1.0 1.1 7.9 10.8

Mean 23 .5 20.5 15 .0 12.6 6.5 7.5 7.2 6.4 1 .1 1 .2 1.2 1.1 6.4 7.3 8 .3 9.1Median 16.8 18 .1 15 .9 12.8 7.5 8 .8 7.0 6.3 1 .1 1 .2 1.2 1.1 7.3 7.4 8 .4 8 .9

Other Asia capital goods

Doosan (Korea) 034020 KS 46,050 3,682 15,388 21.3 105.9 17.1 10.8 12.8 8.5 9.2 7.9 1.2 0.9 1.0 1.0 18.2 0.8 6.0 8.8

IJM (Malaysia) IJM MK 6 2,529 4,060 18.9 18.1 15.1 13.3 13.6 13.4 9.3 8.2 1.5 1.4 1.4 1.3 7.9 7.7 9.0 9.5

Mean 20.1 62.0 16.1 12.1 13 .2 11.0 9.3 8 .0 1 .3 1.1 1.2 1.1 13 .0 4.3 7.5 9.2Median 20.1 62.0 16.1 12.1 1 3 .2 11.0 9.3 8 .0 1 .3 1.1 1.2 1.1 13 .0 4.3 7.5 9.2

America capital goodsGE GE US 25 255,614 514,807 14.5 15.6 14.8 13.5 11.8 12.2 8.2 7.2 1.6 1.8 2.0 1.9 11.1 12.3 13.6 14.1

Honeywell HON US 83 65,168 69,150 20.8 17.2 16.8 15.0 11.0 9.6 10.0 8.7 3.9 3.8 4.3 3.7 17.3 24.6 25.4 24.6

Caterpillar CAT US 83 54,408 88,542 12.2 10.6 13.0 11.2 8.7 7.6 6.9 6.3 4.6 3.3 2.9 2.4 41.6 37.4 21.9 21.6

Emerson EMR US 60 43,664 46,807 12.6 18.1 17.3 15.5 7.2 7.8 9.6 8.5 2.9 3.4 3.9 3.6 24.3 19.0 22.7 23.3

Eaton ETN US 68 31,998 41,430 11.0 15.7 15.7 13.1 8.1 13.4 11.8 10.0 1.9 1.7 2.0 1.8 18.2 10.8 12.7 13.9

Cummins CMI US 120 22,795 21,943 9.2 12.5 15.2 12.4 6.7 8.7 8.5 7.1 3.1 3.1 3.0 2.6 36.4 27.2 19.8 21.0

Mean 13 .4 14.9 15 .5 13 .5 8 .9 9.9 9.2 8 .0 3 .0 2.9 3 .0 2.7 24.8 21.9 19.3 19.8Median 12.4 15 .6 15 .4 13 .3 8 .4 9.2 9.0 7.9 3 .0 3 .2 2.9 2.5 21.3 21.8 20.8 21.3

Europe capital goods

Siemens (Germany) SIE GR 81 91,563 106,443 9.7 15.2 14.7 11.1 6.3 8.0 9.5 7.3 1.9 2.2 2.3 2.1 22.8 16.2 15.5 18.6

ABB (Switzerland) ABB SS 21 50,787 53,557 14.5 16.9 15.1 13.2 7.2 8.6 8.4 7.2 2.7 2.8 2.8 2.5 19.6 16.8 18.3 19.0

Schneider (France) SU FP 58 42,361 48,090 12.0 16.2 14.3 12.9 7.4 8.5 9.1 8.0 1.4 1.8 1.8 1.7 11.9 11.3 12.7 13.2

Atlas (Sweden) ATCOA SS 170 31,463 33,294 13.9 15.6 16.1 15.1 9.8 10.4 10.0 9.4 6.2 6.2 5.1 4.5 44.8 43.5 31.7 29.7

Sandvik (Sweden) SAND SS 82 15,659 20,000 18.2 15.9 13.5 11.7 6.9 8.4 7.5 6.6 3.1 3.6 2.8 2.5 16.9 23.6 20.7 21.3

Ingersoll Rand (Ireland) IR US 62 18,184 21,188 27.2 14.5 17.1 14.6 6.7 9.1 10.0 8.8 1.3 2.0 2.4 2.2 5.4 14.6 14.1 15.0

MAN (Germany) MAN GR 86 16,683 22,109 42.4 67.3 78.4 20.4 5.0 13.3 14.5 9.2 1.8 2.1 2.2 2.1 11.8 3.2 2.8 10.1

LeGrand (France) LR FP 39 13,797 15,554 13.6 16.6 18.8 17.4 7.8 8.8 11.0 10.1 2.2 2.6 3.0 2.8 16.9 16.5 16.0 15.8

Alstom (France) ALO FP 26 10,581 13,988 11.8 11.9 8.1 7.6 6.0 6.2 5.4 4.7 2.0 2.0 1.4 1.2 17.5 17.2 17.3 16.4

Alfa Laval (Sweden) ALFA SS 148 9,473 10,198 17.0 17.8 18.9 17.0 11.2 12.3 11.9 10.6 3.7 3.7 3.7 3.3 22.7 21.1 19.6 19.7

Mean 18 .0 20.8 21.5 14.1 7.4 9.4 9.7 8 .2 2.6 2.9 2.7 2.5 19.0 18 .4 16.9 17.9Median 14.2 16.0 15 .6 13 .9 7.1 8 .7 9.8 8 .4 2.1 2.4 2.6 2.3 17.2 16.6 16.6 17.5

Global MEP/ HVAC

Ingersoll Rand (Ireland) IR US 62 18,184 21,188 27.2 14.5 17.1 14.6 6.7 9.1 10.0 8.8 1.3 2.0 2.4 2.2 5.4 14.6 14.1 15.0

Daikin (Japan) 6376 JP 1,240 976 1,239 20.4 12.5 18.2 16.6 9.2 9.4 8.1 7.3 1.4 1.5 1.3 1.2 6.8 12.9 6.9 7.1

Drake & Scull (UAE) DSI UH 1 718 865 8.8 16.8 17.9 16.0 7.1 11.3 10.7 9.3 0.6 0.6 0.9 0.9 7.5 3.5 5.1 5.3

Voltas (India) VOLT IN 79 435 363 9.6 13.1 11.7 9.3 5.9 7.1 5.9 4.5 1.8 1.6 1.5 1.3 19.3 12.8 13.1 14.9

Blue Star (India) BLSTR IN 154 230 305 na 36.4 15.8 10.4 na 21.1 9.7 6.6 4.3 3.5 2.9 2.6 (23.2) 9.8 18.3 24.8

Mean 16.5 18 .7 16.2 13 .4 7.2 11.6 8 .9 7.3 1 .9 1.8 1 .8 1.6 3 .1 10.7 11.5 13 .4Median 15 .0 14.5 17.1 14.6 6.9 9.4 9.7 7.3 1 .4 1.6 1 .5 1.3 6.8 12.8 13 .1 14.9

PE (x) EV/EBITDA (x) P/B (x) RoE (%)


13/20

Page 13 of 20

Source: Company data, Bloomberg and Espirito Santo Investment Bank Research estimates

Valuation Metrics FY12 FY13 FY14E FY15E FY16E

Recommendation: SELL P/E (x) 5.3 5.7 7.1 9.6 9.4

Fair Value: Rs 162 P/BV (x) 1.5 1.2 1.1 1.0 1.0

EV/EBITDA (x) 3.4 3.6 4.2 5.0 4.5

Share Price Rs 153 Dividend yield (%) 4.2% 3.5% 3.5% 3.5% 3.5%

Upside / (Downside) 6%

3 Month ADV ($m) 10.7 Key ratios FY12 FY13 FY14E FY15E FY16E

Free Float 32%

52 Week Low / High Rs 156-272 EBITDA margin (%) 19.5% 18.0% 15.7% 12.2% 11.5%

EBIT margin (%) 17.8% 16.0% 13.3% 9.3% 8.5%

Bloomberg: BHEL IN ROE (%) 30.9% 23.7% 16.3% 11.1% 10.6%

Model Published On: 02 July 2013 RoCE (%) 33.6% 23.3% 15.8% 10.8% 10.4%

Net gearing (x) -0.3 -0.2 -0.3 -0.4 -0.5

Net Debt / EBITDA (x) -0.7 -0.7 -1.4 -3.4 -4.3

Shares In Issue (mm) 2,448 Asset turnover (x) 2.0 1.7 1.3 1.0 1.0

Market Cap ($m) 6,241

Net Debt ($m) -1,053

Enterprise Value ($m) 5,189 P&L Summary (Rsm) FY12 FY13 FY14E FY15E FY16E

Revenue 469,963 476,356 426,298 366,243 371,593

Forthcoming Catalysts % change 13.5% 1.4% -10.5% -14.1% 1.5%

1QFY14 results 3rd August 2013 EBITDA 91,729 85,749 66,965 44,510 42,721

2QFY14 results October 2013 % change 15.2% 22.9% -27.0% -48.1% -36.2%

% margin 19.5% 18.0% 15.7% 12.2% 11.5%

Depreciation -8,000 -9,534 -10,077 -10,537 -11,302EBIT 83,729 76,215 56,888 33,973 31,418

Espirito Santo Se curities Analyst % change 12.9% 19.9% -32.1% -55.4% -44.8%

Aditya Bhartia % margin 17.8% 16.0% 13.3% 9.3% 8.5%

(91) 22 4315 6832 Interest expense -513 -1,228 -1,061 -1,061 -1,061

[email protected] Other Income 19,999 19,287 19,160 22,541 26,433

Exceptional Items 0 0 0 0 0

Pre Tax Profit 103,215 94,274 74,987 55,453 56,789

Shareholding Pattern Income Tax Expense -32,816 -28,177 -22,496 -16,636 -17,037

Net Income 70,400 66,097 52,491 38,817 39,752

Shares in issue (m) 2,447.6 2,447.6 2,447.6 2,447.6 2,447.6

EPS (Rs/sh) 28.8 27.0 21.4 15.9 16.2

Cash Flow Summary (Rsm) FY12 FY13 FY14E FY15E FY16E

Net Income 70,400 66,097 52,491 38,817 39,752Depreciation 8,000 9,534 10,077 10,537 11,302

Change in working capital -83,135 -52,826 -6,668 38,726 4,648

Others operating cash -2,145 -6,947 -7,126 -9,726 -12,347

Operating cash inflow -6,881 15,858 48,773 78,355 43,356

Order backlog and coverage ratio

Capital expenditure -12,462 -9,391 -9,000 -7,000 -7,000

Change in other assets, investments 8,254 8,500 6,188 8,787 11,408

Cash flows from investing -4,207 -890 -2,812 1,787 4,408

Debt raised 225 12,293 0 0 0

Equity raised 0 0 0 0 0

Dividends Paid (Incl. Tax) -18,206 -16,861 -16,861 -16,861 -16,861

Interest -513 -1,228 -1,061 -1,061 -1,061

Ca sh flow from financing -18,494 -5,796 -17,922 -17,922 -17,922

Change in net cash -29,582 9,172 28,039 62,219 29,842

FCFF pre investments -19,567 6,792 37,773 69,355 34,356

Revenues and EBITDA margins

Balance Sheet Summary (Rsm) FY12 FY13 FY14E FY15E FY16E

Cash & Equivalents 66,720 77,321 105,359 167,579 197,421

Other net current assets 112,348 165,173 171,841 133,115 128,467

Net Block 42,968 48,301 50,224 48,686 44,384

Capital WIP 13,476 8,000 5,000 3,000 3,000

Investments 4,617 4,292 6,292 8,292 10,292

Other assets 15,462 15,507 15,507 15,507 15,507

Total Assets 255,591 318,593 354,223 376,179 399,070

Interest Bearing Debt 1,859 14,152 14,152 14,152 14,152

Shareholders' Equity 253,732 304,441 340,071 362,027 384,918

Tota l Lia bilitie s + Equity 255,591 318,593 354,223 376,179 399,070

BHEL

Promoter

(Govt ofIndia)

68%

FII

15%

DII

12%

Others

5%

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Order backlog Order backlog coverage (RHS)

(Rsbn) (x)

8

10

12

14

16

18

20

22

0

100

200

300

400

500

600

Revenues EBITDA margin (RHS)

(Rsbn) (% )


14/20

Page 14 of 20



Recommendation: BUY P/E (x) 15.9 15.0 15.0 12.6 11.0

Fair Value: Rs 1065 P/E standalone excl sub-value (x) 12.5 12.7 11.7 10.5 9.5

P/BV (x) 2.7 2.3 2.1 1.9 1.7

Share Price Rs 850 EV/EBITDA (x) 13.0 13.1 13.2 12.3 11.3

Upside / (Downside) 25% Dividend yield (%) 1.9% 2.1% 2.2% 2.2% 2.2%

3 Month ADV ($m) 45.2

Free Float 88% Key ratios FY12 FY13 FY14E FY15E FY16E

52 Week Low / High Rs 836 - 1,152

EBITDA margin (%) 13.6% 13.2% 12.8% 12.8% 12.9%

Bloomberg: LT IN EBIT margin (%) 11.1% 11.0% 10.3% 10.1% 10.1%

Model Published On: 22 July 2013 ROE (%) 18.0% 16.5% 14.8% 15.9% 16.4%

RoE standalone (%) 27.1% 20.9% 18.2% 17.3% 16.7%

Net gearing (x) 1.2 1.5 1.7 1.7 1.8

Shares In Issue (mm) 921 Net gearing standalone (x) 0.0 0.1 0.1 0.1 0.1

Market Cap ($m) 13,044 Asset turnover (x) 0.9 0.8 0.7 0.7 0.7

Net Debt ($m) 8,486

Enterprise Value ($m) 21,531

P&L Summary (Rsm) FY12 FY13 FY14E FY15E FY16E

Forthcoming Catalysts Revenue 643,131 744,980 840,894 962,020 1,120,722

2QFY14 results October 2013 % change 23.5% 15.8% 12.9% 14.4% 16.5%

3QFY14 results January 2014 EBITDA 87,700 98,590 107,338 123,347 144,428

Order inflows Ongoing % change 14.1% 12.4% 8.9% 14.9% 17.1%

% margin 13.6% 13.2% 12.8% 12.8% 12.9%Depreciation -16,370 -16,370 -21,100 -26,029 -30,932

Espirito Santo Securities Analyst EBIT 71,330 82,220 86,238 97,318 113,495

Aditya Bhartia % change 12.0% 15.3% 4.9% 12.8% 16.6%

(91) 22 4315 6832 % margin 11.1% 11.0% 10.3% 10.1% 10.1%

[email protected] Interest expense -11,019 -20,950 -23,464 -26,749 -30,494

Other Income 10,960 10,960 12,375 16,484 14,711


Shareholding Pattern (June 2013) Pre Tax Profit 71,839 72,230 75,149 87,054 97,712

Income Tax Expense -22,912 -23,110 -22,544 -24,375 -25,405

Net Income 48,926 49,120 52,604 62,679 72,307

Recurring Net Income 49,040 52,060 52,604 62,679 72,307

Shares in issue (m) 916.4 920.8 925.6 930.6 935.6

EPS (Rs/sh) 53.4 53.3 56.8 67.4 77.3

EPS standalone (Rs/sh) 48.2 49.5 52.2 57.2 62.8


Net Income 48,926 52,070 52,603 62,678 72,306

Depreciation 16,370 16,370 21,100 26,029 30,932

Others operating cash -85,476 -48,818 -4,324 -908 -2,888

Standalone entity revenue split (FY13) Operating cash inflow -20,179 19,622 69,380 87,799 100,351

Capital expenditure -72,853 -95,965 -97,765 -98,554 -96,741

Change in other assets, investments 13,667 13,339 -4,848 12,784 13,806

Ca sh flow s from inve sting -59,186 -82,626 -102, 613 -85,770 -82,935

Debt raised 86,422 84,567 101,305 104,533 100,823

Equity raised 11,938 14,394 625 10 10

Dividends Paid (Incl. Tax) -17,616 -18,775 -19,955 -20,063 -20,170

Interest -11,019 -20,950 -23,464 -26,749 -30,494

Cash flow from financing 69,725 59,236 58,511 57,731 50,169

Change in net cash -9,640 -3,768 25,278 59,760 67,585

FCFF post investments -95,770 -73,324 -45,070 -10,755 3,610





Net Block (incl. CWIP) 343,135 417,400 494,065 566,590 632,399

Investments 15,649 12,630 29,314 29,314 29,314

Financing, other assets 230,457 294,327 338,476 389,247 467,097

Total Assets 833,853 1,032,855 1,211,933 1,410,212 1,641,381

Interest Bearing Debt 471,501 619,937 765,391 920,696 1,099,368


Others 68,484 74,321 74,671 75,021 75,371

Total Liabili ties + Equity 833,853 1,032,855 1,211,933 1,410,212 1,641,381

L&T

FII

16%

DII

37%

Others

47%

9

10

11

12

13

14

0100200300400500600700800900

1,000


(Rsbn) (%)

E&C

88%

E&E

6%

MIP

4%

Others

2%


15/20

Page 15 of 20



Recommendation: SELL P/E (x) 17.4 21.9 20.4 18.2 14.4

Fair Value: Rs 534 P/E (ex B&W JV losses) (x) 17.4 20.9 18.0 16.5 14.1

P/BV (x) 4.3 3.8 3.3 2.9 2.5


Upside / (Downside) -9% Dividend yield (%) 1.2% 1.2% 1.2% 1.2% 1.2%



52 Week Low / High Rs 483 - 684

EBITDA margin (%) 9.9% 9.6% 9.6% 10.0% 10.3%

Bloomberg: TMX IN EBIT margin (%) 8.8% 8.2% 8.3% 8.7% 9.0%

Model Published On: 25 July 2013 ROE (%) 27.4% 18.3% 17.2% 17.1% 18.7%

RoCE (%) 23.1% 15.0% 13.8% 14.0% 15.6%

Net gearing (x) -0.3 0.1 0.0 -0.2 -0.3

Shares In Issue (mm) 119 Net Debt / EBITDA (x) -0.7 0.2 -0.1 -0.6 -1.0

Market Cap ($m) 1,169

Net Debt ($m) 17

Enterprise Value ($m) 1,185 P&L Summary (Rsm) FY12 FY13 FY14E FY15E FY16E

Revenue 61,044 55,173 60,847 64,041 70,919

Forthcoming Catalysts % change 14.4% -9.6% 10.3% 5.3% 10.7%

2QFY14 results October 2013 EBITDA 6,051 5,312 5,842 6,399 7,289

3QFY14 results January 2014 % change 5.4% -12.2% 10.0% 9.5% 13.9%

% margin 9.9% 9.6% 9.6% 10.0% 10.3%

Depreciation -663 -771 -776 -821 -878Espirito Santo Securities Analyst EBIT 5,389 4,541 5,066 5,578 6,411

Aditya Bhartia % change 3.6% -15.7% 11.5% 10.1% 14.9%

(91) 22 4315 6832 % margin 8.8% 8.2% 8.3% 8.7% 9.0%

[email protected] Interest expense -122 -165 -100 -100 -100

Other Income 698 593 766 763 981


Shareholding Pattern Pre Tax Profit 5,965 4,969 5,732 6,241 7,293

Income Tax Expense -2,043 -1,773 -1,834 -1,997 -2,334

Net Income 3,922 3,195 3,898 4,244 4,959

Min Interest 114 161 0 0 0

Post-tax profit/ (loss) from B&W JV 0 -155 -464 -388 -96

Group PAT 4,035 3,201 3,434 3,856 4,863

Shares in issue (m) 119 119 119 119 119

EPS (Rs/sh) 33.9 26.9 28.8 32.4 40.8

EPS (excl B&W JV losses) (Rs/sh) 32.9 26.8 32.7 35.6 41.6


Order backlog over years Net Income 3,922 3,201 3,434 3,856 4,863

Depreciation 663 771 776 821 878

Change in working capital -2,880 -2,631 -748 399 -532

Others operating cash -515 -426 -641 -638 -856

Operating cash inflow 1,189 915 2,821 4,439 4,352

Capital expenditure -3,362 -3,744 -850 -935 -1,029

Change in other assets, investments 718 -1,445 766 763 981

Cash flows from investing -2,645 -5,189 -84 -172 -47

Debt raised 1,225 1,509 0 0 0


Dividends Paid (Incl. Tax) -969 -973 -973 -973 -973

Interest -122 -165 -100 -100 -100

Cash flow from financing 133 371 -1,073 -1,073 -1,073


Change in net cash -1,322 -3,903 1,665 3,194 3,232

FCFF -1,071 -1,486 1,871 3,404 3,223



Other net current assets 208 2,840 3,588 3,189 3,721

Net Block (inc. capital WIP) 10,906 13,902 13,975 14,089 14,240

Investments 2,395 4,433 4,433 4,433 4,433

Total Assets 20,491 24,385 26,871 29,780 33,695



Min interest and others 1,494 1,486 1,511 1,536 1,561

Total Liabilities + Equity 20,491 24,385 26,871 29,780 33,695

Thermax

Promoter

62%FII

14%

DII

9%

Others

15%

(40)

(20)

0

20

40

60

80

100

0

10

20

30

40

50

60

70

Energy Environment

(Rsbn) (% YoY)

8

9

10

11

12

13

0

10

20

30

40

50

60

70

80

90


(Rsbn) (%)


16/20

Page 16 of 20



Recommendation: BUY Adjusted P/E (x) 9.6 13.1 11.7 9.3 8.4

Fair Value: Rs 97 Reported P/E (x) 16.1 12.6 11.7 9.3 8.4

P/BV (x) 1.8 1.6 1.5 1.3 1.2


Upside / (Downside) 23% Dividend yield (%) 2.0 2.0 2.1 2.2 2.3



52 Week Low / High Rs 73 - 139

EBITDA margin 6.3% 4.1% 5.3% 6.3% 6.3%

Bloomberg: VOLT IN EBIT margin 5.6% 3.6% 4.8% 5.8% 5.8%

Model Published On: 02 July 2013 ROE 19.3% 12.8% 13.1% 14.9% 14.6%

RoCE 18.8% 13.2% 13.3% 14.6% 14.4%

Net gearing (x) 0.0 -0.1 -0.1 -0.2 -0.2

Shares In Issue (mm) 331 Net Debt / EBITDA (x) -0.1 -0.4 -0.5 -0.8 -1.2

Market Cap ($m) 436

Net Debt ($m) -15

Enterprise Value ($m) 421 P&L Summary (Rsm) FY12 FY13 FY14E FY15E FY16E

Revenue 51,750 55,141 55,259 58,134 63,863

Forthcoming Catalysts % change 0.0% 6.6% 0.2% 5.2% 9.9%

1QFY14 results August 2013 EBITDA 3,258 2,283 2,948 3,685 4,044

Qatar transportation MEP project awards Early 2014 % change -27.3% -29.9% 29.1% 25.0% 9.8%

% margin 6.3% 4.1% 5.3% 6.3% 6.3%

Depreciation -340 -278 -298 -317 -339EBIT 2,918 2,005 2,650 3,368 3,705

Espirito Santo Securities Analyst % change -31.7% -31.3% 32.2% 27.1% 10.0%

Aditya Bhartia % margin 5.6% 3.6% 4.8% 5.8% 5.8%

(91) 22 4315 6832 Interest expense -314 -398 -400 -350 -350

[email protected] Other Income 901 1,070 938 995 1,071

Exceptional Items -1,313 121 0 0 0

Pre Tax Profit 2,192 2,798 3,188 4,012 4,426

Shareholding Pattern Income Tax Expense -571 -728 -956 -1,204 -1,328

Minority Interest 0 8 0 0 0

Net Income 1,621 2,078 2,232 2,809 3,098

ESIB adjusted Net Income 2,733 1,989 2,232 2,809 3,098

Reported EPS (Rs/sh) 4.9 6.3 6.7 8.5 9.4

ESIB adjusted EPS (Rs/sh) 8.3 6.0 6.7 8.5 9.4

Shares in issue (m) 331 331 331 331 331


Net Income 1,620 2,071 2,232 2,809 3,098

Depreciation 340 278 298 317 339

Revenue split (FY13) Change in working capital -2,137 -20 -946 -476 -628

Others operating cash -1,425 -1,137 15 -52 -78

Operating cash inflow -1,603 1,192 1,598 2,598 2,731

Capital expenditure -300 -420 -423 -518 -555

Change in other assets, investments 1,261 221 472 494 526

Cash flows from investing 961 -199 48 -24 -29

Debt raised 870 361 0 0 0


Dividends Paid (Incl. Tax) -848 -615 -648 -681 -715

Interest -314 -398 -400 -350 -350

Cash flow from financing -292 -652 -1,048 -1,031 -1,065

Change in net cash -934 341 598 1,543 1,637

FCFF -578 1,577 1,261 2,171 2,274

EBITDA over years




Net Block 2,004 2,064 2,104 2,213 2,331

Capital WIP 46 46 46 46 46

Goodwill 890 888 888 888 888

Investments 3,116 4,074 4,074 4,074 4,074

Other assets 259 222 222 222 222

Total Assets 17,200 18,987 20,570 22,698 25,082



Minority Interests 170 118 118 118 118

Total Liabilities + Equity 17,200 18,987 20,570 22,698 25,081

Voltas

Promoter

30%

FII19%

DII

25%

Others

26%

EMP

58%

Eng Prod

8%

UCP

33%

3

4

5

6

7

8

9

10

0

1

2

3

4

5

FY07 FY09 FY11 FY13 FY15E

EBITDA Margin (RHS)

(Rsbn) (%)


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Valuation Methodology

Bharat Heavy Electricals

We value BHEL on a DCF basis, based on Free Cashflow to Equity (FCFE)

approach, as it aptly captures the contraction in earnings over the next few

years. We assume a 7.2% risk free rate (based on government 10-year bond

yields), 6% equity risk premium, 1.1x beta (historical correlation as per

Bloomberg) and 5% terminal growth rate beyond FY20. This yields us a one

year forward value of Rs162/sh. This implies PERs of 7.6x for FY14E and 10.2x

for FY15E and a FY14E P/B of 1.2x.

Larsen & Toubro

We value the stock on a SoTP basis to arrive at our 12 month forward FV of

Rs1,065/sh. We assign 15x FY15 P/E multiple to the companys E&C business

(Rs636/sh) and 12x to other standalone businesses (Rs105/sh). Subsidiaries

add another Rs327/sh value, with the bulk contributed by L&T Infotech, L&T

Finance and IDPL.

Thermax

We value the stock at 15x FY15E P/E (excluding the B&W JV losses; we do notattach any value to the B&W JV as we believe the business is likely to incur

losses in the near term, and may require some equity support from Thermax

and B&W) to arrive at our fair value of Rs534. This is c.10% discount to

Thermaxs 5-year average P/E, reflecting the prevailing sluggish macro

environment. While we see Thermax as one of the best plays on Indias capex

cycle, our SELL recommendation is purely a valuation call as we believe the

companys rich valuation does not reflect the difficult macro environment.

Voltas

We attach a 14x one year forward P/E to the UCP business earnings, and 9-10x

P/E multiple to the earnings of EMP and Engineering Products. This yields us a

target price of Rs97/sh.

Risks to Fair Value

Bharat Heavy Electricals

The main risks to our estimates and fair value for BHEL are:

1. Sharp pick-up in industry segment. BHELs FY13 industry segment orderinflows almost halved YoY, to Rs41bn. We have assumed a 20% growth in

industry orders in FY14E and a further 40% growth in FY15E. Stronger

growth due to success in the railways segment (especially metro/ railway

coaches) or water business could boost industry segment orders, and

thereby moderate revenue declines over next few years. However, in the

last few years, BHEL has not made any significant progress in its growthavenues (yet to enter into 765kV power T&D market, has not won a

meaningful share in the water business, management has been speaking

about winning railway coach orders for last few years but little success

has been achieved).

2. Softening material costs. We have factored in 2ppt increase in materialcosts as a percentage of revenue over FY13-16. This mainly reflects

aggressive pricing of some of the recent tenders. If material costs fall

sharply, it could offset some of this impact. We note, however, that BHEL

faces a delayed impact of change in material costs (inventory day about

100).

3. Positive news flow in the power sector. Any significant positiveannouncements for the power sector can re-rate the stock, though the

impact on financials would be seen with a lag.


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Larsen & Toubro

The key risks to our fair value are:

1. Order flow disappointment. We have built in 14% growth in order flow onexpectation of a sharp pick-up in international orders. Should order inflow

disappoint, then this could lead to de-rating of the stock.

2. Margin decline. L&T has disappointed on its margins in the last two years.We believe if EBITDA margins decline sharply in FY14 as well, it would be

taken negatively by investors.

3. Sluggish macro. If investor perception about the macro environmentdeteriorates further, the stock price can come under pressure.

Thermax

The main risks to our fair value

1. International orders. Thermax is expanding its international presence.Should it manage to grow its order backlog meaningfully in FY14 on the

back of export orders, this will be seen positively by investors.

2. Chunky domestic orders. Large domestic orders can help Thermaxexpand its order backlog, leading to earnings upgrades for FY15-16.

Similarly, if the B&W JV wins some large orders on reasonable pricing, it

will address investor concerns on the JVs profitability.

3. Margin resilience. We have built-in a 40bps EBITDA margin decline forthe standalone entity for both FY14 and FY15. Should the company

manage to hold on to its margins despite intense competition, it could

help the company sustain its premium valuation.

Voltas

Main risks to our fair value are:

1. Margin disappointment in the EMP segment. Voltas margins havedisappointed in the last four quarters. Should losses in some Middle East

projects persist and margins remain low, the stock could de-rate further

from current levels.

2. Unfavourable weather for UCP business. Room AC volumes grow sharplyin years when summers are hot. While Q1 FY14 should be good as

temperatures rose sharply in Northern India, Q4 FY14 temperatures will be

equally important. An early monsoon could spoil the party.

3. Sluggish order inflows. We are expecting a pick-up in orders by FY14-end. Should MEP orders related to the FIFA 2022 World Cup in Qatar be

delayed further, there could be a risk to our and consensus revenue

expectations for the next two years.

Please visit our website atwww.EspiritoSantoIB.co.ukfor up to date recommendation charts.
http://www.espiritosantoib.co.uk/http://www.espiritosantoib.co.uk/http://www.espiritosantoib.co.uk/http://www.espiritosantoib.co.uk/


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IMPORTANT DISCLOSURES300713

This report was prepared by Esprito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Esprito Santo de Investimento, S.A., withheadquarters in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A Corretora de Cmbio e Valores Mobilirios, in Brazil, ExecutionNoble Limited, in the United Kingdom, and Espirito Santo Securities India Private Limited, in India, all authorized to engage in securities activities according to each domestic legislation.All of these entities are included within the perimeter of the Financial Group controlled by Esprito Santo Financial Group S .A. (Banco EspritoSanto Group).

Analyst CertificationEach research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in thisreport: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; the issuers were not previously informed about the content of therecommendation included in this research report and the assumptions were not validated by the issuers; (2) no part of his or her compensation is directly or indirectly related to: (a) thespecific recommendations or views expressed by that research analyst in the research report; and/or (b) any services provided or to be provided by Banco Esprito Santo deInvestimento, S.A. and/or by any of its affiliates to the issuer of the securities under recommendation. Moreover, each of the analysts hereby certifies that he or she has no economic orfinancial interest whatsoever in the companies subject to his or her opinion and does not own or trade any securities issued by the latter.

Ratings DistributionEspirito Santo Investment Bank Research hereby provides the distribution of the equity research ratings in relation to the total Issuers covered and to the investment bankingclients as of end of June 2013.

Explanation of Rating System Ratings Distribution12-MONTH RATING DEFINITION

BUY Analyst expects at least 10% upside potential to fairvalue, which should be realized in the next 12 months

NEUTRAL Analyst expects upside/downside potential of between+10% and -10% to fair value, which should be realized inthe next 12 months

SELL Analyst expects at least 10% downside potential to fairvalue, which should be realized in the next 12 months

As at end June 2013 Total ESIB ResearchTotal Investment Banking Clients

(IBC)

Recommendation Count % of Total Count % of IBC % of Total

12 Month Rating:

Buy 233 44.8% 36 73.5% 6.9%Neutral 180 34.6% 9 18.4% 1.7%Sell 100 19.2% 1 2.0% 0.2%Restricted 2 0.4% 2 4.1% 0.4%Under Review 4 0.8% 1 2.0% 0.2%

TRADING RATING DEFINITION

TRADING BUY Analyst expects a positive short-term movement in theshare price (max duration 2 months from the time TradingBuy is announced) and may move out of line with the fairvalue estimate during that period

TRADING SELL Analyst expects a negative short-term movement in theshare price (max duration 2 months from time TradingSell is announced) and may move out of line with the fairvalue estimate during that period

Trading Rating:

Trading Buy 1 0.2% 0 0.0% 0.0%Trading Sell 0 0.0% 0 0.0% 0.0%

Total recommendations 520 100% 49 100% 9.4%

For further information on Rating System please see Definitions and distributionof ratings on:http://www.espiritosantoib-research.com.

Share PricesShare prices are as at the close of business on the day preceding publication, unless otherwise specified.

Coverage PolicyEsprito Santo Investment Bank Research reserves the right to choose the securities it expresses opinions on. The main criteria to choose such securities are: 1) markets in which they

trade 2) market capitalisation 3) liquidity, 4) sector suitability. Esprito Santo Investment Bank Research has no specific policy regarding the frequency in which opinions and investmentrecommendations are released.

Representation to InvestorsEsprito Santo Investment Bank Research has issued this report for information purposes only. This material constitutes "investment research" for the purposes of the Markets in FinancialInstruments Directive and as such contains an objective or independent explanation of the matters contained in the material.

Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances. This report is not, and should not beconstrued as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable forinvestors depending on their specific investment objectives and financial position. The material in this research report is general information intended for recipients who understand therisks associated with investment. It does not take account of whether an investment, course of action, or associated risks are suitable for the recipient. This research report does notpurport to be comprehensive or to contain all the information on which a prospective investor may need in order to make an investment decision and the recipient of this report mustmake its own independent assessment and decisions regarding any securities or financial instruments mentioned herein. In the event that further clarification is required on the words orphrases used in this material, the recipient is strongly recommended to seek independent legal or financial advice. Where an investment is denominated in a currency other than theinvestors currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide tofuture performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against theinterest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of thesecurities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publicationmay not be eligible for sale in some states or countries.

All the information contained herein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Esprito Santo InvestmentBank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are Esprito Santo Investment Bank Researchpresent opinions only, and are subject to change without prior notice. Esprito Santo Investment Bank Research is not under any obligation to update or keep current the information and

the opinions expressed herein nor to provide the recipient with access to any additional information.Esprito Santo Investment Bank Research has not entered into any agreement with the issuer relating to production of this report. Esprito Santo Investment Bank Research does notaccept any form of liability for losses or damages which may arise from the use of this report or its contents.

Ownership and Material Conflicts of InterestBanco Esprito Santo de Investimento, S.A. and/or its Affiliates (including all entities within Esprito Santo Investment Bank Research) and/or their directors, officers and employees, mayhave, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Esprito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, businessrelationships with the companies mentioned in this report. However, the research analysts may not purchase or sell securities or have any interest whatsoever in companies subject totheir opinion.

Banco Esprito Santo Group has a qualified shareholding (1% or more) in EDP, Portugal Telecom, Providncia and ZON Multimdia. Portugal Telecom has either a direct or indirectqualified shareholding (2% or more) in Banco Esprito Santo, S.A.

Pursuant to Polish Ministry of Finance regulations, we inform that Banco Esprito Santo Group companies and/or Banco Esprito Santo de Investimento, S.A. Branch in Poland do not havea qualified shareholding in the Polish Securities Issuers mentioned in this report higher than 5% of its total share capital.

The Chief Executive Officer of Banco Esprito Santo de Investimento, S.A., Mr. Jos Maria Ricciardi,

ess public sector hopes

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