r pre budget analysis report capital goods...havells india, bajaj electricals, crompton greaves...

Service tax

Direct tax

Excise duty

Defenseexpenditure

Fiscal deficits

Subsidies

Government borrowings

Budget deficits

Indirec

t tax

Corporation tax

Income tax

Import duties

R

R

Expenditure

Good

s and

servi

ce ta

x

PRE BUDGET ANALYSIS REPORT CAPITAL GOODS

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 16

PRE-BUDGET ANALYSIS February 15, 2013

CAPITAL GOODS

Current view Reflecting the sluggish capex cycle, the capital goods index, which is barometer

of the growth in the sector has posted further contraction in the current fiscal. Forthe period Apr-Nov 2012, capital goods index remained in the negative territoryin seven out of eight months.

Growth rate of electrical equipment sector decelerated to 6.9% in 2011-12 ascompared to 11.3% and 13.7% in 2009-10 and 2010-11 respectively. For thefirst time in 10 years, the electrical equipment industry had seen a negativegrowth of 3.9% in the first five months of the current fiscal (2012-13).

Key factors that have been contributing to the holdup in infrastructure spendingcontinue to persist. These include increasing delays in project off take due tolonger time on land acquisition and environmental clearance. This has retardedproject execution in road building, power plants and steel mills. Competitive in-tensity has also been increasing with Chinese/Korean players setting up a manu-facturing foothold in the country. In Transmission and Distribution equipment,availability of unutilized capacity is leading to margin erosion and higher capitalengagement. Concerns regarding higher interest rates led by increasing inflationhave also affected the sector.

The third quarter results for the sector were reflective of the challenging businessenvironment for the sector. While there has been an order intake has laggedexpectations, execution slowdown has impacted revenue generation. In general,most capital goods companies are seeing erosion in cash due to longer workingcapital cycle. Amidst the challenges cited above, consumer goods companies likeHavells India, Bajaj Electricals, Crompton Greaves (consumer division) continue topost impressive growth trend. In 9MFY12-13, consumer durable companies underour coverage reported aggregate growth of 20% YoY.

In terms of specific demand, the government has during the fiscal already raisedimport duty on power generating equipment hence this demand has been ad-dressed.

Our preferred picks are L&T, Greaves Cotton, Cummins India, Engineers India.

EXPECTED BUDGET IMPACT:Positive

LONG TERM OUTLOOK:Positive

Extend the benefitby another 3 years

Continuation of 80IAbenefit

Likely Need to kick-startinvestment in core sectors

Positive forBHEL, L&T andBGR

increase to 30%Depreciation onconstruction equip-ment

Unlikely Govt thrust on fiscalconsolidation

Neutral

ExemptionService tax on powerproject services

Unlikely Govt thrust on fiscalconsolidation

Neutral

Key budget expectations

Issues Industry wish-list Our expectation Rationale for our Impact of ourexpectation expectation

Duty exemption fordeemed exports

Excise duty Unlikely Govt thrust on fiscalconsolidation

Neutral

Source: Kotak Securities - Private Client Research

Maintain status quoReduction in Defencebudget

Likely Govt thrust on fiscalconsolidation

Negative forBEL

Reduce VAT on LEDproducts

VAT on energyefficient products

Likely Providing thrust toenergy efficient products

Positive forHavells, BajajElectricals andCGL


PRE-BUDGET ANALYSIS February 15 2013

Capital Goods (contd...)

Top picks

Company Price EPS (Rs) PE (x) Recommendation(Rs) FY13E FY14E FY13E FY14E as per our last

report

L&T 1441 82.7 94.2 17.4 15.3 ACCUMULATE

GREAVES COTTON 78 6.4 7.7 12.2 10.2 BUY

CUMMINS INDIA 484 24.0 27.1 20.2 17.9 ACCUMULATE

ENGINEERS INDIA 200 19.8 22.6 10.1 8.8 BUY

Source: Kotak Securities - Private Client Research


PRE-BUDGET ANALYSIS February 15, 2013

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Fundamental Research TeamDipen [email protected]+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6621 6305

Teena VirmaniConstruction, [email protected]+91 22 6621 6302

Saurabh AgrawalMetals, [email protected]+91 22 6621 6309

Saday SinhaBanking, NBFC, [email protected]+91 22 6621 6312

Arun [email protected]+91 22 6621 6143

Ruchir KhareCapital Goods, [email protected]+91 22 6621 6448

Ritwik RaiFMCG, [email protected]+91 22 6621 6310

Sumit PokharnaOil and [email protected]+91 22 6621 6313

Amit AgarwalLogistics, [email protected]+91 22 6621 6222

Jayesh [email protected]+91 22 6652 9172

K. [email protected]+91 22 6621 6311

Technical Research Team

Shrikant [email protected]+91 22 6621 6360

Amol [email protected]+91 20 6620 3350

Premshankar [email protected]+91 22 6621 6261

Derivatives Research TeamSahaj [email protected]+91 22 6621 6343

Rahul [email protected]+91 22 6621 6198

Malay [email protected]+91 22 6621 6350

Prashanth [email protected]+91 22 6621 6110

r pre budget analysis report capital goods...havells india, bajaj electricals, crompton greaves...

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