Capital Goods Business sees an uptick amid healthy Q4 Sector Update

Project-based companies’ revenues improved by 10.4% y-o-y because of better Q4FY2021 Results Review execution despite challenges and there was 395 bps margin expansion despite Sector: Capital goods high commodity headwinds on better cost rationalisation resulting in higher PAT growth. Carborundum, BEL, and Thermax had a strong quarter while L&T, Sector View: Positive ISGEC Heavy Engineering, KEC, and Kalpataru had stable performance. Order book remains healthy across companies. For project-based companies, despite COVID-led challenges, management commentaries indicated some revival as in ordering as the tendering pipeline remains healthy in sectors such as railways Our Coverage Universe and oil and gas, as government-led infrastructure spending and Aatmanirbhar Companies CMP Reco./ PT Bharat initiatives get some push; while concerns around global challenges persist, (Rs) View (Rs) international tendering is expected to remain mixed as businesses fully assess Amber 2915 Buy 3716 the impact of COVID-19-led disruption. Companies’ focus remains on maintaining Technologies liquidity and contain working capital requirements. Activities at most project sites Bharat 185 Buy 196 are near normal levels now, while the migrant workforce situation has been near Electronics normal. Electrical and consumer durables companies (V-Guard, Polycab, KEI, Finolex Cables, Amber, and ) reported strong revenue growth Blue Star 814 Buy 1200 (up 41% y-o-y on a lower base) during Q4FY2021 owing to improvement in sales Carborundum 634 Buy 645 led by strong demand recovery along with lower inventory across channels and Universal market share gains, which remained encouraging for consumer durables/electrical. Cummins * 889 Buy 1030 Polycab, Dixon, and V-Guard reported better-than-expected revenue mirroring, Dixon 4411 Buy 4800 some pick up in construction activities, and improvement in consumption demand. Technologies With price hikes undertaken in across products, any softness in volume sales will now be adequately compensated. Barring COVID-19 challenges, the outlook remains Finolex Cables* 525 Buy UR positive voiced by most management with demand expectation and execution pick Honeywell 42000 Buy 52407 up as lockdown eases along with tendering pick up for project-based companies. Automation Hence, demand momentum is expected to improve as lockdown gradually eases India although Q1FY2022 is likely to remain affected by partial lockdown. JMC Projects 118 Hold 105 Outlook KEC 445 Buy 505 Business momentum gradually picking up: COVID-19 second wave outbreak and International the partial shutdown led to partial stoppage of work at most factories, forcing brakes KEI Industries* 755 Buy 750 on demand and execution. Activities at most project sites are near normal levels Kalpataru 421 Buy 485 now, while the migrant workforce situation is near normal and supply chain, raw- Power* material procurement, etc. have been addressed to a large extent. Hence, we expect normalcy in project execution and likely to strengthen. For project-based companies, L&T 1492 Buy 1795 management commentaries indicate some revival in ordering as tendering pipeline Polycab India 2013 Buy UR remains healthy in sectors such as railways, defence, and oil and gas, as government- Ratnamani 2046 Buy 2400 led infrastructure spending and Aatmanirbhar Bharat initiatives get further push. Order Metals book remains strong, providing healthy visibility, despite weak order intake over the trailing four quarters, which was compensated by lower execution. Managements Thermax 1471 Buy 1720 across consumer durable/electrical companies highlighted that companies observed Triveni Turbines 124 Buy 144 demand picking up as the lockdown is gradually easing up. Inventory levels have V-Guard* 260 Buy 311 been near normal levels despite peak summer season. With price hikes undertaken ISGEC Heavy 775 Positive 20- in March and expected in April 2022, any softness in volume sales will now be Engineering 22% adequately compensated. Hence, demand momentum is expected to improve as we Source: Company, Sharekhan Research enter the peak season for consumer durable and electrical companies. UR - Under rerview; *Standalone financials Valuations Prefer companies with abilities to strive during turbulent times: Government’s focus on reviving infra spend and promote domestic manufacturing evident from the recently announced budget remains encouraging for the sector going ahead. We have seen the execution and ordering pipeline and demand environment improving along with improving business environment q-o-q, which remains encouraging. We expect companies with diversified businesses, a higher service revenue, and product basket catering to operating expenditure spends to see pick-up quickly as businesses Price chart are returning to normalcy. Hence, we prefer companies with a strong diversified 200 order book, execution capabilities, and a healthy balance sheet for project-based 175 companies. In the consumer durables segment, we prefer companies with strong cash 150 flows, diversified across geographies and better working capital management, which 125 are better prepared to revive their earnings growth trajectory quickly. Hence, among 100 project-based companies, we prefer L&T, ISGEC, Heavy Engineering, Honeywell 75 Automation India, Carborundum Universal, Cummins India, KEC, Kirloskar Oil Engines, 50 while in the consumer durables space, we prefer Polycab India, Dixon Technologies, 20 21 20 21 21 V-Guard, Amber Enterprises, and KEI Industries. - - - - - Jul Jul Jan Oct Apr Key Risks Sensex BSE Capital Goods 1) Weak domestic macroeconomic environment leading to weak project tendering; and 2) higher commodity prices affecting OPM Leaders in Q4FY2021: Cummins India, Carborundum Universal, V-Guard, and Polycab Laggards in Q4FY2021: Ratnamani Metals and Honeywell Automation Preferred Picks: L&T, ISGEC Heavy Engineering, Honeywell Automation India, Carborundum Universal, Cummins India, KEC, Kirloskar Oil Engines, while in the consumer durables space, we prefer Polycab India, Dixon Technologies, V-Guard, Amber Enterprises, and KEI Industries.

July 01, 2021 2 Sector Update

Q4FY2021 result snapshot Revenue (Rs. cr) OPM (%) Net profit (Rs. cr) Coverage Q4 Q4 y-o-y q-o-q Q4 Q4 y-o-y q-o-q Q4 Q4 y-o-y q-o-q FY21 FY20 (%) (%) FY21 FY20 (bps) (bps) FY21 FY20 (%) (%) Amber Technologies 1.598 1,315 21.5 - 8.8 7.7 109 59 77 63 20.2 - 6,918 5,817 18.9 198.1 28.6 25.7 295 - 1,368 1,047 30.7 - Blue Star 1,612 1,299 24 43 6.3 2.9 345 (94) 68 9 - 85 Carborundum Universal 757 594 27 3 21 17.3 370 325 91 92 -2 20 Cummins India* 1,247 1,053 18 -13 13.4 6.3 710 (354) 186 122 52 -21 Dixon Technologies 2,101 857 - -3.3 3.8 6.5 (273) (82) 44 28 61 -28 Finolex Cables* 921 651 41 11 14 13.4 88 141 96 117 -18 16 Honeywell Automation 673 704 -5 -23 19 18.3 95 -225 104 111 -6 -31 India JMC Projects 1,349 939 43.2 27 10 11.3 -132 107 60 -34 - 134 KEC International 4,361 3,671 19 33 8 10.1 -197 -95 194 193 0.7 34 KEI Industries* 1,246 1,259 -1 8 11 9.6 178 24 89 61 47 12 Kalpataru Power* 2,337 2,303 2 17 10 11.0 -59 1 130 107 22 -49 L&T 48,088 44,245 9 35 13 11.6 171 126 3417 3065 12 51 Polycab India 3,037 2,129 42.6 8.5 13.9 14.1 -25 44 281 214 32 7 Ratnamani Metals 696 629 10 57 23 15.3 - 448 109 67 63 82 Thermax 1,575 1,323 19 12 9 4.8 406 -159 107 39 - -3 Triveni Turbines 179 154 16 3 14 11.6 222 - 23 14 69 -15 V-Guard* 849 537 58.3 2.7 12.9 8.4 453 -78 68 33 - -11 Soft Coverage ISGEC Heavy 1618 1555 4 16 8 4 331 29 69 13 - 6 Engineering Kirloskar Oil Engines 915 711 29 15 13 9.5 350 97 73 47 55 20 AIA Engineering 860 857 0 23 20 21.6 -160 - 134 142 -6 -16 Total 81,341 72,603 12.2 24.1 13.6 11.4 220 64 6,793 5,550 21.4 15.2 Total (excl. L&T and BEL) 26,335 22,540 17.7 21.4 12.8 10.6 220 8 2,008 1,438 36 13.1 Source: Company, Sharekhan Research, *Standalone financials

Valuations CMP Price Target Reco/ EPS (Rs) P/E (x) Company (Rs) (Rs) View FY21 FY22E FY23E FY21 FY22E FY23E Amber Technologies 2,915 3,716 Buy 25 44 75 121 67 39 Bharat Electronics 185 196 Buy 10 11 12 15 14 13 Blue Star 814 1,200 Buy 10 21 28 80 40 29 Carborundum Universal 634 645 Buy 16 19 22 33 28 24 Cummins India* 889 1,030 Buy 22 23 26 35 33 30 Dixon Technologies 4,411 4,800 Buy 27 43 60 147 93 67 Finolex Cables* 525 UR Buy ------Honeywell Automation India 42,000 52,407 Buy 520 624 794 80 68 52 JMC Projects 118 105 Hold 4 9 11 23 11 9 KEC International 445 505 Buy 22 24 29 18 16 13 KEI Industries* 755 750 Buy 30 37 46 20 16 13 Kalpataru Power* 421 485 Buy 41 36 44 9 11 9 L&T 1,492 1,795 Buy 83 66 84 17 21 16.8 Polycab India 2,013 UR Buy - - - - - Ratnamani Metals 2,046 2,400 Buy 59 73 91 34 27 22 Thermax 1,471 1,720 Buy 18 30 35 80 48 41 Triveni Turbines 124 144 Buy 3.9 4.1 4.4 32 30 28 V-Guard* 260 311 Buy 4.6 5 6 57 49 43 Soft Coverage ISGEC Heavy Engineering 775 20-22% Positive 34 39 45 15 20 17 Source: Company, Sharekhan Research, *Standalone financials, UR – Under review

July 01, 2021 3 Sector Update

Upward/Downward revision in earnings estimates Price Change in Current Previous Companies Reason Target estimates Reco Reco (Rs.) Amber Fine Tuned Management remains optimistic about export prospects for both fully Buy Buy 3,716 Technologies built-up units and components that can potentially emerge over the next 3-4 years. With its unique scalable and sustainable business model, we expect Amber to report a 35%/44%/76% CAGR in Revenue/EBITDA/PAT over FY2021-FY2023E, led by enhanced capacity, increased product offerings and customer penetration coupled with healthy demand outlook for the electronic outsourcing industry. Overall, we believe the company has a long runway for growth with multiple growth drivers across its product verticals. Amber is currently trading at a P/E ratio of 67/39x its FY2022E/FY2023E earnings, which we believe leaves further room for an upside. Hence, we retain Buy on the stock with an unchanged PT of Rs. 3,716. Bharat Fine Tuned Management iterated its stands on investment in R&D and would invest Buy Buy 196 Electronics 10% of revenue going ahead. BEL remains our preferred pick in the defence sector on account of its strong manufacturing and R&D base, good cost control, growing indigenisation, and strong balance sheet with improving return ratios. The stock is trading at reasonable valuations of 13.9x and 13.0x its FY2023E and FY2024E earnings, respectively. With improving growth visibility, we retain our Buy rating on the stock with an unchanged PT of Rs. 196 Blue Star Fine Tuned With rising return ratios, healthy cash flow, lean working capital cycle, Buy Buy 1,200 and a comfortable leverage position, Blue Star is placed favourably compared to listed brands in terms of its valuation vis-a-vis RoE and EPS growth prospects. We have fine-tuned our earnings estimates for FY2021- FY2022. The company is currently trading at P/E of 29x its FY2023E EPS. We maintain our Buy rating on the stock with an unchanged PT of Rs. 1,200 Carborundum Fine Tuned The company’s capacity expansion, new product introduction, end- Buy Buy 645 Universal user demand, and geographic diversification are expected to revive its earnings growth trajectory from FY2022. We expect CUMI to report revenue/operating profit/PAT at a CAGR of 13.1%/14.1%/17% during FY2021- FY2023E. We have revised our margins upward given cost-control measures and guidance of sustainable margins. The company is currently trading at PE of 27.7x/24.3x on FY2022E/ FY2023E earnings, which we believe is reasonable, considering its strong earnings growth outlook, and robust balance sheet. Hence, we recommend buy on CUMI with a revised PT of Rs. 645. Cummins Fine Tuned Management seemed optimistic of the demand environment, while Buy Buy 1,030 India* exports demand is expected to come back strongly, wherein North America, China, and India are expected to be the growth areas. We have fine-tuned our estimates for FY2021-FY2023E and we remain constructive on Cummins as it continues to benefit from healthy demand, led by domestic economic revival. Cummins is currently trading at 33.7/29.6x its FY2022E/FY2023E net earnings, which we believe provides further room for upside, considering strong growth potential in end-user industries, strong balance sheet, and steady cash flow generation. Hence, we retain Buy on the stock with an unchanged PT of Rs. 1,030. Dixon Fine Tuned The company is on a strong growth trajectory over the next three to four Buy Buy 4,800 Technologies years with management targeting to triple its size. We have introduced FY2024 earnings estimate in this note. We maintain our Buy rating on the stock with a revised PT of Rs. 4,800, increasing our valuation multiple on account of strong earnings growth outlook. Finolex UR Buy Buy UR Cables*

July 01, 2021 4 Sector Update

Upward/Downward revision in earnings estimates Price Change in Current Previous Companies Reason Target estimates Reco Reco (Rs.) Honeywell Fine Tuned An asset-light model (nil debt), strong cash position (almost Rs. 1,800 Buy Buy 52,407 Automation crore), strong free cash flow generation (over Rs. 1,000 crore in India FY2022EFY2023E), strong return ratios, and a consistent dividend paying record justify the stock’s premium valuation. Currently, the stock is trading at P/E of 52.4x its FY2023E earnings, which we believe leaves room for further upside considering its strong business fundamentals. Hence, we retain Buy on the stock with a revised PT of Rs. 52,407. JMC Projects Fine Tuned The company’s execution outlook remains healthy, as it expects to double Hold Buy 105 its revenue over a 3-4 year time horizon. Although, there remains a risk of increasing commodity prices on OPM. Further, higher growth is likely to be accompanied with increased working capital requirements leading to no significant reduction in standalone debt going ahead. Adjusted for the company’s BOOT road asset valuation, its EPC business is valued at an implied P/E of 11x its FY2023E net earnings, leaving little room for upside. We believe the strong growth profile of the company over FY2021-FY2023E is fairly valued and provides unfavourable risk reward ratio to investors. Hence, we wait for a better entry point and downgrade the stock to Hold with a revised PT of Rs. 105. KEC Fine Tuned Management remains optimistic of delivering a good performance in Buy Buy 505 International FY2022E despite challenges as all projects are operational and the company remains fully equipped compared to last years with more mechanisation in place. Order inflow visibility remains healthy in railways, international T&D, and civil businesses. Further, its liquidity profile is improving with better working capital management and lowering of interest outgo. Currently, the stock is trading at P/E of 16x/13.4x its FY2022E/FY2023E earnings. We have fine-tuned our earnings estimates for FY2022-FY2023E. Given the healthy order backlog, order inflow visibility, and KEC’s ability to ramp-up execution, we maintain our Buy rating on the stock with an unchanged PT of Rs. 505. KEI Industries* Fine Tuned KEI’s outlook is expected to be positive with its diversified user industries, Buy Buy 750 increased focus on retail, high-margin EHV cables, and export sales along with focused industry approach as well as utilisation-driven capex plans likely to help in sustaining strong growth trajectory. We expect revenue and PAT to report a CAGR of 18% and 23%, respectively, during FY2021- FY2023E. We have fine-tuned our estimates for FY2022E-FY2023E. The stock is currently trading at a P/E of 16x/13x its FY2022E/FY2023E EPS, which remains reasonable. Hence, we retain Buy on the stock with a revised (PT) of Rs. 750. Kalpataru Fine Tuned The company reiterated the promoter’s plan of reducing pledge of Buy Buy Power* securities to ~40% from current 50% by December 2021, which should 485 ease concerns related to promoter’s pledge of securities. Hence, KTPL has been addressing key issues and is witnessing improving business outlook despite challenges related to COVID-19. The stock currently trades at 10.5x and 8.6x, which remains below its average five-year PE multiple. We have fine-tuned our estimates for FY2022-FY2023E and we maintain our Buy rating on the stock with an unchanged SoTP-based PT of Rs. 485. L&T Fine Tuned L&T remains at the forefront to reap benefits from AtmaNirbhar Bharat Buy Buy 1,795 Scheme with its diversified businesses across sectors such as defence, infrastructure, heavy engineering, and IT. The company remains the best proxy for domestic capex and its improving business environment. L&T is trading at a P/E of 21x/17x its FY2022E/FY2023E, which remains lower to its long-term average and provides comfort on valuation. Hence, we maintain our Buy rating on the stock with an unchanged SOTP-based PT of Rs. 1,795 Polycab India UR Buy Buy UR

July 01, 2021 5 Sector Update

Upward/Downward revision in earnings estimates Price Change in Current Previous Companies Reason Target estimates Reco Reco (Rs.) Ratnamani Fine Tuned RMTL is well positioned to strengthen its leadership position in the Buy Buy 2,400 Metals high-margin SS pipes segment post availability of new capacity from Q1FY2022E. We stay Positive on RMTL, led by a strong balance sheet and its ability to generate superior return ratios despite capacity expansions. At the CMP, the stock trades at 27.4x/22.1x its FY2022E/ FY2023E earnings, which is justified given its strong revenue growth potential in FY2022E and long-term growth potential. We maintain our Buy rating on RMTL with a revised PT of Rs. 2,400. Thermax Fine Tuned The company’s focus on newer technologies is expected to provide the Buy Buy 1,720 next leg of growth in the near future. We have fine-tuned our earnings estimate for FY2022-FY2023E earnings. The stock is currently trading at a PE of 41x and 36x its FY2023-FY2024E EPS and we expect Thermax to report a 14%/22% CAGR in Revenue/ PAT over FY2021-FY2024E. Improving tailwinds in the sector and consistent strong performance from the company along with improving visibility for new orders due to positive business environment provide healthy outlook ahead. Hence, we upgrade Thermax to Buy with a revised PT of Rs. 1,720. Triveni Fine Tuned TRIV will achieve full-year product order booking reported for FY2021 Buy Buy 144 Turbines by H1FY2022. We have tweaked our estimates for FY2022-FY2023 and have introduced FY2024E estimates, factoring near-term uncertainties in terms of execution and order inflow. The stock is currently trading at 31.7x/30.1x its FY2022E/FY2023E EPS, which is at a discount to its long- term historical average. We retain our Buy rating on TRIV with a revised PT of Rs. 144, considering improving business environment and valuation comfort. V-Guard* Fine Tuned The company would like to grow at 15% per annum with a sustainable Buy Buy 311 margin of 10-10.5%. We have fine-tuned our earnings estimates for FY2022E and FY2023E and the stock is currently trading at 49x and 43x its FY2022 and FY2023E EPS. We believe the company’s strong balance sheet, cash flows, and reputed brand along with robust business fundamentals provide comfort in the present environment. Hence, we continue to maintain Buy on the stock with an unchanged PT of Rs. 311. ISGEC Heavy Fine Tuned ISGEC reported positive operating cash flow of Rs. 228 crore in FY2021 Positive Positive 20- Engineering and Rs. 103 crore in FY2020 from negative cash flows in FY2019. This 22% indicates that the company’s core business activities are thriving and provides an additional measure/indicator of the company’s profitability potential. Despite an increase in receivables, net working capital was under control due to higher payables leading to strong operating cash flows. We believe execution should gather pace in the near to medium term. Public spending on infrastructure, emission norms, private sector capex, and railway projects is a major growth driver. We stay positive on ISGEC and expect an upside of 20-22% Source: Company, Sharekhan Research, *Standalone financials, UR – Under review

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July 01, 2021 6 Know more about our products and services

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