7 December 2018 SECTOR UPDATE INDIA INDUSTRIALS
AUTOMOTIVE Building blocks
ROADS in place
CHEMICALS
FOOD & BEVERAGE
Sales growth at a 30-quarter high
Broad-based recovery; 33 of 40 companies growing in double digits
CEMENT Trough valuations; at -1 standard deviation
SUGAR
RAILWAYS STEEL
PAPER
POWER 7 December 2018 SECTOR UPDATE INDIA INDUSTRIALS
TABLE OF CONTENTS
INDIA INDUSTRIALS Sandeep Tulsiyan 03 Introduction [email protected] Tel: (91 22) 6630 3085 04 Key charts We acknowledge the support services of Harses Kampani in the MAIN THEMES preparation of this report.
06 Observations during the quarter – Broad-based growth with resilient margins
10 Order backlog at a decade-high, order inflows double JM Financial Research is also 12 Outlook – Bright prospects ahead but we remain selective available on: Bloomberg - JMFR
15 What surprised the street? Please see Appendix I at the end of this report for Important Disclosures 16 Investment cycle at a decade low, private capex quiet and Disclaimers and Research Analyst Certification. 18 Peer Valuations You can also access our portal COMPANIES www.jmflresearch.com
19 SKF India
22 Voltas
25 Kirloskar Oil Engines
28 Bharat Electronics
OTHER REPORTS
INDIA STRATEGY INDIA POWER RURAL SAFARI VIII INDIA ELECTRICAL 2019 OUTLOOK CONSUMER DURABLES
JM Financial Institutional Securities Limited Page 2 7 December 2018 SECTOR UPDATE INDIA INDUSTRIALS
Building blocks in place 5%+ for the 7th consecutive quarter
Industrials growth Industrials - adjusted (%) MULTIPLE ENGINES FIRING 30.0% 25.0%
An uptick in capex activity across multiple sectors has been 20.0% driving sharp and steady growth in India's industrials sector over the past few quarters. Aggregate sales of 40 industrials 15.0% companies grew 21.8% YoY in 2QFY19, while rolling TTM 10.0% sales grew 13.4% YoY, indicating that such robust growth 5.0% was not merely driven by the base effect. (%)YoY
We have a positive growth outlook for CY19 on recovery 0.0% being more broad-based in nature (33 of 40 companies -5.0% grew in double digits), a strong order backlog position that stands at a 10-year high (2.8x TTM sales), continued capex -10.0% by PSUs (roads, railways, environment and renewables) and capacity enhancement by early-cycle industries such as -15.0% bearings, abrasives, machine tools and welding 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 consumables, indicating a pick-up in production levels. Source: Companies, JM Financial
- Growth at 5%+ for the 7th consecutive quarter - Highest growth in 30 quarters CAPEX UPTICK + FAVOURABLE - Order backlog at a decade-long high of 2.8x sales BASE = J-CURVE
At a 30-quarter high, aggregate net sales growth stood at 21.8% YoY (price inflation adjusted growth at 17%), thus sustaining above the 5% level for the 7th consecutive TROUGH VALUATIONS WITH quarter, accentuated further in 2QFY19 owing to a RESILIENT MARGINS favourable base. Barring power gen, all segments grew in strong double digits, led by an uptick in capex activity. Operating margins have been improving steadily and are We constructed JM's Industrials PE Index, comprising 15 hovering near 8-year highs of 12.3% (ex-BHEL). Also, the key industrials companies, which acts as a proxy to sector cumulative order backlog for 2QFY19 stood at a decade- valuations. Our analysis shows that the index has a strong long high of INR 2,295bn (+18%), providing visibility for correlation to the operating margins cycle and is currently 2.8 years. Despite the absence of marquee projects in hovering at -1 standard deviation levels of 28x 1-year power and steel sectors, order inflows doubled, led by forward PE and 33x TTM PE. We believe recent price hikes exports, railways, construction, FGD, sugar, chemicals, across various industries, improving capacity utilisations paper, fertilisers and F&B. and softening commodity prices are likely to keep margins resilient in the medium term and eventually lead to a We continue to remain positive on the sector and our top revival in sector valuations, closer to the LT median of 39x picks are SKF India, Voltas, Kirloskar Oil Engines and Bharat 1-year forward PE and 42x TTM PE. Electronics.
JM Financial Institutional Securities Limited Page 3 Industrials 7 December 2018 Exhibit 1. Key charts IIP growth continues to be upwards of 5% Sales growth highest in 6 years, partly led by the base effect
Industrials growth Industrials - adjusted (%) IIP YoY (%) Capital Goods YoY (%) 20.0 25.0%
20.0% 15.0 15.0% 10.0 10.0%
5.0 5.0% YoY (%)YoY 0.0% 0.0
-5.0% Jul-15 Jul-16 Jul-17 Jul-18 Jan-15 Jan-16 Jan-17 Jan-18 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Nov-14 Nov-15 Nov-16 Nov-17 Mar-15 Mar-16 Mar-17 Mar-18 May-15 May-16 May-17 -5.0 May-18 -10.0%
-10.0 -15.0% 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 -15.0 2Q19
Investments witness a decline a pre-election year, private capex down 7% YoY Commodity prices have started cooling off lately
230 60% Private Inv YoY Govt Inv YoY
50% 220
40% 210
30% 200 190 20% 180 10% 170 0% 160 -10% 150 -20% Feb-16 Feb-17 Feb-18 Nov-15 Nov-16 Nov-17 Nov-18 Aug-16 Aug-17 Aug-18 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 Jun May-16 May-17 May-18 Oct 08 Oct 09 Feb 09 Oct 10 Feb 10 Oct 11 Feb 11 Oct 12 Feb 12 Oct 13 Feb 13 Oct 14 Feb 14 Oct 15 Feb 15 Oct 16 Feb 16 Oct 17 Feb 17 Oct 18 Feb
Order backlog at decade high, at 2.8x TTM sales Order inflows doubled - led by construction, PSUs and international orders
Order backlog (INR bn) Order backlog/TTM sales (x) Order inflow (INR bn) Book to bill ratio (x) 500 2.5 2,400 2.3 2.8 2.8 2.9 2.8 2.8 450 2.8 2.7 2.7 2,200 2.7 400 2.0 2.6 2.6 2.6 2.7 1.8 2.6 2.6 1.7 2.5 350 2,000 1.4 2.4 2.5 300 1.3 1.4 1.5 2.4 1.2 2.3 1.6 1.0 1,800 250 1.0 1.1 2.3 1.0 1.0 0.9 200 0.8 0.8 0.8 1.0 1,600 2.1 150
100 0.5 1,400 1.9 50
1,200 1.7 - 0.0 Jun-15 Jun-16 Jun-17 Jun-18 Jun-15 Jun-16 Jun-17 Jun-18 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Dec-14 Dec-15 Dec-16 Dec-17 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Dec-14 Dec-15 Dec-16 Dec-17 Mar-15 Mar-16 Mar-17 Mar-18 Mar-15 Mar-16 Mar-17 Mar-18 EBITDA margins continue to remain strong Net profit growth is sturdy at 23%, ex-BHEL at 21%
EBITDA % EBITDA % (ex-BHEL) Net profit (ex-BHEL) (INR mn) YoY % (ex-BHEL) 14.0% 30,000 40.0%
13.0% 12.6% 12.6% 12.3% 11.9% 30.0% 11.7% 11.7%11.6% 20,000 12.0% 11.2% 10.7% 10.8% 10.7% 11.0% 20.0% 10.0% 9.9% 10,000 9.4% 9.6% 10.0% 9.1% 9.1% 8.8% 8.6% 9.0% 10.0% 7.7% 7.9% 0 8.0% 0.0% 7.0% 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 -10,000 6.0% -10.0% 5.0% -20,000 -20.0% 4.0%
2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 -30,000 -30.0%
Source: Industry, Company, JM Financial
JM Financial Institutional Securities Limited Page 4 Industrials 7 December 2018 Exhibit 2. Industrials sector quarterly snapshot . Net Sales (INR mn) EBITDA (INR mn) EBITDA Margins Adj PAT (INR mn) 2Q18 2Q19 YoY (%) 2Q18 2Q19 YoY (%) 2Q18 2Q19 Change (bps) 2Q18 2Q19 YoY (%) Power Generation BHEL 63,849 67,799 6.2 -954 2,408 NA -1.5 3.6 500bps 1,154 1,852 60.4 BGR Energy 5,174 7,772 50.2 771 729 -5.4 14.9 9.4 -550bps 11 69 511.5 Sub Total 69,023 75,571 9.5 -183 3,137 NA -0.3 4.2 440bps 1,165 1,921 64.8 Captive Power Thermax 10,331 14,276 38.2 952 1,100 15.6 9.2 7.7 -150bps 572 745 30.2 Triveni Turbines 2,170 2,168 -0.1 460 414 -9.9 21.2 19.1 -210bps 283 274 -3.2 TD Power Systems 1,262 980 -22.4 92 47 -49.1 7.3 4.8 -250bps 49 -6 -111.2 ISGEC 6,393 10,057 57.3 430 516 19.9 6.7 5.1 -160bps 460 288 -37.4 Sub Total 20,156 27,482 36.3 1,933 2,077 7.4 9.6 7.6 -200bps 1,365 1,302 -4.6 Power T&D Equipment ABB 19,234 25,154 30.8 1,342 1,940 44.6 7.0 7.7 70bps 834 1,083 29.9 GE T&D 8,700 9,933 14.2 805 921 14.5 9.3 9.3 0bps 475 515 8.3 Siemens 30,447 38,020 24.9 2,201 2,814 27.9 7.2 7.4 20bps 2,302 2,792 21.3 Schneider Electric 2,697 3,191 18.3 -64 -55 -14.1 -2.4 -1.7 70bps -109 -203 85.5 Sub Total 61,078 76,298 24.9 4,283 5,620 31.2 7.0 7.4 40bps 3,502 4,188 19.6 Power T&D EPC Kalpataru Power 12,228 15,741 28.7 1,329 1,709 28.6 10.9 10.9 0bps 715 914 27.8 KEC International 21,322 24,085 13.0 2,158 2,532 17.3 10.1 10.5 40bps 894 963 7.8 Sub Total 33,550 39,826 18.7 3,487 4,241 21.6 10.4 10.6 30bps 1,609 1,877 16.7 Transformer manufacturers Bharat Bijlee 1,751 2,378 35.8 105 106 1.1 6.0 4.4 -150bps 63 61 -3.3 Emco 858 402 -53.2 -54 -138 NA -6.2 -34.4 NA -303 -379 NA Indo Tech 429 499 16.2 -37 -3 NA -8.6 -0.5 810bps -40 -11 NA TRIL 1,658 1,867 12.6 145 78 -45.8 8.7 4.2 -450bps 28 -7 -123.8 Voltamp 1,289 1,890 46.6 86 191 121.4 6.7 10.1 340bps 153 154 0.8 Sub total 5,986 7,036 17.5 245 234 -4.5 4.1 3.3 -80bps -99 -182 84.4 Engines Cummins 11,539 14,869 28.9 1,675 2,509 49.8 14.5 16.9 240bps 1,529 2,116 38.4 Kirloskar Oil Engines 6,467 7,620 17.8 570 658 15.4 8.8 8.6 -20bps 299 412 37.9 Greaves Cotton 4,524 4,951 9.4 679 733 8.0 15.0 14.8 -20bps 429 494 15.0 Sub Total 22,530 27,440 21.8 2,923 3,900 33.4 13.0 14.2 120bps 2,257 3,022 33.9 Bearings SKF India 6,798 7,660 12.7 1,111 1,227 10.5 16.3 16.0 -30bps 740 843 14.0 Schaeffler India 10,040 11,915 18.7 1,677 1,997 19.0 16.7 16.8 10bps 959 1,298 35.4 Timken India 3,102 4,138 33.4 538 704 31.0 17.3 17.0 -30bps 373 346 -7.2 NRB Bearings 2,082 2,510 20.6 383 461 20.4 18.4 18.4 0bps 211 291 38.3 Sub Total 22,022 26,224 19.1 3,708 4,389 18.3 16.8 16.7 -10bps 2,281 2,778 21.8 Compressors Elgi Equipment 3,729 4,518 21.2 448 434 -3.0 12.0 9.6 -240bps 259 237 -8.4 Ingersoll Rand 1,611 1,774 10.1 175 316 81.2 10.8 17.8 700bps 220 226 2.4 Kirloskar Pneumatic 872 1,904 118.4 -45 289 NA -5.2 15.2 2040bps -16 178 NA Sub Total 6,212 8,196 31.9 577 1,040 80.2 9.3 12.7 340bps 463 641 38.4 Air-conditioning and coolers Blue Star 8,498 10,322 21.5 489 581 18.7 5.8 5.6 -10bps 223 266 19.1 Symphony 1,843 1,480 -19.7 642 450 -29.9 34.8 30.4 -440bps 507 380 -25.0 Voltas 10,317 14,147 37.1 806 1,019 26.4 7.8 7.2 -60bps 946 1,035 9.3 Sub Total 20,657 25,949 25.6 1,938 2,050 5.8 9.4 7.9 -150bps 1,676 1,680 0.3 Pumps Kirloskar Brothers 4,341 4,882 12.5 328 300 -8.5 7.6 6.1 -140bps 185 200 8.1 KSB Pumps 2,005 2,804 39.9 211 321 52.1 10.5 11.4 90bps 116 161 38.7 Sub Total 6,346 7,686 21.1 539 621 15.2 8.5 8.1 -40bps 301 361 19.9 Abrasives, ceramics and others Carborundum Universal 5,794 6,509 12.3 981 996 1.6 16.9 15.3 -160bps 554 648 17.1 Grindwell Norton 3,444 4,168 21.0 579 708 22.2 16.8 17.0 20bps 360 407 13.0 Sub Total 9,238 10,677 15.6 1,560 1,704 9.2 16.9 16.0 -90bps 914 1,055 15.5 Commercial Vehicles Ashok Leyland 60,469 76,080 25.8 6,118 8,059 31.7 10.1 10.6 50bps 3,369 4,755 41.1 Bharat Forge 12,580 16,792 33.5 3,694 4,753 28.7 29.4 28.3 -110bps 2,037 2,684 31.7 Sub total 73,049 92,872 27.1 9,812 12,812 30.6 13.4 13.8 40bps 5,406 7,439 37.6 Others AIA Engineering 5,591 7,269 30.0 1,124 1,613 43.5 20.1 22.2 210bps 865 1,210 39.9 Bharat Electronics 24,762 33,814 36.6 5,950 8,544 43.6 24.0 25.3 120bps 4,124 5,713 38.5 Engineers India 4,291 6,814 58.8 1,390 915 -34.2 32.4 13.4 -1900bps 1,192 978 -18.0 Honeywell Automation 6,732 7,823 16.2 1,072 1,325 23.5 15.9 16.9 100bps 737 974 32.1 Kennametal 1,811 2,268 25.2 201 427 112.8 11.1 18.8 770bps 100 244 144.2 Techno Electric 2,542 2,293 -9.8 768 693 -9.7 30.2 30.2 0bps 601 536 -10.8 Sub Total 45,730 60,282 31.8 10,505 13,517 28.7 23.0 22.4 -50bps 7,619 9,655 26.7 Grand Total 3,22,527 3,92,665 21.7 31,515 42,527 34.9 9.8 10.8 110bps 23,053 28,296 22.7 Grand Total (ex-BHEL) 2,58,678 3,24,866 25.6 32,469 40,120 23.6 12.6 12.3 -20bps 21,899 26,445 20.8 Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 5 Industrials 7 December 2018 Observations during the quarter – Broad-based growth with resilient margins
Revenue growth: Aggregate net sales rose 21.8% YoY (price inflation adjusted growth at 17%), thus sustaining above the 5% level for the 7th consecutive quarter. Growth was led by strong double digit growth across all sectors except power-gen segment which grew in high single digits, primarily due to dearth of thermal power plant installations.
Also, to eliminate the base effect, (1QFY18 had pre-GST slump in sales), we look at rolling TTM growth which stood at 13.4%, thus reinforcing our positive view.
Exhibit 3. Sector sales growth observed a J-curve in 2QFY19 Highest ever sales growth of 22% in the last 6 years While, ex-BHEL it was 25.7%
Industrials growth Industrials - adjusted (%) 25.0% Industrials (ex-BHEL) Industrials (ex-BHEL)- adjusted (%) 30.0% 20.0% 25.0% 15.0% 20.0% 10.0% 15.0%
5.0% 10.0% YoY (%)YoY YoY (%)YoY 0.0% 5.0%
-5.0% 0.0%
-10.0% -5.0%
-15.0% -10.0% 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 Source: Company, JM Financial
T&D EPC companies reported strong growth of 19% YoY mainly led by strong execution in non-T&D segments such as railways, civil construction, oil and gas pipelines and international markets. Railways have in particular done extremely well led by strong order intake and timely execution. Solar and water management solutions also contributed to the growth. KECI’s revenue share from non-T&D segments stood at 50% from an average of 25-30% earlier. Base T&D execution by PGCIL/SEBs has been slow this quarter.
In captive power, revenue growth of 36% has been led by a weak base, strong order backlog and after-market revenues. Ordering was driven by industries such as chemicals, food/beverages, sugar, cement, fertilisers, exports and bio-mass have braced this growth.
Exhibit 4. Not a one-off affair, several quarters of consistent TTM growth TTM Rolling YoY (%) 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19
Power equipment -13.3% -11.2% -13.3% -8.2% -4.8% 2.5% 12.0% 8.3% 2.0% -0.2% 1.0% 0.0% 4.8%
Captive Power 15.7% 14.0% 12.9% 5.8% -3.5% -12.4% -16.1% -17.5% -13.8% -7.0% -5.2% 4.1% 14.6%
T&D Equipment 1.3% 3.5% 3.7% 4.8% 3.4% 4.0% 5.7% 5.4% 5.1% 6.2% 5.5% 6.4% 13.1%
T&D EPC 0.9% -0.8% -0.5% -3.5% 1.0% 4.0% 5.1% 7.3% 6.6% 11.7% 17.2% 19.1% 22.2%
Transformer manufacturers -7.3% -6.8% 1.8% 11.9% 21.9% 19.7% 11.1% 2.9% -11.4% -13.5% -13.5% -7.5% 3.8%
Engines -2.5% -3.7% -5.8% 6.8% 9.0% 12.2% 15.7% 8.9% 5.3% 3.1% 3.5% 3.6% 10.2%
Bearings 5.3% 3.6% 4.0% 3.5% 4.9% 5.8% 6.5% 6.8% 6.8% 8.1% 10.0% 13.5% 16.1%
Compressors 5.5% 5.1% 6.2% 7.0% 4.2% 2.1% -2.0% -4.2% -2.6% 1.9% 12.8% 18.3% 25.2%
Air-conditioning 2.0% 7.2% 9.9% 18.1% 17.2% 13.5% 13.0% 10.4% 9.9% 11.5% 7.7% 5.3% 9.6%
Pumps 5.1% 5.5% 1.6% 0.0% -0.8% 0.1% 3.3% 6.3% 11.4% 13.0% 12.0% 11.9% 12.6%
Abrasives, ceramics and others -3.2% -4.2% -2.0% 1.5% 6.1% 8.8% 8.8% 7.6% 8.4% 10.0% 12.5% 15.8% 16.7%
Commercial Vehicles 46.4% 34.3% 28.5% 19.0% 6.7% 5.0% 2.6% 3.2% 13.6% 25.4% 31.9% 39.8% 37.8%
Industrials 6.3% 2.7% 7.3% 4.4% 4.4% 8.0% 11.6% 21.5% 25.1% 24.1% 15.6% 12.0% 14.4%
Grand Total -1.7% -0.9% -0.6% 1.4% 2.1% 4.1% 7.1% 7.0% 6.3% 7.5% 7.8% 8.8% 13.4%
Grand Total (ex-BHEL) 3.8% 3.2% 3.8% 4.2% 3.8% 4.4% 5.6% 6.5% 7.3% 9.6% 9.5% 10.7% 15.6% Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 6 Industrials 7 December 2018
Engine companies saw a strong growth (+22% YoY) led by bounce back in domestic power-gen segment, revival in exports and favourable base. Domestic growth has been driven by data centers, commercial realty and manufacturing sectors while residential realty remains subdued. Within categories, HHP and MHP have performed strongly while LHP has grown at a modest pace led by weaker demand. Domestic growth for power-gen industry has been revised upwards from 8% to 10% in FY19, driving KKC to revise upward its domestic guidance from 8-10% to 10-12%. Price hikes of 3-5% will be implemented in 3Q. Industrial engines reported a strong quarter as demand from railways, marine, defence and construction equipment has been strong. Mining has been a little slow and things are starting to look up for the water-well segment.
Diversified players such as ABB, Siemens reported strong growth supported by a weak base and strong growth in the power-gen segment. ABB reported a strong growth led by a pick-up in HVDC project execution (RP800 project) helped the power grids segment grow 71% YoY along with strong revenue growth across all other segments while Siemens saw good growth across segments.
Bearings witnessed strong growth of 19% YoY led by continuing strong growth in both auto and industrial segments. Strong growth has been witnessed across all auto segments while auto after-market was weak. Within industrials, railways continued traction, wind segment improved sequentially and manufacturing industries fared well. Exports remained weak this quarter as players faced capacity constraints.
Pumps reported strong 21% YoY growth from the agri-sector, industrial segments, building & construction, valves and a low base effect led to the strong growth this quarter for the pumps industry. Large orders from oil & gas, industrial segments and water resource management are expected which would lead to double-digit growth for the industry this year.
Abrasive companies saw strong growth (+16% YoY) as capacity utilisations moved higher led by demand from auto and general industrials. Price hikes will be initiated of about 4- 6% in the next 2 quarters. Growth from industrials looks positive.
For consumer durable companies, growth was mainly led by strong execution of projects at BLSTR (27%) and Voltas (62%) led by strong order backlogs. AC sales remained weak as the larger players grew by 8-9%, but margins halved as companies tried to push inventory into the channels at lower prices. Despite rising input costs, higher competition restricted price hikes.
We have a positive growth outlook for CY19 on recovery being more broad-based in nature as 33 of 40 companies grew in double digits in 2Q19. Also, strong growth was witnessed by diversified players like ABB India, Thermax, Siemens, Cummins, Schaeffler India, Grindwell Norton and Honeywell Automation.
Exhibit 5. 33 of 40 companies reported double-digit sales growth
33
29
22 21 20 19 18 17 16 15 15 14 14 14 13 13 12 12 10 8 8 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19
Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 7 Industrials 7 December 2018
Exporters continue strong performance: Net exporters performed well this quarter as exports to key geographies such as MENA, SAARC and the Africas continued at a good pace. KEC’s revenue share from international business improved led by strong execution of order backlog. Export sales for Cummins continued well in 2Q19, whereas Elgi, Carborundum witnessed a pick-up in operations from their respective regions.
Exhibit 6. Exporters continue to do well Net Sales (INR mn) EBITDA (INR mn) EBITDA Margins Adj PAT (INR mn)
2Q18 2Q19 YoY (%) 2Q18 2Q19 YoY (%) 2Q18 2Q19 Change (bps) 2Q18 2Q19 YoY (%)
Thermax 10,331 14,276 38.2 952 1,100 15.6 9.2 7.7 -150bps 572 745 30.2 Cummins 11,539 14,869 28.9 1,675 2,509 49.8 14.5 16.9 240bps 1,529 2,116 38.4 TD Power 1,262 980 -22.4 92 47 -49.1 7.3 4.8 -250bps 49 -6 -111.2 Elgi Equipment 3,729 4,518 21.2 448 434 -3.0 12.0 9.6 -240bps 259 237 -8.4 Carborundum 5,794 6,509 12.3 981 996 1.6 16.9 15.3 -160bps 554 648 17.1 AIA Engineering 5,591 7,269 30.0 1,124 1,613 43.5 20.1 22.2 210bps 865 1,210 39.9 KEC International 21,322 24,085 13.0 2,158 2,532 17.3 10.1 10.5 40bps 894 963 7.8 Source: Company, JM Financial
Product manufacturing companies continue consistent performance: An overview of small-ticket industrial goods’ sales growth highlights improved capacity utilisation levels and higher spends by manufacturing industry. Healthy growth in sub-segments such as roads, railways, automotive (CVs and tractors) has helped sustain growth in these segments. Bearing companies have fared well as improving utilisations across industries and machine tools have led to strong growth in after-market sales. Industrial engines have shown great traction due to robust ordering from construction equipment and rail.
Exhibit 7. Small ticket industrial products continue strong growth 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 Cummins India - industrial 0.9 0.6 19.0 36.0 34.5 15.2 34.0 21.0 9.0 8.4 -2.0 -12.5 41.2 Bharat Bijlee - industrial 7.2 1.7 5.9 -2.2 3.0 9.1 1.5 -3.4 -3.2 -2.3 3.2 28.0 39.1 Timken India 12.4 11.8 17.2 8.0 7.7 -7.9 -4.6 7.5 11.3 20.6 32.6 39.3 33.4 Honeywell Automation -0.5 -0.7 30.4 10.0 13.8 12.2 4.9 16.2 16.1 7.1 8.0 17.5 16.2 Grindwell Norton - abrasives 2.4 3.7 1.3 11.6 11.8 12.4 10.0 2.6 -3.8 1.5 1.5 0.1 22.2 SKF India - industrial 1.9 7.1 2.2 13.3 16.2 10.4 15.0 -3.4 -8.7 -6.1 3.4 13.3 17.4 ABB - discrete automation 2.9 6.4 32.1 10.5 3.5 -9.4 10.8 -13.3 -7.1 -4.2 19.6 34.0 32.7 Carborundum - abrasives 1.5 7.5 16.3 15.2 6.2 9.3 10.7 -4.6 2.7 6.4 3.1 11.4 9.2 Kirloskar Oil - Industrial+Agri -0.5 11.6 23.0 22.6 17.0 3.6 3.8 5.2 -5.8 16.2 23.4 21.2 17.6 Kennametal - hard metals -9.2 -2.5 5.8 15.4 28.8 20.5 16.6 6.7 12.1 9.2 16.0 10.5 22.7 Source: Company, JM Financial
Sequential improvement in Gross and EBITDA margins: Gross margins across the industrials universe (ex-BHEL) have dropped 170bps YoY, but grown sequentially by 140bps led by lower commodity prices and price hikes of 3-5%. The drop in margins is also a factor of higher one-off gross margins for several companies in 2Q18. 29 of 40 industrial companies reported a decrease in gross margins, out of which power T&D, power equipment, EPC players witnessed the maximum fall due to higher share of lower margin projects. Consumer players also witnessed severe decline in margins led by higher competition, higher input costs and customs duty hikes. Product companies such as bearings, engines, compressors, abrasives have witnessed gross margin compression due to time lag between increase in material costs and roll out of prices hikes. We expect gross margin pressure to ease out as material prices have eased, while second round of prices hikes are being rolled out in 2HFY19. EBITDA margins expanded by 110bps to 10.8% and excluding BHEL it declined by 20bps to 12.3%. We note that EBITDA margins are at a multi-year high, but expected to sustain around 11-12% levels as commodity prices remain stable and capacity utilisations continue to inch higher.
JM Financial Institutional Securities Limited Page 8 Industrials 7 December 2018 Exhibit 8. Commodity index and gross margins Commodity prices cooling off since the last few months Price hikes helped gross margins start stabilising
230
220 41.0% 40.2%
210 39.5% 38.5%
200 38.0% 37.1%
190 36.5%
180 35.0%
170 33.5%
160 32.0%
150 30.5%
29.0% Feb-16 Feb-17 Feb-18 Nov-15 Nov-16 Nov-17 Nov-18 Aug-16 Aug-17 Aug-18 May-16 May-17 May-18
2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 Source: Bloomberg, Company, JM Financial
Exhibit 9. EBITDA margins continue to remain strong EBITDA % EBITDA % (ex-BHEL) 14.0%
13.0% 12.6% 12.5% 12.3% 11.9% 11.7% 11.7%11.6% 12.0% 11.2% 10.7% 10.8% 10.7% 11.0% 10.0% 9.9% 9.4% 9.6% 10.0% 9.1% 9.1% 8.8% 8.6% 9.0% 7.7% 7.9% 8.0% 7.0% 6.0% 5.0% 4.0%
2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 Source: Company, JM Financial
Exhibit 10. Net profit growth at 21%
Net profit (ex-BHEL) (INR mn) YoY % (ex-BHEL) 30,000 40.0%
30.0% 20,000
20.0% 10,000
10.0% 0 0.0% 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 -10,000 -10.0%
-20,000 -20.0%
-30,000 -30.0%
Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 9 Industrials 7 December 2018 Order Backlog at decade-high, order inflows double
Order backlog at decade-high, order inflows double: The cumulative order backlog for 2QFY19 was at a decade high of INR 2,295 bn (+18% YoY) and excluding BHEL at INR 1,140 bn (+16% YoY). Order book to TTM sales provides revenue visibility for 2.8 years. Order inflows were up 108% YoY to INR 289bn while order inflows (ex-BHEL) were up 97% as EPC players saw robust growth.
Exhibit 11. Order backlog and order inflows Order backlog stands at 2.8x TTM sales, up 18% YoY While order inflows more than doubled
Order backlog (INR bn) Order backlog/TTM sales (x) Order inflow (INR bn) Book to bill ratio (x) 500 2.5 2,400 2.3 2.8 2.8 2.9 2.8 2.8 450 2.8 2.7 2,200 2.7 2.7 400 2.0 2.6 2.6 2.6 2.7 1.8 2.6 2.6 1.7 2.5 350 2,000 1.4 2.4 2.5 300 1.3 1.4 1.5 2.4 1.2 2.3 1.6 1.0 1,800 250 1.1 2.3 1.0 1.0 1.0 0.9 200 0.8 0.8 0.8 1.0 1,600 2.1 150
100 0.5 1,400 1.9 50
1,200 1.7 - 0.0 Jun-15 Jun-16 Jun-17 Jun-18 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Dec-14 Dec-15 Dec-16 Dec-17 Jun-15 Jun-16 Jun-17 Jun-18 Mar-15 Mar-16 Mar-17 Mar-18 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Dec-14 Dec-15 Dec-16 Dec-17 Mar-15 Mar-16 Mar-17 Mar-18 Order backlog (ex-BHEL) stands at 2.2x TTM sales, up 16% YoY And ex-BHEL, ordering was strong growing almost 97%
Order inflow (INR bn) (Ex-BHEL) Book to bill ratio (x) 1,270 Order backlog (INR bn) (Ex-BHEL) Order backlog/TTM sales (x) 2.4 250 2.5 1,170 2.2 2.1 2.2 2.1 2.2 2.1 2.1 2.1 2.1 2.0 1,070 2.0 200 2.0 1.8 1.9 2.0 970 1.9 1.5 1.5 1.7 870 1.8 150 1.5 1.7 1.7 1.3 1.2 1.6 1.6 1.6 1.1 1.1 1.6 1.1 1.1 1.2 1.0 770 1.6 1.0 1.0 100 0.8 1.0 670 1.0 1.4 570 50 0.5 1.2 470
370 1.0 - 0.0 Jun-15 Jun-16 Jun-17 Jun-18 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Dec-14 Dec-15 Dec-16 Dec-17 Jun-15 Jun-16 Jun-17 Jun-18 Mar-15 Mar-16 Mar-17 Mar-18 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Dec-14 Dec-15 Dec-16 Dec-17 Mar-15 Mar-16 Mar-17 Mar-18
Source: Company, JM Financial
PGCIL capex has slowed down and TBCB bidding activity has remained muted but SEB orders have started flowing in for low-voltage products. Overall domestic T&D visibility remains hazy but ordering from SEBs in states like Karnataka, Tamil Nadu, UP, Bihar, West Bengal orders is looking up. In FY19, there could also be surprise ordering of INR 80-90bn from PGCIL for green corridors. Few EPC players are focusing on flue-gas desulfurization orders as opportunity stands at INR 250-300bn over the next 2-3 years.
EPC players such as KEC and KPP saw strong order inflows from railways, construction, oil & gas and international markets. There is a huge pipeline of projects in Bangladesh, Nepal and Afghanistan, while Brazil market is looking ripe as there are several auctions lined up in Dec-2018. Africa has various opportunities, while Middle East is displaying signs of recovery. In the captive power segment, there are clear signs of revival in the domestic captive power market led by industries such as chemicals, food processing, biomass, sugar, cement and steel.
Ordering momentum by certain process industries, consumer-manufacturing industries and chemicals remains intact but the core-sector order pipeline seems hazy. The HVAC industry is seeing demand from hospitals and commercial realty in the private sector while government driven projects such as metros, airports and healthcare have sizeable inquiries.
JM Financial Institutional Securities Limited Page 10 Industrials 7 December 2018
Railways ordering has been buoyant in the last few years which has been clearly visible in order backlog for KEC and KPP which have almost grown 4x (Exhibit 12) from an average of INR 20-25bn to INR 90bn in just 1.5 years. We believe a pre-election dip in ordering activity may be temporary in nature as a) government plans to electrify all routes to 100% by 2022 from the current 45%, b) investments in new lines and doubling of lines is set to grow 100% to INR 458bn from INR 230bn in FY17, c) large orders coming from DFC, c) contracts given to non-performing companies have been cancelled and are to be re- tendered and d) opportunities in Bangladesh and some other countries.
Exhibit 12. Railways capex and order backlog for KEC and Kalpataru Railway capex has increased at 17% CAGR since FY16 Which has shown in order backlogs growing 4x for KEC and Kalpataru
Electrification projects Line Doubling 100 KEC KPP 1,000 Construction of new lines Rolling stock 90 900 50 80 800 70 47 700 60 42 600 50
INR bnINR 36
INR bnINR 500 40
400 30
20 14 300 15 14 10 200 9 9 11 14 20 27 40 0 100 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Source: Ministry of Railways, Company, JM Financial
JM Financial Institutional Securities Limited Page 11 Industrials 7 December 2018 Outlook – Bright prospects ahead but we remain selective
We have a positive growth outlook for CY19 on recovery being more broad-based in nature (33 of 40 companies grew in double digits), a strong order backlog position that stands at a 10-year high (2.8x TTM sales), continued capex by PSUs (roads, railways, environment and renewables) and capacity enhancement by early-cycle industries such as bearings, abrasives, machine tools and welding consumables, indicating a pick-up in production levels.
Ordering is primarily driven by three areas namely a) PSU-led capex in roads, railways, renewables and environment, b) Opex spends in capacity/efficiency enhancement and digitalisation of factories and c) International orders led by Africa, Latin America and South Asia. We expect margins to remain resilient in 11-12% range as we expect further benefits of operating leverage, rollout of price hikes and lower commodity prices.
Exhibit 13. Sub-segments outlook 2 year sales Sub-segments Outlook Key comments on our Outlook CAGR
Thermal power capacity addition is expected to remain weak in near term, thus ordering is likely to be driven by orders Power Generation -1.1% from FGD and process industries
Revenue growth to continue on back of strong order backlog. There are clear signs of revival in the domestic captive Captive Power 13.3% power market led by industries such as chemicals, food processing, biomass, sugar, cement and steel but order finalisations could be delayed in the coming quarters on back of upcoming elections.
Remain optimistic on ordering for products led by a) higher spends on opex and digitalisation products in sectors where consolidation is underway, b) a good portfolio of products addressing the data centres market, c) increasing railway Power T&D Equipment 11.7% spends, d) smart cities and green corridors and e) export growth. Although order inflows from power-gen and PGCIL are down, it is being compensated by SEB orders but it remains lumpy.
Growth is going to be led by non-T&D segments such as railways, civil construction, water, solar etc. We don’t expect Power T&D EPC 11.7% T&D business to report high growth rates for the next few years and most of it would be driven by international T&D orders.
Industrial Engines demand looks strong led by ordering from rail, marine and defence; domestic power gen segment has Engines 7.3% bottomed out and is expected to grow at 10% led by data centers, commercial realty and manufacturing industries.
Expect strong growth led by auto, industrials and exports along with new product introductions. Railway capex is Bearings 29.3% expected to steer growth.
Auto, specific pockets in construction and mining appear to be slowing down. Industrial demand and service revenue Compressors 16.6% continue to remain buoyant. Overall outlook remains positive.
Weak summer season led to the slowdown but project execution remains strong on back of healthy inflows. Expect low Air-conditioning and coolers 14.0% base and structural factors to drive growth going forward.
Pumps 20.5% Growth is there to stay led by oil & gas, industries, construction, housing, water management and after-market service.
On the demand front, auto is seeing robust demand while general industrials are also doing well and hence strong Abrasives, ceramics and others 13.8% growth is likely to sustain.
Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 12 Industrials 7 December 2018 Industrial Index – Bottom valuations with stout earnings growth
We created a JM Industrials PE index comprising of the key large 15 companies (Exhibit 14) to deep dive into the valuation picture compared to the underlying growth estimates for the next 2 years. We look at the 1-year forward and TTM PE multiples based on weighted average market caps of the company and have excluded BHEL given the severe fluctuations in profitability in specific years.
Valuations have come to 28x 1-year forward and 33x TTM, which is hovering at -1 median standard deviation. Multiple-de rating has largely been contributed by ABB, Siemens and BHE where there have been concerns on order inflows and other structural issues. On the other hand, SKF, Schaeffler and Thermax haven’t seen multiple de-rating.
Exhibit 14. Industrial Index PER charts 1-yr forward multiples at 28x TTM PE multiples at 33x
60.0 70.0 52.8
60.0 50.0 50.7 41.5 50.0 40.0 39.4 33.4 40.0 30.0 30.0 28.1 30.1 27.9 20.0 20.0 22.3 21.8
10.0 10.0
0.0 0.0 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
PE 1 yr Fwd (x) - Wt Avg MC Nifty index Median -1 SD +1 SD PE (x) TTM - Wt Avg MC Nifty index Median -1 SD +1 SD
Source: Bloomberg, Company, JM Financial
Valuations correlate with operating margins: We note that sector valuations have a strong correlation with both aggregate sales as well as operating margins. Divergent trends in CY18 make a strong case for convergence of trends over next 12-18 months. A case in point: During CY08, sector PE multiple declined to -1 standard deviation, but quickly bounced back to +1 standard deviation by CY12 as sales growth improved with stable operating margins profile. Post CY12, we have observed a prolonged slowdown in sales and muted margins which led to the sharp decline in valuation during CY13-17 period. However, we have seen a recovery on both of these parameters during CY18, while valuations continue to remain suppressed. We expect a similar reversal in sector PE valuations (as seen during CY08-12) as net sales growth is likely to sustain on strong order backlog, while improving capacity utilisations and roll out of price hikes are likely to keep margins stable at current levels.
Exhibit 15. Correlation with sales growth and operating margins Correlation with sales growth Correlation with operating margins
1-year fwd PER Median +1 Standard deviation -1 Standard deviation EBTIDAM 1-year fwd PER Median +1 Standard deviation -1 Standard deviation Sales YoY (%)
90.0 15.0 90.0 20 14.0 80.0 80.0
15 13.0 70.0 70.0 12.0 60.0 60.0 10 11.0 50.0 50.0 10.0 40.0 40.0 5 9.0 30.0 30.0 8.0 20.0 0 20.0 7.0 10.0 10.0 6.0 0.0 -5 0.0 5.0 Apr-08 Apr-10 Apr-12 Apr-14 Apr-16 Apr-18 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18 Aug-09 Aug-11 Aug-13 Aug-15 Aug-17 Apr-08 Apr-10 Apr-12 Apr-14 Apr-16 Apr-18 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18 Aug-09 Aug-11 Aug-13 Aug-15 Aug-17 Source: Bloomberg, Company, JM Financial
JM Financial Institutional Securities Limited Page 13 Industrials 7 December 2018
Market capitalisation of these 15 companies have fallen 20% from INR 2.5 trillion to INR 1.97 trillion over 12 months. We note that on an average 10-15% has been contributed by earnings cut for FY19 while the remaining 20-30% has come because of multiple de- rating led by structural negatives and outlook for some companies (Exhibit 17). This reinforces our view on the growth outlook on several companies. Over FY18-21, sales/net profit for these companies is expected to 14%/15% respectively (Exhibit 16).
Exhibit 16. Index weights and sales and profit CAGR Index Weights (%) Sales (INR mn) PAT (INR mn) FY18A FY21E CAGR (%) FY18A FY21E CAGR (%)
ABB India 15% 90,873 1,31,243 13% 4,200 7,659 22% AIA Engineering 8% 24,451 44,387 22% 4,434 7,714 20% Bharat Electronics 11% 1,03,224 1,53,622 14% 13,993 18,045 9% Cochin Shipyard 3% 23,509 42,963 22% 3,926 5,443 12% Cummins India 11% 50,825 71,557 12% 6,647 9,426 12% Kirloskar Oil Engines 2% 28,319 37,518 10% 1,501 2,249 14% Schaeffler India 5% 39,713 59,916 15% 3,896 6,185 17% SKF India 5% 27,504 40,083 13% 2,959 4,775 17% Techno Electric 2% 12,976 15,990 7% 2,079 2,709 9% Thermax 6% 44,649 72,994 18% 2,321 4,999 29% Timken India 2% 12,340 22,327 22% 920 2,036 30% Voltas 9% 63,568 94,536 14% 5,720 7,999 12% Kalpataru Power Transmission* 3% 87,044 1,26,646 13% 2,807 5,623 26% KEC International* 4% 1,00,580 1,49,931 14% 4,604 7,347 17% Siemens* 16% 1,23,640 1,72,805 12% 9,012 13,012 13% Total 8,33,215 12,36,517 14.1% 69,018 1,05,221 15.1%
Source: Company, JM Financial Note: * indicates Bloomberg estimates
Exhibit 17. Multiple de-rating vs earnings cut 1 year Price Multiple de- Companies Earnings Revision Reasons for multiple de-rating/re-rating correction rating Cochin Shipyard -34% 6% -39% Forex fluctuation is likely to distort margins in ASW corvette order, where it is L1 Bharat Electronics -52% -14% -39% Benchmark margins in nominated orders in defence lowered to 7.5% Timken India -39% -4% -36% Growth estimates tempered down post completion of ABC Bearings acquisition KEC International -14% 10% -24% Concerns on order Inflows Techno Electric -34% -10% -24% Order inflow guidance reduced ; OB back to 2015 levels Kirloskar Oil Engines -41% -20% -21% Investment of surplus cash in NBFC Kalpataru Power -20% -3% -17% Concerns on order Inflows SKF India 10% 12% -3% Strong growth and buoyant outlook Voltas -16% -13% -3% Market share gains and consumer durables foray Schaeffler India 6% -1% 6% Strong growth and addition of non-bearings transmission portfolio Cummins India -8% -17% 9% Recovery in exports; Management revised guidance upwards Thermax -5% -15% 10% Order inflow momentum remains strong 1HFY19 AIA Engineering 12% -4% 15% Depreciating INR and less liquidity helped multiples to re-rate ABB India -1% -18% 17% Order inflows are strong while margins remain robust; valuations stand at 10-year low Siemens -25% -11% -14% Strong order inflows Source: Bloomberg, Company, JM Financial
JM Financial Institutional Securities Limited Page 14 Industrials 7 December 2018 What surprised the street?
Higher number of companies reported a beat/in-line with estimates: Net sales for 19 of 22 companies were in line with or beat estimates, which on average is very strong after almost 10 quarters. While revenue surprises were scattered across industries, misses leaned towards the power generation and power T&D as margin expectations were higher. Most of the product companies reported in-line revenues. 8 of 22 companies reported a beat in net profit estimates while 6 companies reported in-line profits and 8 companies missed net profit estimates. Misses in profits were largely because of lower gross margins and one offs due to higher commodity prices and INR depreciation.
Exhibit 18. Sales and net profit beat/misses Sales (INR mn) PAT (INR mn)
Expected Actual Deviation (%) Expected Actual Deviation (%) Beat Beat Engineers India 5,568 6,814 22.4 ABB 812 1,083 33.5 Thermax 11,881 14,276 20.2 Cummins 1,688 2,116 25.3 Voltas 11,831 14,147 19.6 NRB Bearings 235 291 23.8 ABB 21,762 25,154 15.6 Kalpataru Power 788 914 16.0 Cummins 12,905 14,869 15.2 Siemens 2,541 2,792 9.9 Kalpataru Power 14,034 15,741 12.2 Greaves Cotton 454 494 8.8 Voltamp 1,751 1,890 8.0 Voltas 954 1,035 8.4 Siemens 35,215 38,020 8.0 AIA Engineering 1,117 1,210 8.3 Timken India 3,877 4,138 6.7 In-line Blue Star 9,773 10,322 5.6 Bharat Electronics 5,527 5,713 3.4 Bharat Electronics 32,057 33,814 5.5 Blue Star 258 266 3.1 In-line Engineers India 957 978 2.2 GE T&D 9,465 9,933 4.9 Kirloskar Oil Engines 407 412 1.3 NRB Bearings 2,405 2,510 4.4 Thermax 748 745 -0.3 Kirloskar Oil Engines 7,437 7,620 2.5 KEC International 999 963 -3.6 Greaves Cotton 4,888 4,951 1.3 Miss AIA Engineering 7,269 7,269 0.0 SKF India 888 843 -5.1 KEC International 24,232 24,085 -0.6 Timken India 366 346 -5.5 SKF India 7,818 7,660 -2.0 GE T&D 553 515 -6.9 Carborundum Universal 6,704 6,509 -2.9 Carborundum Universal 697 648 -7.0 Miss Techno Electric 588 536 -8.9 Triveni Turbines 2,302 2,168 -5.8 Voltamp 175 154 -11.7 BHEL 78,313 67,799 -13.4 Triveni Turbines 323 274 -15.1 Techno Electric 2,791 2,293 -17.8 BHEL 3,291 1,852 -43.7 Source: Bloomberg, Company, JM Financial
Exhibit 19. Net sales estimate trend analysis
Beat In-line Miss 100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0% 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19
Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 15 Industrials 7 December 2018 Investment cycle at decade low – private capex quiet
New investments planned at decade low: New investments announced in FY18 were at INR 11.5 trillion which are at a decade low. During our study of the investments planned, we understand that during FY14-18, new investments from the manufacturing and service sector have remained fairly stable but investments from the core sectors have halved (Exhibit 20). We believe metals & mining, electricity generation, and real estate which were key drivers of previous capex cycle are now stuck with large amount of unproductive assets in the form of stalled and under-implementation projects.
Exhibit 20. New Investments planned New Investments as a % of GDP at 13 year low New investments planned across sectors
New investments (%) of constant GDP FY03-08 FY09-14 FY14-18 50%
45% 45 42 39% 38% 40% 36% 40 34 34 35% 31% 31% 35 31 30 30 30% 30 25% 23% 20% 25 19% 18% 20 21 20% 18 14% 20 15% 12% 12% trillionINR 10% 9% 15 10% 10 5% 5 0% 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Manufacturing sector Services Core Industries
Source: Industry
Govt investments drive ordering as private capex muted: Overall, new private investments de-grew 37% and 9% in FY18 and FY17. On an average, private investments have almost halved to INR 6.7 trillion during FY12-18 compared to INR 12 trillion during FY05- 11 as there were adequate capacities to cater to demand and higher share of stalled projects. Private sector capex over FY13-18 has reported -1% CAGR while PSU/Govt investments over the same period have reported 7% CAGR led by spends on railways, roads, defence and environment. Hence the share of public sector investment continues to be on the up-trend and constitutes 55%.
Exhibit 21. Private and Government capex Private capex continues to remain muted since 7 years Share of public sector grows led by roads, railways, defence and environment
60% Private Inv YoY Govt Inv YoY Pvt sector share (%) Public sector share (%) 65% 50%
40% 52%
30% 39% 20%
10% 26% 0%
-10% 13%
-20% 0% Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Sep 18 Sep May 09 May 10 May 11 May 12 May 13 May 14 May 15 May 16 May 17 May 18 May Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
Source: Industry
JM Financial Institutional Securities Limited Page 16 Industrials 7 December 2018
Engineering exports: Engineering exports saw a moderate increase of 7.4% in 2QFY19, whereas imports grew 21.2% for the same period, thus increasing the gap to 22% (highest in the past 6 quarters). Imports saw the highest growth in the past 10 quarters led by iron and steel products (+9%), ferrous and non-ferrous products (+28%), machine tools (+45%), non-electric machinery (+23%) and electric machinery (+40%).
Exhibit 22. Engineering exports and imports
10,000 Exports (US$mn) Imports (US$mn)
9,000
8,000
7,000
6,000
5,000
4,000
3,000 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Oct-12 Feb-13 Oct-13 Feb-14 Oct-14 Feb-15 Oct-15 Feb-16 Oct-16 Feb-17 Oct-17 Feb-18 Oct-18 Source: Industry, Company, JM Financial
Capital goods index: The capital goods index grew 5.2% YoY in 2QFY19, sustaining average growth of +5% for the 4th quarter. The growth was primarily led by sales of boilers, steel vessels, transformers, welding machinery, hydraulic equipment, machine tools, sugar machinery, paper machinery, printing machinery and ship building parts. Agri tractors and harvesters/threshers have grown in double digits. Road infrastructure driven items such as construction equipment, dumpers, loaders and commercial vehicles have continued double-digit growth for the 3rd quarter. Railway coaches, wagons and locomotives witnessed 37%, 57% and 29% YoY growth respectively.
Exhibit 23. IIP and capital goods index
IIP YoY (%) Capital Goods YoY (%) 20.0
15.0
10.0
5.0
0.0 Jul-15 Jul-16 Jul-17 Jul-18 Jan-15 Jan-16 Jan-17 Jan-18 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Nov-14 Nov-15 Nov-16 Nov-17 Mar-15 Mar-16 Mar-17 Mar-18 -5.0 May-15 May-16 May-17 May-18
-10.0
-15.0
Source: Industry, Company, JM Financial
JM Financial Institutional Securities Limited Page 17 Industrials 7 December 2018 Peer Valuations
Exhibit 24. JM Financial industrials universe Rating Target Price Upside (%) M Cap EPS CAGR (%) PE (x) PBV (x) RoE (%) EV/EBITDA (x) INR INR bn FY18-20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E
ABB India Buy 1,450 5% 292 26.4 58.4 43.6 7.3 6.4 13.2 15.7 32.7 25.3 AIA Engineering Hold 1,475 -12% 158 18.3 31.3 25.4 4.6 4.1 15.7 17.1 23.9 18.6 Bharat Electronics Buy 110 34% 200 9.8 12.9 11.8 2.3 2.0 18.7 18.2 8.0 7.0 BHEL Sell 64 -4% 242 18.4 21.0 15.6 0.7 0.7 3.5 4.7 10.4 7.0 GE T&D Sell 220 -4% 58 -14.7 28.5 30.6 4.4 4.1 16.3 13.9 14.9 14.9 Cochin Shipyard Buy 670 79% 51 10.4 11.5 10.6 1.5 1.4 13.2 13.3 4.1 4.5 Cummins India Buy 920 18% 217 11.7 28.6 26.2 5.1 4.8 18.4 18.9 23.8 21.2 Kirloskar Oil Engines Hold 270 40% 28 17.2 14.9 13.5 1.6 1.6 11.2 11.8 9.2 8.1 Schaeffler India Hold 5,000 -8% 169 49.2 36.3 32.0 6.2 5.3 21.1 17.9 20.6 17.6 SKF India Buy 2,150 13% 98 17.1 28.2 24.1 4.7 4.1 17.6 18.0 17.9 15.0 Techno Electric Hold 325 25% 30 8.8 13.0 12.1 2.1 1.8 17.1 16.0 9.1 8.2 Thermax Hold 930 -16% 132 31.9 43.6 32.7 4.5 4.1 10.8 13.1 29.9 22.1 Timken India Buy 675 34% 38 36.1 27.4 22.2 2.9 2.6 12.8 12.4 14.1 12.0 Voltas Buy 630 18% 177 8.1 31.4 26.4 4.1 3.6 13.7 14.5 29.0 23.2 Source: Company, JM Financial
Exhibit 25. Uncovered company valuations CMP Mcap EV/EBITDA (x) P/E (x) EPS CAGR % P/BV (x)
INR INR bn FY18 FY19E FY20E FY18 FY19E FY20E FY18-20E FY18 FY19E FY20E
Product Companies
Greaves Cotton 122 30 11.0 9.8 8.8 14.7 15.9 13.9 2.8 3.1 2.9 2.7 NRB Bearings 186 18 11.7 10.8 9.1 19.9 17.5 15.1 14.8 4.8 3.9 3.3 Elgi Equipment 228 36 20.9 19.3 15.2 37.9 34.3 25.3 22.4 5.2 4.7 4.0 Kirloskar Pneumatic 152 10 13.6 9.2 7.3 18.1 16.1 12.9 22.0 2.3 2.0 1.8 Blue Star 640 62 19.7 19.8 16.0 41.0 36.2 27.7 21.6 7.7 6.7 6.1 Kirloskar Brothers 163 13 10.2 7.6 5.7 26.1 13.9 8.9 71.5 1.4 NM NM KSB Pumps 780 27 24.4 21.0 17.0 38.3 33.8 28.9 15.1 3.8 3.7 3.4 Carborundum Universal 346 65 15.0 13.5 11.6 30.3 24.3 20.1 22.9 4.2 3.7 3.3 Grindwell Norton 486 54 18.5 17.7 15.4 35.9 30.7 26.5 16.4 5.4 5.1 4.6 Honeywell Automation 22,684 201 44.6 41.2 33.3 80.3 58.4 47.3 30.4 14.1 11.4 9.3 Kennametal 962 21 20.1 15.9 14.0 40.4 29.9 26.0 24.7 4.8 4.1 3.6 Average 19.1 16.9 14.0 34.8 28.3 23.0 24.1 5.2 4.8 4.2
Project Companies
Siemens 923 329 22.0 20.2 18.0 36.5 32.7 29.2 11.8 7.9 3.7 3.4 Kalpataru Power 356 55 5.8 6.8 6.0 18.2 13.0 10.9 23.8 1.9 1.7 1.4 KEC International 278 71 9.2 8.5 7.3 15.5 13.7 11.3 17.2 3.6 2.9 2.4 Average 12.3 11.8 10.4 23.4 19.8 17.1 17.6 4.5 2.7 2.4
Source: Bloomberg
JM Financial Institutional Securities Limited Page 18 7 December 2018 India | Industrials | Company Update
SKF India | BUY
Building capacity and filling gaps to drive growth
SKF India (SKF) is operating at 100% capacity during past quarter as a sharp uptick in growth Sandeep Tulsiyan [email protected] | Tel: (91 22) 66303085 across both verticals (automotive and industrial) has led to jump in sales. The company is currently in capex mode and is looking to double its annual capex over next 2 years, which is likely to yield 25-30% additional capacity, in our view. During the past 3 years, the company has introduced several new products to stem product gaps like a) hub-3 bearings for PVs where production is slated to commence from 4QFY19, b) pinion bearings in CVs where it holds a lower share and c) freight wagon bearings (now eligible to bid for 100% of tendered quantity by IR vs. restriction of 25% earlier). We expect EBITDA margins to expand 100bps to
17% in FY21 led by new initiatives to improve cost efficiencies and lower commodity prices.
We believe the valuation discount of 25% to Schaeffler India (SCHFL) should reduce and Recommendation and Price Target target multiples would coincide growth profile is similar, while RoE/RoIC and cash flow Current Reco. BUY generation is superior due to initiation of cash back. We maintain BUY with TP of INR 2,150. Previous Reco. BUY Current Price Target (12M) 2,150 Inroads in railways and new products to drive growth: SKF is set to increase its market Upside/(Downside) 15.4% share over the next 3 years through various steps including starting to manufacture a) Previous Price Target 2,150 hub-3 bearings for PVs, b) pinion bearings in CVs and c) freight wagon bearings (now Change 0%
eligible to bid for 100% of tendered quantity by IR vs. restriction of 25% earlier). It would Key Data – SKF IN also be a beneficiary of the migration to Class ‘K’ bearings by Indian Railways as it puts all Current Market Price INR1,863 players on equal footing, given there is no criteria of past track record in new range of Market cap (bn) INR95.7/US$1.4 bearings. It envisages a huge opportunity from railways, which contributes 7-8% to SKF’s Free Float 48% sales currently, led by the new-generation Class ‘K’ bearings for DFC. Shares in issue (mn) 51.3 Diluted share (mn) 51.3 New initiatives to improve cost efficiencies and lower commodity prices to help margin 3-mon avg daily val (mn) INR25.0/US$0.4 expansion: The company had set up an India Distribution Centre (IDC), which has resulted 52-week range 2,010/1,600 in reducing lead time for its industrial bearings from 4-6 weeks to 2-6 days currently. This Sensex/Nifty 35,717/10,729 INR/US$ 70.6 has made its products more competitive from freight costs savings. It has set up a Remote Diagnostic Centre (RDC) where it is currently monitoring bearings in more than 50,000 Price Performance shafts in various locations, which should help in early assessment of potential faults and % 1M 6M 12M allow timely delivery of critical bearings. This will help to reduce inventory, price products Absolute 4.5 6.2 9.6 Relative* -2.4 4.6 3.2 competitively and secure repeat orders. Easing commodity prices (down 10-15%) and * To the BSE Sensex cost saving measures to drive EBITDA margin expansions by 100bps to 17% in FY21.
Valuation discount of 25% to SCHFL will reduce: Currently, SKF trades at a 25% valuation discount to SCHFL that is unlikely to sustain and target multiples should coincide as a) forecasted EBITDA CAGR over FY18-21 is similar for both companies at around 15%, b) SKF’s RoE remains similar but RoIC profile now supersedes SCHFL’s as excess cash balance is paid out in form of buybacks, c) superior cash flow generation as cash flow yield ranges in the 3-3.5% range for SKF vs. 2.5-3% for SCHFL and d) higher share of operational income at 83% vs. 75% for SCHFL.
Maintain BUY with TP of INR2,150: We forecast sales/net profit CAGR of 13%/17% over FY18-21E and maintain BUY with revised TP of INR 2,150. Key risks: USD appreciation and steel price increase.
Financial Summary (INR mn) Y/E March FY17A FY18A FY19E FY20E FY21E Net Sales 26,006 27,142 31,229 35,376 40,083 Sales Growth (%) -12.0 4.4 15.1 13.3 13.3 EBITDA 3,361 4,348 4,983 5,825 6,826 EBITDA Margin (%) 12.8 15.8 16.0 16.5 17.0 JM Financial Research is also available on: Adjusted Net Profit 2,439 2,959 3,464 4,055 4,775 Bloomberg - JMFR
JM Financial Institutional Securities Limited SKF India 7 December 2018
Financial Tables (Standalone)
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E Net Sales 26,006 27,142 31,229 35,376 40,083 Shareholders’ Fund 18,112 18,373 20,971 24,037 27,821 Sales Growth -12.0% 4.4% 15.1% 13.3% 13.3% Share Capital 527 513 513 513 513 Other Operating Income 308 362 0 0 0 Reserves & Surplus 17,585 17,860 20,457 23,523 27,308 Total Revenue 26,314 27,504 31,229 35,376 40,083 Preference Share Capital 0 0 0 0 0 Cost of Goods Sold/Op. Exp 16,252 16,068 18,269 20,695 23,248 Minority Interest 0 0 0 0 0 Personnel Cost 2,222 2,368 2,512 2,665 2,994 Total Loans 340 850 0 0 0 Other Expenses 4,479 4,720 5,465 6,191 7,015 Def. Tax Liab. / Assets (-) -115 -175 -175 -175 -175 EBITDA 3,361 4,348 4,983 5,825 6,826 Total - Equity & Liab. 18,337 19,048 20,796 23,861 27,646 EBITDA Margin 12.8% 15.8% 16.0% 16.5% 17.0% Net Fixed Assets 3,341 3,300 3,459 4,117 4,694 EBITDA Growth -7.0% 29.4% 14.6% 16.9% 17.2% Gross Fixed Assets 4,255 4,619 5,619 6,819 8,019 Depn. & Amort. 479 457 471 542 623 Intangible Assets 0 0 0 0 0 EBIT 2,882 3,891 4,512 5,284 6,203 Less: Depn. & Amort. 1,267 1,689 2,160 2,702 3,325 Other Income 873 714 897 1,046 1,242 Capital WIP 352 371 0 0 0 Finance Cost 0 50 80 90 100 Investments 1,488 1,535 1,535 1,535 1,535 PBT before Excep. & Forex 3,756 4,555 5,329 6,239 7,346 Current Assets 18,096 19,428 21,363 24,509 28,555 Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 4,166 4,029 4,278 4,846 5,491 PBT 3,756 4,555 5,329 6,239 7,346 Sundry Debtors 5,143 4,908 5,561 6,300 7,138 Taxes 1,317 1,596 1,865 2,184 2,571 Cash & Bank Balances 5,915 7,426 8,530 10,456 12,632 Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 2,872 3,065 2,995 2,908 3,294 Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 0 0 0 0 0 Reported Net Profit 2,439 2,959 3,464 4,055 4,775 Current Liab. & Prov. 4,588 5,215 5,561 6,300 7,138 Adjusted Net Profit 2,439 2,959 3,464 4,055 4,775 Current Liabilities 3,040 3,897 3,850 4,361 4,942 Net Margin 9.3% 10.8% 11.1% 11.5% 11.9% Provisions & Others 1,548 1,318 1,711 1,938 2,196 Diluted Share Cap. (mn) 52.7 51.3 51.3 51.3 51.3 Net Current Assets 13,508 14,213 15,802 18,210 21,417 Diluted EPS (INR) 46.2 57.6 67.5 79.0 93.0 Total – Assets 18,337 19,048 20,796 23,862 27,646 Diluted EPS Growth -4.7% 24.6% 17.1% 17.1% 17.7% Source: Company, JM Financial Total Dividend + Tax 952 618 866 990 990 Dividend Per Share (INR) 15.0 10.0 14.0 16.0 16.0 Source: Company, JM Financial
Cash Flow Statement (INR mn) Dupont Analysis Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E Profit before Tax 3,756 4,555 5,329 6,239 7,346 Net Margin 9.3% 10.8% 11.1% 11.5% 11.9% Depn. & Amort. 461 423 471 542 623 Asset Turnover (x) 1.5 1.5 1.6 1.6 1.6 Net Interest Exp. / Inc. (-) 0 0 0 0 0 Leverage Factor (x) 1.0 1.0 1.0 1.0 1.0 Inc (-) / Dec in WCap. -644 807 -486 -481 -1,032 Others 0 0 0 0 0 RoE 14.0% 16.2% 17.6% 18.0% 18.4%
Taxes Paid -1,346 -1,656 -1,865 -2,184 -2,571 Operating Cash Flow 2,226 4,129 3,449 4,116 4,366 Key Ratios Capex -514 -382 -629 -1,200 -1,200 Y/E March FY17A FY18A FY19E FY20E FY21E Free Cash Flow 1,712 3,747 2,819 2,916 3,166 BV/Share (INR) 343.5 357.9 408.5 468.2 541.9 Inc (-) / Dec in Investments -1,488 -47 0 0 0 ROIC 18.8% 27.6% 32.4% 34.5% 35.6% Others 0 0 0 0 0 ROE 14.0% 16.2% 17.6% 18.0% 18.4% Investing Cash Flow -2,003 -429 -629 -1,200 -1,200 Net Debt/Equity (x) -0.4 -0.4 -0.5 -0.5 -0.5 Inc / Dec (-) in Capital 0 -2,092 0 0 0 P/E (x) 40.3 32.3 27.6 23.6 20.0 Dividend + Tax thereon -952 -618 -866 -990 -990 P/B (x) 5.4 5.2 4.6 4.0 3.4 Inc / Dec (-) in Loans -310 510 -850 0 0 EV/EBITDA (x) 26.2 20.0 17.0 14.3 11.8 Others -20 12 0 0 0 EV/Sales (x) 3.3 3.2 2.7 2.3 2.0 Financing Cash Flow -1,282 -2,188 -1,716 -990 -990 Debtor days 71 65 65 65 65 Inc / Dec (-) in Cash -1,059 1,512 1,103 1,926 2,176 Inventory days 58 53 50 50 50 Opening Cash Balance 6,973 5,915 7,426 8,530 10,456 Creditor days 48 61 54 54 54 Closing Cash Balance 5,914 7,426 8,530 10,456 12,632 Source: Company, JM Financial Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 20 SKF India 7 December 2018
History of Earnings Estimate and Target Price Recommendation History Date Recommendation Target Price % Chg.
16-Feb-16 Hold 1,300
17-Feb-16 Hold 1,300 0.0
12-May-16 Hold 1,300 0.0
14-Jun-16 Hold 1,300 0.0
22-Jul-16 Hold 1,350 3.8
27-Oct-16 Hold 1,350 0.0
15-Feb-17 Hold 1,500 11.1
30-May-17 Hold 1,500 0.0
10-Jul-17 Hold 1,500 0.0
1-Aug-17 Hold 1,500 0.0
30-Oct-17 Hold 1,570 4.7
14-Feb-18 Hold 1,730 10.2
9-May-18 Hold 1,780 2.9
25-Oct-18 Buy 2,150 20.8
JM Financial Institutional Securities Limited Page 21 7 December 2018 India | Industrials | Company Update
Voltas | BUY
Dark clouds drifted away; bright sunshine ahead
Room AC industry is witnessing rough weather as incessant weather patterns disrupted Sandeep Tulsiyan [email protected] | Tel: (91 22) 66303085 summer season sales in 2018 and led to burgeoning of channel inventory. Additionally, rising commodity prices, depreciating INR vs. USD and increase in import duties escalated input costs. However, Voltas weather this period better than peers as it grew by 9% vs 6% industry decline and ramped up its market share to 25.5% vs 22% at FY18-end. Also, the projects segment witnessed a sharp bounce back in sales at 45% YoY in 1HFY19, despite which order book remained largely stable at INR 49bn (1.4x TTM sales). Channel pumping for Voltbek products have commenced in 2QFY19 and our initial channel checks indicate that the brand is placed at par or slight premium to the market leader in each category, but offered more features. While Voltbek is likely to report minor losses in initial phase, we Recommendation and Price Target remain positive on long term growth as we expect the company to gain 5% market share in Current Reco. BUY first 5 years (by FY23) in key categories like refrigerators and washing machines. Balance Previous Reco. BUY sheet remains strong with net cash of more than INR 20bn. Maintain BUY, TP of INR 630. Current Price Target (12M) 630 Upside/(Downside) 17.3% Room AC industry sales to recover in 2019: The room AC industry witnessed a 6% Previous Price Target 630 degrowth in 1HFY19 as adverse weather (unseasonal rains) resulted in weak sales during Change 0.0%
the summer season, which account for 70% of annual sales. This resulted in built up of Key Data – VOLT IN inventory and price competition amongst players, thus resulting in margin pressure. Current Market Price INR537 However, Voltas weathered it better than peers as it increased its market share to 25.5% Market cap (bn) INR177.8/US$2.5 vs 22% at end-FY18. Operating margins in UCP segment fell 280bps to 10.8% in Free Float 63% 1HFY19, but are much above peers. Shares in issue (mn) 330.9 Diluted share (mn) 330.9 Voltbek- Cherry on the cake: Voltas has commenced pumping of channel inventory 3-mon avg daily val (mn) INR752.0/US$10.6 through Voltbek (49% owned JV) and expects to clock sales of INR 1.7-1.8bn in FY19. 52-week range 675/471 Sensex/Nifty 35,312/10,601 Our channel checks indicate that the brand is priced at par or at a slight premium to INR/US$ 70.9 market leader in respective categories, but offers superior features. We are confident that the company is likely to garner 5% market share in first five years of operations (by FY23) Price Performance in key categories of washing machines and refiregerators, given its distribution network % 1M 6M 12M and brand strength. Strategically, this move will set Voltas on a strong growth trajectory Absolute 2.6 1.3 -10.4 Relative* 1.7 0.9 -17.3 and yield multiple benefits like a) outpacing its competitors in terms of growth, b) * To the BSE Sensex providing a technological edge through support of Arcelik’s global R&D strength and c) lowering its cost of production as it can leverage on Arcelik’s sourcing.
Higher share of domestic orders to ensure steady execution: The projects segment witnessed a sharp bounce back in sales at 45% YoY in 1HFY19, despite which order book remained largely stable at INR 49bn (1.4x TTM sales). We expect EMP revenues to grow at 15% CAGR over FY18-21 with margins around 8%.
Sturdy financials: We expect consolidated revenues/profits to grow at 14%/12% CAGR over FY18-21. Despite declining margins, we believe RoE of 14-15% is likely to be maintained and cumulative FCF of INR 9bn over FY19-21 is likely to be generated. We maintain BUY with TP of INR 630.
Financial Summary (INR mn) Y/E March FY17A FY18A FY19E FY20E FY21E Net Sales 59,706 63,568 72,270 82,583 94,536 Sales Growth (%) 4.9 6.5 13.7 14.3 14.5 EBITDA 5,046 6,151 6,104 7,524 9,182 EBITDA Margin (%) 8.5 9.7 8.4 9.1 9.7 JM Financial Research is also available on: Adjusted Net Profit 5,166 5,720 5,631 6,681 7,999 Bloomberg - JMFR
JM Financial Institutional Securities Limited Voltas 7 December 2018
Financial Tables (Consolidated)
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E Net Sales 59,706 63,568 72,270 82,583 94,536 Shareholders’ Fund 33,066 39,052 43,412 48,703 55,113 Sales Growth 4.9% 6.5% 13.7% 14.3% 14.5% Share Capital 331 331 331 331 331 Other Operating Income 0 0 0 0 0 Reserves & Surplus 32,735 38,721 43,081 48,372 54,782 Total Revenue 59,706 63,568 72,270 82,583 94,536 Preference Share Capital 0 0 0 0 0 Cost of Goods Sold/Op. Exp 42,359 45,675 52,034 59,460 68,066 Minority Interest 285 317 317 317 317 Personnel Cost 6,184 5,867 6,161 6,592 7,053 Total Loans 1,709 1,423 5,423 5,423 5,423 Other Expenses 6,116 5,875 7,971 9,007 10,234 Def. Tax Liab. / Assets (-) -198 -46 -46 -46 -46 EBITDA 5,046 6,151 6,104 7,524 9,182 Total - Equity & Liab. 34,863 40,746 49,106 54,397 60,807 EBITDA Margin 8.5% 9.7% 8.4% 9.1% 9.7% Net Fixed Assets 3,004 3,012 3,016 3,244 3,452 EBITDA Growth 24.3% 21.9% -0.8% 23.3% 22.0% Gross Fixed Assets 5,165 5,262 5,562 6,062 6,562 Depn. & Amort. 244 244 256 272 292 Intangible Assets 723 723 723 723 723 EBIT 4,802 5,907 5,849 7,252 8,890 Less: Depn. & Amort. 2,889 3,013 3,269 3,541 3,833 Other Income 2,743 2,217 2,420 2,656 2,902 Capital WIP 6 41 0 0 0 Finance Cost 160 119 240 380 380 Investments 22,679 27,536 27,536 27,536 27,536 PBT before Excep. & Forex 7,384 8,005 8,029 9,529 11,412 Current Assets 38,807 42,370 54,744 64,653 76,400 Excep. & Forex Inc./Loss(-) 11 6 0 0 0 Inventories 9,070 8,130 10,890 12,444 14,245 PBT 7,395 8,011 8,029 9,529 11,412 Sundry Debtors 14,541 15,703 17,820 20,363 23,310 Taxes 2,004 2,270 2,409 2,859 3,424 Cash & Bank Balances 3,314 2,837 5,047 7,863 11,649 Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 935 1,218 1,188 1,358 1,295 Assoc. Profit/Min. Int.(-) 217 17 -10 -10 -10 Other Current Assets 10,947 14,482 19,800 22,626 25,900 Reported Net Profit 5,174 5,724 5,631 6,681 7,999 Current Liab. & Prov. 29,628 32,172 36,190 41,036 46,580 Adjusted Net Profit 5,166 5,720 5,631 6,681 7,999 Current Liabilities 19,946 21,764 22,810 26,065 29,837 Net Margin 8.7% 9.0% 7.8% 8.1% 8.5% Provisions & Others 9,682 10,408 13,381 14,971 16,743 Diluted Share Cap. (mn) 330.9 330.9 330.9 330.9 330.9 Net Current Assets 9,180 10,198 18,554 23,617 29,819 Diluted EPS (INR) 15.6 17.3 17.0 20.2 24.2 Total – Assets 34,863 40,746 49,106 54,397 60,807 Diluted EPS Growth 40.8% 10.7% -1.6% 18.6% 19.7% Source: Company, JM Financial Total Dividend + Tax 1,020 1,394 1,271 1,390 1,588 Dividend Per Share (INR) 2.6 3.5 3.2 3.5 4.0 Source: Company, JM Financial
Cash Flow Statement (INR mn) Dupont Analysis Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E Profit before Tax 7,384 8,005 8,029 9,529 11,412 Net Margin 8.7% 9.0% 7.8% 8.1% 8.5% Depn. & Amort. -1 124 256 272 292 Asset Turnover (x) 1.8 1.7 1.6 1.6 1.6 Net Interest Exp. / Inc. (-) 0 0 0 0 0 Leverage Factor (x) 1.1 1.1 1.1 1.1 1.1 Inc (-) / Dec in WCap. 533 -1,496 -6,146 -2,246 -2,416 Others -206 -11 10 10 10 RoE 16.9% 15.9% 13.7% 14.5% 15.4%
Taxes Paid -1,891 -2,118 -2,409 -2,859 -3,424 Operating Cash Flow 5,818 4,504 -260 4,706 5,875 Key Ratios Capex 60 -132 -259 -500 -500 Y/E March FY17A FY18A FY19E FY20E FY21E Free Cash Flow 5,878 4,372 -519 4,206 5,375 BV/Share (INR) 99.9 118.0 131.2 147.2 166.6 Inc (-) / Dec in Investments -3,221 -4,857 0 0 0 ROIC 37.2% 43.4% 30.3% 28.5% 30.6% Others 0 0 0 0 0 ROE 16.9% 15.9% 13.7% 14.5% 15.4% Investing Cash Flow -3,160 -4,989 -259 -500 -500 Net Debt/Equity (x) -0.7 -0.7 -0.6 -0.6 -0.6 Inc / Dec (-) in Capital 0 0 0 0 0 P/E (x) 34.4 31.1 31.6 26.6 22.2 Dividend + Tax thereon -1,020 -1,394 -1,271 -1,390 -1,588 P/B (x) 5.4 4.5 4.1 3.6 3.2 Inc / Dec (-) in Loans -998 -287 4,000 0 0 EV/EBITDA (x) 30.5 24.2 24.7 19.7 15.7 Others 820 1,688 0 0 0 EV/Sales (x) 2.6 2.3 2.1 1.8 1.5 Financing Cash Flow -1,198 8 2,729 -1,390 -1,588 Debtor days 89 90 90 90 90 Inc / Dec (-) in Cash 1,460 -477 2,210 2,816 3,787 Inventory days 55 47 55 55 55 Opening Cash Balance 1,855 3,314 2,837 5,047 7,863 Creditor days 133 138 126 127 128 Closing Cash Balance 3,315 2,837 5,047 7,863 11,649 Source: Company, JM Financial Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 23 Voltas 7 December 2018
History of Earnings Estimate and Target Price Recommendation History Date Recommendation Target Price % Chg.
16-Feb-16 Buy 325
17-Feb-16 Buy 325 0.0
19-May-16 Buy 360 10.8
4-Aug-16 Buy 385 6.9
21-Nov-16 Buy 340 -11.7
24-Jan-17 Hold 340 0.0
17-Feb-17 Hold 355 4.4
20-Jun-17 Hold 485 36.6
4-Aug-17 Hold 485 0.0
14-Sep-17 Hold 500 3.1
10-Nov-17 Hold 500 0.0
13-Feb-18 Buy 700 40.0
11-May-18 Buy 700 0.0
17-May-18 Buy 680 -2.9
19-Jun-18 Buy 680 0.0
5-Jul-18 Buy 680 0.0
10-Aug-18 Buy 705 3.7
11-Oct-18 Buy 705 0.0
6-Nov-18 Buy 630 -10.6
JM Financial Institutional Securities Limited Page 24 7 December 2018 India | Industrials | Company Update
Kirloskar Oil Engines | BUY
Valuation discount unwarranted
Kirloskar Oil Engines (KOEL) is witnessing an improvement its financials over the past 3 Sandeep Tulsiyan [email protected] | Tel: (91 22) 66303085 quarters through market share gains in HHP segment (captured 10% market share in 24 months), power tillers (release of subsidy in several states) and a turnaround in its newly acquired subsidiary La-Gajjar Machineries (LGM). The company continues to tread on its strategy to launch new products in each of its verticals to fill product gaps in areas of data centres, railways, firefighting and farm mechanisation. It is the second largest diesel generator set manufacturer in India with c.24% market share and we believe it is likely to outpace the market growth over next 2-3 years through market share gains.The industrial engines business has recorded continued healthy growth, which KOEL aims to accelerate through new products such as fishing trawlers and firefighting engines. After a slowdown in Recommendation and Price Target the agri-business post GST, KOEL aims for robust growth by venturing into the electric pump Current Reco. BUY set market through the acquisition of La-Gajjar Machines (LGM) and new product launches in Previous Reco. BUY the farm mechanisation space such as power weeders. The stock price has seen a 58% Current Price Target (12M) 270 Upside/(Downside) 40.2% correction from its peak and is trading at 13.5x 1-year forward PE (35% discount to its Previous Price Target 270 median multiple and 50% discount to Cummins), which we believe presents a great Change 0.0% opportunity. We recommend BUY as we forecast sales/net profit CAGR of 11%/16% over FY19-21. Cash balance stood at INR 56/share at end-2QFY19 (30% of mkt cap). Key Data – KOEL IN Current Market Price INR193 Improving growth through entry in the high kVA segment: KOEL entered the high KVA Market cap (bn) INR27.8/US$0.4 segment (750kVA+) 2 years ago and has been able to garner 10% market share in this Free Float 35% space as the product is well accepted in commercial real estate and metro rail segments. Shares in issue (mn) 144.6 With focus now on the data centre market, the company aims to reach a 20% market Diluted share (mn) 144.6 3-mon avg daily val (mn) INR9.1/US$0.1 share in this segment over the next 2 years. We understand that the domestic power-gen 52-week range 454/192 market is set to grow 8-10% in FY19 with price hikes of 2-3% being implemented in 3Q, Sensex/Nifty 35,312/10,601 which affirms our view on KOEL gaining market share. INR/US$ 70.9
Entry in electric pump set counters decline in its traditional diesel pump set business: Price Performance While improving power connectivity is disrupting the traditional diesel pump set market, % 1M 6M 12M KOEL is countering it through the acquisition of LGM, a leading electric pumps player in Absolute -12.4 -35.3 -46.3 Relative* -13.2 -35.5 -50.5 northern India. The company has also launched products in the farm mechanisation space * To the BSE Sensex such as power tillers and power weeders, sales of which have been growing well to counter the decline in its diesel pump set business.
Low capex requirement and high RoIC: After consolidation, RoEs have fallen to single digits (9% in FY18), but inherent RoICs remain healthy at 15% (despite a loss in the newly-acquired LGM entity). As one-time expenses reduce at LGM (related to write-offs in LGM accounts), we expect RoEs to rise to high teens. Free cash flow generation continues to remain robust due to tight control over NWC and low capex requirements.
PE multiples at -1 std deviation: After a 58% correction from peak, the stock trades at 13.5x 1-year forward PE (35% discount to its median and 50% discount to Cummins). We forecast sales/profit CAGR of 11%/16% over FY18-21. Maintain BUY.
Financial Summary (INR mn) Y/E March FY17A FY18A FY19E FY20E FY21E Net Sales 26,704 30,555 35,467 38,907 42,230 Sales Growth (%) 8.4 14.4 16.1 9.7 8.5 EBITDA 2,827 2,642 2,921 3,307 3,668 EBITDA Margin (%) 10.6 8.6 8.2 8.5 8.7 JM Financial Research is also available on: Adjusted Net Profit 1,736 1,447 1,832 2,064 2,300 Bloomberg - JMFR
JM Financial Institutional Securities Limited Kirloskar Oil Engines 7 December 2018
Financial Tables (Consolidated)
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E Net Sales 26,704 30,555 35,467 38,907 42,230 Shareholders’ Fund 16,167 15,696 16,499 17,407 18,352 Sales Growth 8.4% 14.4% 16.1% 9.7% 8.5% Share Capital 289 289 289 289 289 Other Operating Income 0 0 0 0 0 Reserves & Surplus 15,878 15,406 16,210 17,118 18,063 Total Revenue 26,704 30,555 35,467 38,907 42,230 Preference Share Capital 0 0 0 0 0 Cost of Goods Sold/Op. Exp 16,883 19,553 23,296 25,552 27,731 Minority Interest 0 0 0 0 0 Personnel Cost 2,016 2,222 2,415 2,582 2,759 Total Loans 125 1,395 936 1,014 929 Other Expenses 4,978 6,137 6,835 7,466 8,073 Def. Tax Liab. / Assets (-) 117 -28 0 0 0 EBITDA 2,827 2,642 2,921 3,307 3,668 Total - Equity & Liab. 16,408 17,063 17,436 18,420 19,281 EBITDA Margin 10.6% 8.6% 8.2% 8.5% 8.7% Net Fixed Assets 4,545 7,015 6,743 6,733 6,655 EBITDA Growth 2.3% -6.5% 10.6% 13.2% 10.9% Gross Fixed Assets 13,556 15,015 15,815 16,615 17,390 Depn. & Amort. 1,107 1,119 821 907 950 Intangible Assets 0 2,246 2,246 2,246 2,246 EBIT 1,720 1,523 2,101 2,400 2,718 Less: Depn. & Amort. 9,181 10,548 11,318 12,128 12,981 Other Income 831 718 770 810 853 Capital WIP 171 302 0 0 0 Finance Cost 28 116 108 82 70 Investments 9,898 6,753 6,753 6,753 6,753 PBT before Excep. & Forex 2,523 2,126 2,762 3,127 3,501 Current Assets 7,252 10,926 11,039 13,613 15,327 Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 2,261 3,446 3,501 4,218 4,542 PBT 2,523 2,126 2,762 3,127 3,501 Sundry Debtors 2,010 4,033 3,275 5,013 5,403 Taxes 787 698 946 1,063 1,182 Cash & Bank Balances 180 703 771 1,406 2,142 Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 1,099 1,072 2,429 288 323 Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 1,702 1,672 1,063 2,688 2,918 Reported Net Profit 1,736 1,428 1,816 2,064 2,319 Current Liab. & Prov. 5,287 7,630 7,099 8,678 9,453 Adjusted Net Profit 1,736 1,447 1,832 2,064 2,300 Current Liabilities 3,550 4,887 4,961 6,079 6,624 Net Margin 6.5% 4.7% 5.2% 5.3% 5.4% Provisions & Others 1,738 2,743 2,138 2,599 2,829 Diluted Share Cap. (mn) 144.6 144.6 144.6 144.6 144.6 Net Current Assets 1,965 3,296 3,940 4,935 5,874 Diluted EPS (INR) 12.0 10.0 12.7 14.3 15.9 Total – Assets 16,408 17,063 17,436 18,420 19,281 Diluted EPS Growth -6.9% -16.7% 26.6% 12.7% 11.4% Source: Company, JM Financial Total Dividend + Tax 870 870 1,215 1,388 1,649 Dividend Per Share (INR) 5.0 5.0 7.0 8.0 9.5 Source: Company, JM Financial
Cash Flow Statement (INR mn) Dupont Analysis Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E Profit before Tax 2,523 2,126 2,762 3,127 3,501 Net Margin 6.5% 4.7% 5.2% 5.3% 5.4% Depn. & Amort. 868 1,366 770 810 853 Asset Turnover (x) 1.7 1.8 2.1 2.2 2.2 Net Interest Exp. / Inc. (-) 0 0 0 0 0 Leverage Factor (x) 1.0 1.1 1.1 1.1 1.1 Inc (-) / Dec in WCap. -511 -809 -577 -360 -202 Others 0 0 0 0 0 RoE 11.3% 9.1% 11.4% 12.2% 12.9%
Taxes Paid -800 -843 -919 -1,063 -1,182 Operating Cash Flow 2,081 1,841 2,037 2,514 2,970 Key Ratios Capex -348 -1,588 -498 -800 -775 Y/E March FY17A FY18A FY19E FY20E FY21E Free Cash Flow 1,733 253 1,539 1,714 2,195 BV/Share (INR) 111.8 108.5 114.1 120.4 126.9 Inc (-) / Dec in Investments -1,995 3,130 0 0 0 ROIC 19.1% 12.9% 14.1% 15.7% 17.4% Others 0 0 0 0 0 ROE 11.3% 9.1% 11.4% 12.2% 12.9% Investing Cash Flow -2,343 1,542 -498 -800 -775 Net Debt/Equity (x) 0.0 0.0 0.0 0.0 -0.1 Inc / Dec (-) in Capital 0 0 0 0 0 P/E (x) 16.1 19.3 15.2 13.5 12.1 Dividend + Tax thereon 0 -870 -1,215 -1,388 -1,649 P/B (x) 1.7 1.8 1.7 1.6 1.5 Inc / Dec (-) in Loans 53 1,270 -458 77 -85 EV/EBITDA (x) 9.9 10.9 9.6 8.3 7.3 Others -5 -3,299 187 232 294 EV/Sales (x) 1.0 0.9 0.8 0.7 0.6 Financing Cash Flow 48 -2,899 -1,486 -1,079 -1,439 Debtor days 27 48 34 47 47 Inc / Dec (-) in Cash -214 484 52 635 756 Inventory days 31 41 36 40 39 Opening Cash Balance 395 180 703 771 1,406 Creditor days 54 64 56 62 63 Closing Cash Balance 181 664 756 1,407 2,162 Source: Company, JM Financial Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 26 Kirloskar Oil Engines 7 December 2018
History of Earnings Estimate and Target Price Recommendation History Date Recommendation Target Price % Chg.
6-Oct-16 Buy 400
25-Oct-16 Buy 400 0.0
31-Jan-17 Buy 380 -5.0
15-May-17 Buy 440 15.8
21-Jun-17 Buy 440 0.0
11-Jul-17 Buy 460 4.5
10-Aug-17 Buy 460 0.0
27-Oct-17 Buy 415 -9.8
31-Jan-18 Hold 410 -1.2
12-Jun-18 Hold 345 -15.9
2-Nov-18 Buy 270 -21.7
JM Financial Institutional Securities Limited Page 27 7 December 2018 India | Industrials | Company Update
Bharat Electronics | BUY
Long term growth to outweigh near term concerns
Bharat Electronics (BHE) stock price has seen a sharp fall of 54% over last 12 months as Sandeep Tulsiyan [email protected] | Tel: (91 22) 66303085 valuations dipped from a peak of 25x to 12x 1-year forward PE (median: 16x). However, we believe that margin compression concerns on nominated orders will be outweighed by the long term steady growth. We forecast a revenue CAGR of 14% over FY18-21 led by a robust order book position of INR 490bn (4.2x TTM sales), strong bid pipeline and exports. While PBT level margins on nominated orders are being capped at 7.5% vs. 12.5% earlier, we note that the applicability of these margins is only on nominated orders, which form 50% of its order book (80% previously) and excludes the large value orders of LRSAM and Akash
Missile. At current valuations of 12x FY20E EPS (almost c.1- median standard deviation) and
2x FY20E BV, we see limited downside and recommend BUY with a TP of INR 110. Recommendation and Price Target Current Reco. BUY Mark-up margins reduced to 7.5%; 10-year EPS CAGR to be 9%: As per recent pricing Previous Reco. BUY guidelines issued by the Ministry of Defence to defence PSUs, threshold PBT level margins Current Price Target (12M) 110 on nominated orders have been capped at 7.5% vs. 12.5% earlier. We note that a) the Upside/(Downside) 34.5% applicability of these margins is only on nominated orders, which form 50% of the order Previous Price Target 110 book (down from 80% in the past), b) while bid margins have been lowered by 500bps, Change 0.0%
the number of cost inclusions has increased, thus limiting impact on blended margins and Key Data – BHE IN c) the new policy is not applicable with retrospective effect, essentially excluding the Current Market Price INR82 existing backlog as well as new orders (both LRSAM and Akash Missile will be under old Market cap (bn) INR199.3/US$2.8 norms). We expect the PBT margins (excluding other income) to fall 250-350bps over the Free Float 29% next 5 years as the share of new orders rises, while 10-year EPS (FY18-28) CAGR is Shares in issue (mn) 2,436.6 expected to decline from 12% to 9%. Diluted share (mn) 2,436.6 3-mon avg daily val (mn) INR1,235.1/US$17.4 52-week range 190/74 Strong track record and robust order book to outweigh concerns: We believe BHE is a Sensex/Nifty 35,312/10,601 secular play on India’s defence sector and revenues have not declined in any single year INR/US$ 70.9 over FY03-18. India's overall defence capex has recorded a 12% CAGR over the past 20 years, whereas BHE's order book saw a much faster 20% CAGR during the same period. Price Performance BHE is poised to report revenue CAGR of 14% over FY18-FY21E, led by a) its robust order % 1M 6M 12M book position of INR 490bn (4.2x TTM sales), which has nearly doubled in the past 3 Absolute -14.1 -29.6 -54.3 Relative* -14.9 -29.9 -57.9 years, b) strong bid pipeline, which indicates that order inflow momentum is likely to * To the BSE Sensex continue over the next 3-4 years as large orders are finalised for aircraft (Rafale and Tejas), communication systems (TCS and BMS) and missile systems (surface-to-air missiles) and c) a ramp-up in exports, which would boost its strong growth (26% CAGR in the last 10 years) led by offset contracts. BHE’s long term association with large defence projects at early stage, depreciated assets and strong balance sheet (zero debt) presents an entry barrier to private sector on both knowledge as well as cost front.
Valuations at rock-bottom: Valuations have fallen sharply as 1-year forward PE and P/B are below the 10-year median. Currently, the stock trades at 12x FY20E EPS (almost c.1- median standard deviation) and 2x FY20E BV. After factoring in declining margins for new defence orders coming in at 7.5%, we expect profit CAGR of 9% over FY18-28.
Financial Summary (INR mn) Y/E March FY17A FY18A FY19E FY20E FY21E Net Sales 86,119 1,03,224 1,21,686 1,38,342 1,53,622 Sales Growth (%) 17.5 19.9 17.9 13.7 11.0 EBITDA 17,617 19,997 23,723 25,906 27,803 EBITDA Margin (%) 20.5 19.4 19.5 18.7 18.1 JM Financial Research is also available on: Adjusted Net Profit 15,476 13,993 15,434 16,881 18,045 Bloomberg - JMFR
JM Financial Institutional Securities Limited Bharat Electronics 7 December 2018 Financial Tables (Standalone)
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E Net Sales 86,119 1,03,224 1,21,686 1,38,342 1,53,622 Shareholders’ Fund 75,170 77,949 87,471 98,257 1,09,786 Sales Growth 17.5% 19.9% 17.9% 13.7% 11.0% Share Capital 2,234 2,437 2,437 2,437 2,437 Other Operating Income 0 0 0 0 0 Reserves & Surplus 72,936 75,512 85,035 95,820 1,07,350 Total Revenue 86,119 1,03,224 1,21,686 1,38,342 1,53,622 Preference Share Capital 0 0 0 0 0 Cost of Goods Sold/Op. Exp 43,802 54,775 65,102 76,088 86,028 Minority Interest 0 0 0 0 0 Personnel Cost 15,483 17,723 18,259 19,747 21,356 Total Loans 500 333 0 0 0 Other Expenses 9,217 10,728 14,602 16,601 18,435 Def. Tax Liab. / Assets (-) -5,323 -4,312 -4,312 -4,312 -4,312 EBITDA 17,617 19,997 23,723 25,906 27,803 Total - Equity & Liab. 70,347 73,970 83,159 93,945 1,05,475 EBITDA Margin 20.5% 19.4% 19.5% 18.7% 18.1% Net Fixed Assets 19,116 24,399 28,315 30,773 32,571 EBITDA Growth 28.4% 13.5% 18.6% 9.2% 7.3% Gross Fixed Assets 16,170 22,198 29,198 35,198 41,198 Depn. & Amort. 1,915 2,510 3,084 3,542 4,202 Intangible Assets 0 0 0 0 0 EBIT 15,702 17,487 20,639 22,364 23,601 Less: Depn. & Amort. 3,617 6,128 9,211 12,753 16,955 Other Income 4,710 2,004 802 1,082 1,461 Capital WIP 6,563 8,328 8,328 8,328 8,328 Finance Cost 118 13 5 0 0 Investments 4,597 9,032 9,032 9,032 9,032 PBT before Excep. & Forex 20,294 19,478 21,436 23,446 25,062 Current Assets 1,42,525 1,47,166 1,72,499 1,98,168 2,23,807 Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 49,050 47,755 60,009 68,223 75,759 PBT 20,294 19,478 21,436 23,446 25,062 Sundry Debtors 43,549 57,045 73,345 79,594 84,176 Taxes 4,818 5,486 6,002 6,565 7,017 Cash & Bank Balances 37,902 7,387 10,807 18,134 28,097 Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 806 730 1,667 1,895 2,104 Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 11,219 34,249 26,671 30,321 33,671 Reported Net Profit 15,476 13,993 15,434 16,881 18,045 Current Liab. & Prov. 95,891 1,06,627 1,26,686 1,44,027 1,59,935 Adjusted Net Profit 15,476 13,993 15,434 16,881 18,045 Current Liabilities 13,466 14,002 25,004 28,426 31,566 Net Margin 18.0% 13.6% 12.7% 12.2% 11.7% Provisions & Others 82,425 92,625 1,01,682 1,15,601 1,28,369 Diluted Share Cap. (mn) 2,457.0 2,436.6 2,436.6 2,436.6 2,436.6 Net Current Assets 46,634 40,539 45,813 54,141 63,872 Diluted EPS (INR) 6.3 5.7 6.3 6.9 7.4 Total – Assets 70,347 73,970 83,159 93,945 1,05,475 Diluted EPS Growth 27.2% -8.8% 10.3% 9.4% 6.9% Source: Company, JM Financial Total Dividend + Tax 7,415 5,894 5,573 6,095 6,515 Dividend Per Share (INR) 2.5 2.0 1.9 2.1 2.2 Source: Company, JM Financial
Cash Flow Statement (INR mn) Dupont Analysis Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E Profit before Tax 20,294 19,478 21,436 23,446 25,062 Net Margin 18.0% 13.6% 12.7% 12.2% 11.7% Depn. & Amort. 1,914 2,511 3,084 3,542 4,202 Asset Turnover (x) 1.0 1.3 1.5 1.5 1.5 Net Interest Exp. / Inc. (-) 0 0 0 0 0 Leverage Factor (x) 1.0 1.0 1.0 1.0 1.0 Inc (-) / Dec in WCap. -12,364 -24,420 -1,853 -1,001 232 Others 0 0 0 0 0 RoE 18.8% 18.3% 18.7% 18.2% 17.3%
Taxes Paid -5,533 -4,474 -6,002 -6,565 -7,017 Operating Cash Flow 4,311 -6,906 16,664 19,422 22,478 Key Ratios Capex -6,967 -7,793 -7,000 -6,000 -6,000 Y/E March FY17A FY18A FY19E FY20E FY21E Free Cash Flow -2,656 -14,699 9,664 13,422 16,478 BV/Share (INR) 30.6 32.0 35.9 40.3 45.1 Inc (-) / Dec in Investments -1,406 -4,435 0 0 0 ROIC 49.7% 26.4% 23.0% 23.2% 23.6% Others 0 0 0 0 0 ROE 18.8% 18.3% 18.7% 18.2% 17.3% Investing Cash Flow -8,373 -12,228 -7,000 -6,000 -6,000 Net Debt/Equity (x) -0.5 -0.1 -0.1 -0.2 -0.3 Inc / Dec (-) in Capital -21,878 -3,520 0 0 0 P/E (x) 13.0 14.3 12.9 11.8 11.1 Dividend + Tax thereon -7,415 -5,894 -5,573 -6,095 -6,515 P/B (x) 2.7 2.6 2.3 2.0 1.8 Inc / Dec (-) in Loans 500 -167 -333 0 0 EV/EBITDA (x) 9.2 9.6 8.0 7.0 6.2 Others -897 -1,800 -338 0 0 EV/Sales (x) 1.9 1.9 1.6 1.3 1.1 Financing Cash Flow -29,690 -11,381 -6,244 -6,095 -6,515 Debtor days 185 202 220 210 200 Inc / Dec (-) in Cash -33,751 -30,514 3,420 7,326 9,963 Inventory days 208 169 180 180 180 Opening Cash Balance 71,653 37,902 7,387 10,807 18,134 Creditor days 72 61 93 92 92 Closing Cash Balance 37,902 7,387 10,807 18,134 28,097 Source: Company, JM Financial Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 29 Bharat Electronics 7 December 2018
History of Earnings Estimate and Target Price Recommendation History Date Recommendation Target Price % Chg.
21-Sep-17 Buy 220
31-Jan-18 Buy 200 -9.1
13-Jun-18 Buy 145 -27.5
1-Aug-18 Buy 145 0.0
29-Oct-18 Buy 110 -24.1
JM Financial Institutional Securities Limited Page 30 Bharat Electronics 7 December 2018 APPENDIX I
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This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) solely responsible for its content. The research analyst(s) preparing this research report is/are resident outside the United States and are not associated persons or employees of any U.S. registered broker-dealer. Therefore, the analyst(s) are not subject to supervision by a U.S. broker-dealer, or otherwise required to satisfy the regulatory licensing requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
JM Financial Institutional Securities only accepts orders from major U.S. institutional investors. Pursuant to its agreement with JM Financial Institutional Securities, JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors may place orders with JM Financial Institutional Securities directly, or through JM Financial Securities, in the securities discussed in this research report.
Additional disclosure only for U.K. persons: Neither JM Financial Institutional Securities nor any of its affiliates is authorised in the United Kingdom (U.K.) by the Financial Conduct Authority. As a result, this report is for distribution only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the "Financial Promotion Order"), (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the matters to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as "relevant persons"). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.
Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement or a public offering of the securities described herein in Canada or any province or territory thereof. Under no circumstances is this report to be construed as an offer to sell securities or as a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the registration requirement in the relevant province or territory of Canada in which such offer or sale is made. This report is not, and under no circumstances is it to be construed as, a prospectus or an offering memorandum. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the merits of the securities described herein and any representation to the contrary is an offence. If you are located in Canada, this report has been made available to you based on your representation that you are an “accredited investor” as such term is defined in National Instrument 45-106 Prospectus Exemptions and a “permitted client” as such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Under no circumstances is the information contained herein to be construed as investment advice in any province or territory of Canada nor should it be construed as being tailored to the needs of the recipient. Canadian recipients are advised that JM Financial Securities, Inc., JM Financial Institutional Securities Limited, their affiliates and authorized agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss arising from any use of this research report or the information contained herein.
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