Capital Goods

1QFY17E Results Preview

5 JUL 2016

Pawan Parakh
pawan.parakh@hdfcsec.com
+91-22-6171 7314

1QFY17E RESULTS PREVIEW

1QFY17E: Public sector capex to drive growth on select basis

100,000

-12.0%

-20.0%
1Q FY17

-4.0%

4Q FY16

200,000

3Q FY16

4.0%

2Q FY16

300,000

1Q FY16

12.0%

4Q FY15

400,000

3Q FY15

20.0%

2Q FY15

28.0%

500,000

Operating Performance Also Skewed By L&T, Suzlon And Inox

EBITDA

EBITDA margin (%)

1Q FY17

4Q FY16

3Q FY16

2Q FY16

16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
1Q FY16

80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
4Q FY15

YoY growth (%)

600,000

3Q FY15

Revenue (Rs mn)

2Q FY15

Revenue Growth Only Optically Good

1Q FY15

Top picks: Kalpataru Power (robust order flows enhancing

revenue visibility), Suzlon and Inox Wind (driven by strong
expected order flows). Reco change: We downgrade L&T to
Neutral as valuations turn expensive post the recent run up.
Our coverage universe is likely to witness ~5% YoY growth in
revenues. However, the growth is skewed, led by L&T (11%
YoY), Suzlon (41% YoY), Inox Wind (44% YoY) and Techno
Electric (33% YoY). Companies like Thermax, Cummins and KEC
are likely to have flat to negative growth. Despite some rebound
in commodity prices in the past 3-4 months, the YoY benefits
would persist, thereby aiding margin improvement in 1QFY17.
Order flows continue to be led by public sector capex, which
includes power transmission, railways, roads and renewables,
among others. Hopes are riding on a pick-up in defence orders.
Visibility on private sector capex is muted.
Within the power sector, transmission orders led by Power Grid
(PGCIL) were better (Rs 114bn in 1QFY17 vs. Rs 53.7bn 1QFY16)
owing to a single HVDC order worth Rs 58bn. However, the
generation side was muted with only 300MW worth of orders
announced by BHEL.
Quarterly reporting will be impacted by the new Ind AS norms.
In some, such as L&T, headline numbers may not be directly
comparable (JV consolidation to now be under equity method).
The key changes include stricter provisioning norms for debtors,
effective interest rate method for FCCBs (negative for L&T and
Suzlon) and equity method of consolidation for certain JVs.
Other changes pertaining to excise duty and cash discount will
optically change financial ratios (and not profitability).

1Q FY15

Source: Company, HDFC sec Inst Research

2

1QFY17E RESULTS PREVIEW

1QFY17E: margin expansion to aid profitability

COMPANY

1QFY17
OUTLOOK

WHATS LIKELY

Crompton
Greaves

GOOD

Cummins

AVG

Inox Wind

KEC International

AVG

GOOD

KEY MONITORABLES

Headline numbers are not comparable YoY with the demerger of

the consumer business and the sale of the international power
business.
On like-to-like basis, revenue growth is expected to be ~21% on
account of (1) Base effect as 1QFY16 was marred by lower sales
in the power segment and (2) Strong growth likely in the
industrial segment.
Operating performance would also be driven by Power segment
(losses in Q1FY17).
Expect 5% YoY growth in revenue, which is a confluence of
growth in the domestic power generation business and a decline
in exports.
Cooling commodity prices should aid margin improvement to the
tune of ~60bps YoY to 17.2%.

Timeline on the completion of the

international businesss sale (management has
guided for Oct-16) and the likely cash flow
position thereafter.

Outlook on exports growth (especially LHP

gensets).
Pricing environment in the domestic market.

Expect WTG volume of 175MW in 1QFY17 (vs. 120MW in

1QFY16).
With higher contribution of WTG sales (vs. EPC), we expect
margin improvement of 170bps YoY to 16.6%.
Expect an improvement in the cash-flow situation as debtors for
4QFY16 sales will have materialised. Working capital has been a
key concern in 4QFY16 results.

Expect 7% growth in revenue for 1QFY17.

Margin improvement is likely to continue further in FY17E as
legacy projects are completed. We expect to see a 50bps
improvement in 1QFY17.

Improvement in working capital scenario and

roadmap on reduction in exposure to group
companies.
Outlook on order flows and execution for
FY17E.

While railway orders have witnessed traction,

the managements outlook on solar and
substation orders will be key to growth in the
order book.
3

1QFY17E RESULTS PREVIEW

1QFY17E: margin expansion to aid profitability

COMPANY

1QFY17
OUTLOOK

WHATS LIKELY

Kalpataru Power

GOOD

Larsen & Toubro

GOOD

We expect revenue growth of ~11% in 1QFY17. However, it will

pick-up in subsequent quarters as KPP kicked off FY17 with a
strong opening order book.
KPP has announced orders to the tune of ~Rs 20bn in 1QFY17,
providing strong revenue visibility.
Expect margins to be stable at 10.5% for the standalone entity.

L&T has announced orders flows of ~Rs 150bn in 1QFY17. Over

the past two quarters, it has had substantial proportion of
unannounced order flows. We don't expect any major
disappointment in order inflows.
On a like-to-like basis, we expect L&T to clock ~11% revenue
growth for the quarter.
Expect ~40bps YoY improvement in margins to 11.7% on the back
of easing commodity prices and some operating leverage benefit.

Post strong execution in 4QFY16 (443 MW), 1Q is relatively a

Suzlon

AVG

KEY MONITORABLES

weak quarter (seasonally). Expect volumes of ~300 MW in

1QFY17.
We expect realisations to be ~Rs 60mn/MW and ~2% YoY growth
in O&M revenues.
With lower volumes, we expect Suzlon to report loss of Rs 538mn
in 1QFY17. On an annual basis, we expect Suzlon to be profitable
in FY17E.

Roadmap for recovery in performance for

JMC.
Traffic growth in road BOOT projects of JMC.

The managements view on finalisation of

some of the large order flows like Mumbai
Metro and defence.
Updates on asset monetisation (L&T Infotech
being imminent, technology services and
Nabha Power will be in the pipeline).
Outlook on working capital requirement

Outlook on wind industry size and Suzlon's

market share for FY17E.

1QFY17E RESULTS PREVIEW

1QFY17E: margin expansion to aid profitability

COMPANY

Techno Electric

1QFY17
OUTLOOK

AVG

WHATS LIKELY

Thermax

BAD

Triveni Turbine

GOOD

Voltas

GOOD

KEY MONITORABLES

We expect strong revenue growth of ~33% YoY driven by a strong

opening order book.
Revenue growth will aid margin improvement. With improved
grid availability, operating performance is expected to be strong
for the wind assets as well. We expect ~230bps improvement in
margins (to 24.7%) for 1QFY17.
Weak order flows will mean continuing decline in revenues (we
expect 5% YoY decline in 1QFY17).
Despite the decline, we factor in marginal improvement in
EBITDA margin (30bps YoY to 8.5%) on account of lower
commodity prices.
With no major announced order flows, expect further contraction
in the order book (Rs 46.6bn as of FY17-end).
Expect ~15% YoY growth in revenues for 1QFY17.
4QFY16 has seen build up in inventory (deferment in sales),
which also helps revenue growth in 1QFY17.
Expect ~120bps improvement in margins driven by strong
revenue growth and easing commodity prices.

Outlook on sale of remaining wind assets.

Outlook on order flows for FY17E (given
expected benefits from UDAY programme).

Outlook on order inflows.

Guidance on loss reduction in subsidiaries.

Outlook on international order flows

(especially in 30+ MW segment)
Likely growth in order inflows for FY17E.

Revenue growth of ~12.6%, primarily led by the UCP segment,

which is expected to grow by 15% YoY.
The UCP segment is benefitted by a low base effect in 1QFY16
(early monsoons). However, the management stated that high
demand/stock situation was only in Apr-16, post which demand
environment has tapered off.
Overall margin profile is expected to be similar. We expect EBIT
margins of 2/30/12% in EMP/EP/UCP segments.

Updates on stuck projects and visibility on

fresh order flows in MENA/India.
Developments in the air cooler business.

1QFY17E RESULTS PREVIEW

1QFY17E: Financial summary

Company
Crompton Greaves

NET SALES (Rs bn)

1Q
QoQ
YoY
FY17E
(%)
(%)
12.5
-25.4
-60.6

EBITDA (Rs bn)

1Q
QoQ
YoY
FY17E
(%)
(%)
1.2
-25.4
46.0

EBITDA Margin (%)

1Q
QoQ
YoY
FY17E
(bps)
(bps)
9.3
-0.3
677.0

APAT (Rs bn)

1Q
QoQ
YoY
FY17E
(%)
(%)
0.5
-54.0 -229.9

Adj. EPS (Rs/sh)

1Q
4Q
1Q
FY17E
FY16
FY16
0.7
1.6
-0.6

Cummins

13.8

29.5

5.0

2.4

38.7

8.7

17.2

114.1

58.9

2.2

36.9

6.6

8.1

5.9

7.6

Inox Wind

9.1

-50.1

43.5

1.5

-51.9

60.2

16.6

-61.8

172.4

0.9

-58.5

71.9

3.9

9.4

2.3

Kalpataru Power

12.9

-6.2

10.7

1.4

-5.8

11.1

10.5

5.0

3.6

0.6

-14.6

26.9

4.0

4.7

3.2

KEC International

20.2

-21.2

7.3

1.6

-27.7

14.6

8.0

-71.0

50.8

0.5

-43.2

49.1

1.8

3.2

1.2

Larsen & Toubro

225.5

-32.0

11.3

26.4

-45.7

15.3

11.7

-294.8

39.8

9.0

-62.4

49.1

9.7

25.9

6.5

21.7

-33.2

40.6

3.1

-25.5

111.7

14.4

146.8

482.0

-0.5

-548.3

-74.4

-0.1

0.0

-0.4

Techno Electric

2.7

-17.6

33.3

0.7

30.9

47.2

24.7

913.9

232.6

0.3

15.6

61.5

5.5

4.8

3.4

Thermax

9.3

-27.8

-5.0

0.8

-33.1

-2.3

8.5

-67.3

23.8

0.6

-46.1

-2.9

5.0

9.3

5.2

Triveni Turbine

1.4

-31.8

15.4

0.3

-52.6

24.2

17.5

-770.9

123.9

0.2

-49.8

20.1

0.5

1.0

0.4

18.0

-4.7

12.6

1.5

-16.8

17.6

8.6

-124.7

36.4

1.2

-34.4

4.7

3.5

5.3

3.3

347.1

-28.6

5.6

40.8

-39.1

21.0

11.7

-201.9

149.3

15.4

-54.6

69.7

Suzlon

Voltas
Aggregate

Source: Company, HDFC sec Inst Research

1QFY17E RESULTS PREVIEW

1QFY17E: Peer valuation

Company

CMP Mcap
(Rs/sh) (Rs bn)

TP

Reco

Adj EPS (Rs/sh)

P/E (x)

EV/EBITDA (x)

RoE (%)

FY16E

FY17E

FY18E

FY16E

FY17E

FY18E

FY16E

FY17E

FY18E

FY16E

FY17E

FY18E

Crompton Greaves

74

46

76

BUY

2.1

2.3

3.3

35.7

32.6

22.1

13.8

11.8

10.8

2.9

3.1

4.4

Cummins

850

236

940

BUY

27.1

28.3

31.3

31.3

30.0

27.1

30.5

28.0

24.8

24.8

22.5

23.7

Inox Wind

236

52

475

BUY

21.2

24.5

31.5

11.1

9.6

7.5

8.9

7.1

5.7

27.9

25.8

26.7

KEC International

145

36

160

BUY

7.4

10.0

10.6

19.4

14.4

13.6

8.5

7.4

6.9

13.5

15.8

14.7

Kalpataru Power

260

40

330

BUY

13.0

15.5

17.5

20.0

16.8

14.9

9.5

8.2

7.3

9.2

10.0

10.3

Larsen & Toubro

1,565

1,455

1,444

NEU

50.8

60.6

70.9

30.8

25.8

22.1

13.4

12.1

10.8

11.1

12.2

13.1

Suzlon

17

104

28

BUY

1.1

1.0

2.0

16.1

17.1

8.6

22.9

10.6

8.1

NA

NA

NA

Techno Electric

577

33

605

BUY

24.7

27.5

33.0

23.4

21.0

17.5

15.8

12.0

10.8

12.2

14.3

15.1

Thermax

856

102

686

SELL

23.1

26.3

27.4

37.0

32.6

31.2

20.2

19.5

17.5

12.4

13.0

12.5

Triveni Turbine

125

41

128

BUY

3.3

3.7

4.3

38.4

34.0

29.3

23.9

21.0

18.2

41.3

36.8

33.9

Voltas

321

106

310

NEU

11.7

12.4

14.4

27.5

25.9

22.3

22.9

19.4

16.7

15.3

15.2

16.6

Source: Company, HDFC sec Inst Research

1QFY17E RESULTS PREVIEW

Rating Definitions
BUY
: Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL
: Where the stock is expected to deliver (-) 10% to 10% returns over the next 12 month period
SELL
: Where the stock is expected to deliver less than (-) 10% returns over the next 12 month period
Disclosure:
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issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No
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8

1QFY17E RESULTS PREVIEW

HDFC securities
Institutional Equities
Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel,
Mumbai - 400 013
Board : +91-22-6171 7330
www.hdfcsec.com
9