Religare-Capital Goods - Sector Report - June 2010

Capital Goods Sector Report 21 June 2010
Sector Report 21 June 2010
Recommendation snapshot
Capital Goods Company CMP Rating Target
Realign for the change ahead ABB 866 Hold 850
BHEL 2,383 Hold 2,400

We believe the dynamics in the capital goods sector are likely to undergo a BGR Energy 737 Hold 700
change. In our view, the sector is in a stage of its cycle where growth and
Crompton Greaves 260 Hold 285
returns are still exciting. However competition is likely to drive down returns
over the medium to long term in select segments. We believe that over the next Cummins India 607 Hold 575
two years, companies with a superior product profile and contracting abilities Jyoti Structures 154 Buy 185
are likely to outperform, as intensifying competition is likely to weed out weak Kalpataru Power 1,033 Hold 1,000
players. Our top pick in the sector is Siemens India (SIEM) based on its superior KEC International 474 Hold 500
product profile, positive changes to business model and hence potential to
Siemens India 731 Buy 925
surprise on the upside. We initiate coverage on SIEM with a one year target
price of Rs 925, implying a 27% upside from current levels. Our top mid-cap Suzlon Energy 57 Sell 45
idea is Voltas (VOLT), as we believe valuations could re-rate with improvement Techno Electric 289 Buy 400
in order flows. We initiate coverage on BHEL with a Hold recommendation Thermax 710 Hold 710
(target price of INR 2400) as we believe; even as growth in likely to taper down Voltas 189 Buy 220
from FY13E, the execution profile is likely to remain robust over the short to
medium term.
Growth across the value chain: At FY07-end, India’s power generation capacity Key Catalyst
stood at ~132.3GW. Over FY08-FY17, various power developers are proposing Sector Key catalyst Impact
to add power generation capacity of ~150 GW, more than the generation Additional capacity creation in the
-ve
Power BTG equipment segment
capacity added in the last 60 years. We believe this statistic captures the essence generation
of the future growth in India’s power sector. On our current estimates, we expect equipment Ordering of 800 MW super critical
+ve
BTG equipment
revenues to grow at an average CAGR of ~19% over the FY10-FY12E across the
power equipment and contracting value chain. Power
Capacity creation in the EPC and
generation +ve
BoP segments
Competition high in select segments: Competition has already intensified in the contracting
transmission equipment sector. This is corroborated by the Herfindahl Hirschman
Relaxation of prequalification
index for the transmission tower EPC business which has moved from 0.25 to norms by PGCIL for 765 kV +ve
Power transmission equipment
0.08,thus denoting high concentration in the sector (low concentration >0.2, transmission
high concentration <0.1). While we do not see the same intensity of competition equipment Stronger Rupee to reduce the price
in the generation equipment sector over the short term, competitive activity is competitiveness of Chinese +ve
manufacturers
likely to intensify in the long-term.
Leaders to outperform: In our view higher competitive intensity is likely to

impact margins and hence returns over the next two years. We expect earnings to
grow at an average CAGR of ~16% (lower than revenues growth) over the FY10-
FY12E across our coverage. However we expect BGR Energy (BGR) and SIEM to
outperform, based on the strength of their product profiles and contracting
abilities. We expect the earnings for SIEM to grow at a CAGR of ~22% over
FY10-FY12E, highest in the transmission equipment segment.
Valuations, advocate a selective approach: Our favourite stocks in the sector are
those, where we believe business models will strengthen, leading to valuations
rerating or earnings upgrades to cons. estimates. Given the high growth and
negative cash flows in explicit forecast period, we prefer the P/E and EV-EBITDA/
EBITDA growth (EVEG) valuation metrics for the sector. At our estimates, SIEM
trades at a P/E of 25.8x and 21.1x for FY11E and FY12E respectively. The stock
has traded in an average one-year forward PE band of ~20x-40x over the last five
years. Even as we like the business models of Cummins India (KKC) and Thermax
(TMX), based on current valuations, we initiate coverage on TMX and KKC with a
Hold. TMX is trading at a P/E of 26.3x and 20.1x, and KKC at 23.6x and 21.2x,
for FY11E and FY12E respectively.
Misal Singh Arun Aggarwal

RCML: Winner of LIPPER-STARMINE broker award for “Earnings Estimates in Midcap Research 2008” | “Honourable
(91-22) 6766 3466 (91-22) 6766 3440 Mention” in Institutional Investor 2009 | Voted amongst Top 5 most improved brokerages by Asia Money1Poll 2009
misal.singh@religare.in arun.aggarwal@religare.in RCML Research is also available on Bloomberg FTIS <GO> and Thomson First Call
Contents
Section Page No.
Capital Goods
Bright long-term prospects 2
Heightened competition to impact margins post FY12E 2
Power generation: wide scope, varied dynamics 4
Power transmission outlay set to surge 5
Power transmission sees higher order flows, competition 5
Outlook and Valuations 7

Key risks 12
Companies
ABB Ltd 14
Bharat Heavy Electricals Ltd 21
BGR Energy Systems Ltd 26
Crompton Greaves Ltd 31
Cummins India Ltd 36
Jyoti Structures Ltd 41
Kalpataru Power Transmission Ltd 46
KEC International Ltd 51
Siemens Ltd 56
Suzlon Energy Ltd 67
Techno Electric & Engineering Company Ltd 72
Thermax Ltd 77
Voltas Ltd 82
Fig 1 - Comparative Valuation Sheet

P/E at Sales EBITDA margin (%) EPS RoCE EV/EBITDA PE
CMP Target % upside/
Rating target
(Rs.) price (Downside) FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E
price
Power generation
BHEL 2,383 Hold 2,400 1% 17.8 335,728 404,834 504,512 18.6 19.0 19.4 88.1 107.0 135.2 40.0 40.1 41.4 17.0 13.8 10.9 27.1 22.3 17.6
BGR Energy 737 Hold 700 -5% 15.5 30,779 41,413 51,055 11.3 11.3 11.3 28.0 36.7 45.3 22.0 20.9 19.7 15.5 11.5 9.4 26.3 20.1 16.3
Suzlon 57 Sell 45 -22% 26.8 207,792 210,409 234,531 4.5 5.0 8.7 (7.7) (3.4) 1.7 1.1 1.5 5.5 23.3 20.7 10.8 - - 34.2
Techno Electric 289 Buy 400 39% 14.4 7,066 8,053 9,521 21.7 20.9 19.9 21.5 24.6 27.7 76.5 74.2 51.1 9.7 8.9 7.9 13.4 11.7 10.4
Thermax 710 Hold 710 0% 20.1 37,699 44,472 57,584 11.6 11.5 11.7 23.9 27.0 35.4 44.0 45.7 50.1 18.2 15.5 11.8 29.7 26.3 20.1
Power transmission
ABB 866 Hold 850 -2% 26.3 80,204 94,597 109,269 9.6 9.9 10.0 22.7 27.6 32.3 27.1 28.3 27.9 23.1 18.9 16.3 38.2 31.4 26.8
Crompton Greaves 260 Hold 285 10% 20.1 91,409 99,216 109,914 14.0 13.3 13.0 12.9 13.0 14.2 38.5 33.4 31.3 13.1 12.6 11.7 20.2 20.0 18.3
Jyoti Structures 154 Buy 185 20% 12.2 20,185 23,889 27,295 11.9 11.5 11.5 11.2 13.1 15.2 28.3 27.6 28.1 6.3 5.5 4.8 13.7 11.8 10.2
Kalpataru Power 1,033 Hold 1,000 -3% 13.5 25,974 31,193 35,299 11.7 11.7 11.7 64.3 65.3 74.2 17.9 18.7 18.8 10.6 8.8 7.8 16.1 15.8 13.9
KEC International 474 Hold 500 5% 10.1 39,082 45,594 52,294 10.4 10.2 10.2 36.9 43.1 50.4 27.5 25.6 25.9 3.1 2.7 2.3 12.9 11.0 9.4
Siemens 731 Buy 925 27% 26.8 92,154 117,858 145,510 13.6 12.8 12.6 23.2 28.3 34.6 35.5 35.3 35.0 16.5 13.7 11.3 31.5 25.8 21.1
Others
Cummins 607 Hold 575 -5% 20.1 32,071 35,673 40,980 18.8 18.8 18.6 23.6 25.7 28.7 48.4 45.6 43.2 19.2 17.2 15.1 25.7 23.6 21.2
Voltas 189 Buy 220 17% 18.1 45,570 50,139 55,639 9.0 8.4 8.4 10.8 11.0 12.1 61.1 46.5 40.7 11.1 10.3 8.7 17.5 17.1 15.6
Source: Company, RCML Research
1
Bright long-term prospects

India’s power generation capacity to burgeon
While the power generation capacity addition in the 11th plan period has lagged targets,
India is likely to add ~115GW of power it needs to be noted that total capacity addition in the first three years of this plan (FY08-
generation capacity from FY11E to FY12E) is equal to the capacity added in the entire 10th period (FY03-FY07; ~27GW).
FY15E More importantly, India is likely to add ~115GW of power generation capacity from
FY2011E to FY2015E (according to best case estimates of our power utility team), led by
contribution from independent power producers (IPP) and supplemented by central and
state owned projects. Hence, over the 11th plan period and first few years of the 12th
plan period, India is expected to double its power generation capacity (compared to the
power capacity at the end of 10th plan i.e. March ’07).
Fig 2 - India’s installed power generation capacity Fig 3 - Addition in India’s installed power generation capacity
(MW) (MW)
180,000 30,000
160,000
140,000 25,000
120,000 20,000
100,000
80,000 15,000
60,000 10,000
40,000
20,000 5,000
0 0
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Source: CEA Source: CEA
Thus, the growth in the Indian power generation equipment market remains attractive
over the medium to long term. Many entrants, enticed by the high growth potential of
this market, have already announced their participation in this space.
Heightened competition to impact margins post FY12E

BHEL’s capacity is likely to increase by BHEL’s market share declines in face of increasing competition
more than ~3x in the 11th - from 6GW The 11th plan period (FY07-FY12) is likely to see an addition of ~60-65GW in power
in FY07 to 20GW in FY12E generation capacities, implying an annual capacity addition of ~12-13GW. BHEL
increased its capacity to 10GW in December ’07 and to 15GW by March ’10. The
company plans to further increase its capacity to 20 GW by the end of 11th plan.
BHEL had a market share of 61% in FY07, when India’s total installed power generation
capacity was 132.3GW. However, the domestic BTG equipment market had started
changing from H1FY07, as the state sharpened its focus on adding power generation
capacities. From FY07, there was an increased presence of international players,
primarily Chinese BTG vendors. Not surprisingly, BHEL’s market share has seen a
progressive decline – the company’s market share stood at 59.2% at FY09-end, when
India’s total installed capacity was at 147.9GW.
Impact of intensifying competition on new entrants to be lower

India is likely to have annual capacity of In this backdrop, we feel it is imperative to analyse the entry of new players in the
~35- 40GW in the BTG sector by domestic equipment market. While the growth prospects of the BTG equipment market
FY14E, implying a total capacity in are bright over the 11th and 12th plan, we believe stiffening competition would lower
excess of 150 GW for the Twelfth plan profitability of BTG players in 12th plan. We, however, believe that instead of new
period. Compared to the demand side, entrants, the incumbent BHEL and Chinese manufacturers are likely to see a negative
there is visibility of only 100GW for the impact of this development on their business models. On closely observing the business
twelfth plan period. models of new entrants, we note that their current margin profiles are significantly lower
2
than BHEL. Hence, for these players, diversification would be a positive move – even if
the BTG margins in the industry decline, they are still likely to be higher than the margin
profile in their current businesses.
Fig 4 - BTG equipment industry- Margin profile of incumbents and new entrants
EBIT margins (%) RoCE (%)
FY09 FY10 FY09 FY10E
Incumbent
BHEL 14.5 17.3 32.5 40.0
New entrants
Larsen and Toubro (parent) 10.5 11.9 25.0 23.7
BGR Energy 10.4 11.0 17.9 22.1
Thermax 11.7 10.8 78.4 41.8
BHEL’s RoCE has improved substantially We believe that the decline in BHEL’s market share is likely to become more apparent
in FY10E, driven by margin expansion from FY14E, as domestic capacities come on stream. We do not foresee a decline in the
and revenues growth. We expect the company’s market share over the next two years of the 11th plan. In fact, BHEL’s market
ratio to trend downwards from FY13E share has increased in FY10E, as international manufacturers have been impacted by
absence of after sales and service for some of their existing plants. Further, the execution
for projects supervised by international contractors was slower in FY10E due to the non-
availability of work force as the government enforced stricter visa norms.
Fig 5 - Details of new entrants in the BTG equipment industry

Proposed capacity Capacity commissioning time
Sr. no New entrants Recent orders secured
(GW) frame
Larsen and Toubro- 2X 660 MW- Jaypee Group at Singrauli-

Mistibushi Heavy Industries Boilers- December 2010 Madhya Pradesh- Order valued at INR 20 bn
1 4
For boilers, turbine and Turbine- June 2011 1600 MW- APGENCO, Andhra Pradesh-
generators Order valued at INR 15.5 bn
Bharat Forge- Alstom

2 5 By end of FY2012
For turbines and generators
Project was financially closed in

JSW Group- Toshiba September 2009. First phase will
3 3 be commissioned by December
For turbines and generators 2011. Second phase by
H2FY2012.
BGR Energy- Foster

Wheeler- Hitachi
4 3
For boilers, turbines and
generators
Thermax- Babcock and Land acquisition in process. To

5 Wilcox 3 be operational by the end of
For boilers FY12E.
Source: RCML Research
After the new capacities come in, most likely by the end of 11th plan, India is likely to
have annual capacity of ~35- 40 GW in the BTG sector, which implies at full capacity
the BTG industry can cater to 175 GW – 200 GW of power generation capacity addition
in a five-year plan period.
3
Power generation: wide scope, varied dynamics

Power generation market heterogeneous in nature
Even as the growth in the power generation equipment market looks attractive, it needs
to be viewed with conjunction with other factors. Firstly, the power generation market is
essentially heterogeneous in nature and can be classified on the basis of scope of work
(typically wide and varied) in a power plant. Secondly, even as the growth is likely to
remain uniform, market dynamics and companies differ across segments of work.
Fig 6 - Power generation plant- Scope of work

Power generation- Approximate share by value
No Key companies present in the segment
classification on scope of work for setting up a power plant
1 Boiler- Turbine- Generator BHEL, Shangai Electric, Dongfang, Alstom 55- 60%
2 Coal handling system Elecon, TRF, L&T, Thyssenkrupp, Mc Nally Bharat, Techpro Systems 10- 12%
3 Ash handling system Indure, DC Industrial Plant Services, Mecawber Beekay 5- 6%
4 Cooling tower Paharpur Cooling Towers, Gammon India 1.5- 2%
NBCC, Gammon India, Simplex, North West Power Construction Co.

5 Chimney 1.5- 2%
China
WPIL, Jyoti Ltd, Kirloskar Brothers, Driplex, PE Erector, Walchandnagar
6 Cooling water system 1.25- 1.5%
Industries, Punj Lloyd
Driplex, Ion Exchange, Degremont, VA Tech, GeoMiller, BGR Energy,
7 PT plant and DM plant 0.75- 1.0%
Thermax, Doshion
8 HVAC system ABB, Blue Star, Voltas 0.75- 1.0%
9 Fuel oil system BHEL, Techno Electric, 1.0- 1.5%
10 Control system BHEL, ABB, Yogokawa, Emerson 0.3- 0.5%
Minimax GMBH, KIDDE India, Nohmi Bosai – Japan, Wormald Fire

11 Fire protection system 0.75%- 1.0%
Systems, Kirloskar Brothers, Subhash Projects, Agnice Fire Protection
Era Construction, Nagarjuna Construction, Sunil Hitech, JMC, Gannon
12 Main plant civil work 18- 20%
Dunkerly, Bridge & Roof
Scale to remain a constraint for BoP segment

It is clear that the BTG equipment segment is the most attractive within the power
generation equipment segment primarily due to its scale. Further, entry barriers in the
BTG segment are higher due to technology issues and complexity of project execution.
In fact, for most of the projects being developed by the state and private sector, the BTG
equipment contractors are also the project supervisors who in turn sub-contract the
remaining scope of the power plant to smaller contractors. Hence, they have the option
Even as the growth is likely to be high in of reducing their capital requirement in the project by increasing the capital
the BoP segment, it does not provide requirements for BoP contractors.
the same scale as BTG. Further it is a
Thus, even as capacities in the BoP segment remain constrained, not all BoP contractors
highly working capital intensive
are able to take advantage of the favorable dynamics. Some BoP contractors lose out as
business
they accede to less favourable terms to obtain pre-qualifications. Others are impacted
when trying to increase the growth profile of their businesses by taking higher than
optimal number of orders. Hence, we believe that while the BoP segment is attractive
due to its long-term growth potential, investors need to be selective and look at
companies that have sound customer profiles, as the same directly impacts capital
requirements in this business.
4
Power transmission outlay set to surge

Power transmission spend to increase by ~200% in 11th plan
Driven by the addition in power generation capacities and upgrades in India’s existing
power transmission network, the power transmission spend is expected to increase by
~200% in the 11th plan period over the 10th plan period.
Fig 7 - India’s power transmission spend under 10th and 11th five-year plans
March YE, INR Xth Plan XI th Plan
2003 2004 2005 2006E 2007E 2008E 2009E 2010E 2011E 2012E
mn total total
Central sector 28,004 24,849 32,815 41,985 57,660 185,313 91,020 146,092 175,714 179,556 164,394 756,775
PGCI 27,649 24,212 32,224 41,336 56,446 181,867 64,650 110,140 130,840 130,090 109,790 545,510
% change -12% 33% 28% 37% 15% 70% 19% -1% -16%
Others 355.3 637.1 591 649.2 1213.7 3,446 26,370 35,952 44,874 49,466 54,604 211,265
% change 79% -7% 10% 87% 2073% 36% 25% 10% 10%
State sector 32,863 36,235 43,194 50,109 90,454 252,854 94,238 134,993 149,043 100,898 82,449 561,622
Northern region 8,008 8,559 12,191 14,932 15,361 59,050 21,291 20,409 24,322 22,042 17,076 105,139
% change 7% 42% 22% 3% 39% -4% 19% -9% -23%
Western region 3,597 3,997 3,708 3,554 15,951 30,806 15,576 33,315 52,685 37,825 22,431 161,832
% change 11% -7% -4% 349% -2% 114% 58% -28% -41%
Southern region 10,173 12,479 12,944 13,501 33,352 82,448 36,665 39,125 17,100 15,171 25,563 133,625
% change 23% 4% 4% 147% 10% 7% -56% -11% 68%
Eastern region 10,585 10,643 13,150 16,869 23,407 74,655 15,944 35,164 48,108 19,075 11,963 130,254
% change 1% 24% 28% 39% -32% 121% 37% -60% -37%
North Eastern
501 557 1,201 1,253 2,384 5,896 4,762 6,980 6,829 6,785 5,415 30,771
region
% change 11% 116% 4% 90% 100% 47% -2% -1% -20%
Total All India 60,868 61,084 76,009 92,094 148,113 438,167 185,258 281,085 324,757 280,453 246,844 1,318,397
Source: CEA
India’s eastern/north eastern belt to see significant capacity addition

The primary demand for power transmission in India comes from the western, northern
and southern regions. However, going forward, sizable power generation capacities are
likely to come up in the eastern and the north eastern part of the country due to coal
deposits in eastern India. This implies higher outlay for the power transmission sector.
Further, as hydro power capacities come up in north eastern India, the probability of an
increase in the power transmission outlay in the future is high.
Fig 8 - Base power requirement and supply- Region wise

Power supply Northern Western Southern Eastern N. Eastern Total
Regionally, there is likely to be a power (MU) Deficit (%) Deficit (%) Deficit (%) Deficit (%) Deficit (%) Deficit (%)
demand supply imbalance in India over
Mar-07 -11.0 -15.6 -2.7 -3.0 -9.9 -9.6
the 11th and 12th plan periods, leading
Mar-08 -10.8 -15.8 -3.2 -4.9 -12.3 -9.9
to higher investment in power
transmission Mar-09 -10.8 -16.0 -7.5 -4.6 -13.5 -11.0
Mar-10 -11.6 -13.7 -6.4 -4.5 -11.1 -10.1
Source: CEA
Power transmission sees higher order flows, competition

PGCIL awards orders of Rs 277.2bn in first three years of 11th plan
Recently, the Power Grid Corporation of India (PGCIL) announced that it plans to float
tenders of Rs 640bn in FY11E for nine high capacity corridors that will transmit power
from new projects in Orissa, Sikkim, Jharkhand, Chhattisgarh, Madhya Pradesh, Andhra
Pradesh, and Tamil Nadu. It may be noted that some of these power transmission
projects are in addition to plans formulated by PGCIL at the beginning of the 11th plan
period. This lends credence to the hypothesis that order inflows in the power
transmission sector could be stronger than expectations.
5
PGCIL has given orders worth Rs PGCIL has awarded orders worth Rs 277.2bn in the first three years of the 11th plan
277.2bn in the 11th plan period till period; this implies that to meet its targets under the 11th plan, the company will have to
FY10, of which 36.8% of the orders are give out an equal amount of orders over the next two years of the plan period. Even as
for transmission line tower EPC and the order flows from PGCIL, which can be taken as a proxy for the total investment in
18% are for substations India’s power transmission sector, have increased from FY09 onwards, the competitive
intensity in the sector has intensified.
Fig 9 - Power Grid Corporation order flows - Rs mn, March year end
FY08 FY09 FY10 Total
Conductor - 20,438 14,836 35,275
Consultancy 301 - - 301
Insulator 63 15,575 9,941 25,579
Miscellaneous 144 687 2,169 3,000
Pile foundation - 574 1,261 1,835
Rural electrification 66 20,919 2,668 23,653
Substation 6,194 23,006 20,720 49,920
Telecom 149 - - 149
Transformer 1,045 7,620 26,848 35,513
Transmission line tower EPC 7,027 49,552 45,489 102,068
Transmission tower EPC has become an 14,989 138,371 123,934 277,294
extremely competitive business due to Source: Company, RCML Research
low entry barriers. Additionally
transformers segment has become Reducing HHI = increasing competitive intensity
competitive as Chinese manufacturers Competition in the power transmission equipment sector has increased significantly in
have gained market share due to price the key packages of transmission line tower EPC and transformers. To demonstrate this,
differential they compared to the Indian we compute the Herfindahl-Hirschman index (HHI) which measures the industry
manufacturers. concentration. We note that the HHI for the transmission towers industry has reduced
significantly over the last three years from FY08, indicating increase in competitive
intensity.
Fig 10 - Increasing competition in power transmission orders

Transmission line tower EPC Transformers
PGCIL
order flow Total value of Number of Top 5 Total value of Number of Top 5
details orders awarded companies market HHI(x) orders awarded companies market HHI(x)
(INR mn) awarded orders share (%) (INR mn) awarded orders share (%)
FY08 7,027 5 100.0 0.25 1044.685 2 100.0 0.50
FY09 49,552 20 68.2 0.11 7620.3663 7 94.7 0.27
FY10 45,489 23 54.1 0.08 26848.284 14 72.9 0.14
Source: RHH, Company
6
Outlook and Valuations

Sound business models with high RoCE to outperform over the long term
Driven by the capacity addition in the power generation and power transmission
sectors, we believe we are in a secular growth trend in the sector over the medium to
long term. However, in our view, at this stage of the cycle in the sector, investors need
to look beyond growth. We believe the business models that generate high RoCE –
driven by a strong product profile or low working capital requirement – are likely to
outperform over the longer term. Further, we believe that for contracting companies, the
working capital requirement is determined by the customer profile. Hence, in our
opinion, customer profile is an additional indicator of a long-term sustainability of
business models. The key risks that the business models of some contracting companies
in the sector run is that of a) overdependence on selected customers and b) high
working capital requirement that eventually leads to frequent capital raising activities.
We look at P/E valuations for the company in conjunction with the value creation
potential of its business model. We believe that valuations of a business model generally
lead its anticipated value creation. Consequently, we believe that valuations peak before
the peak value is created (PVC) for a business model, as during the PVC period,
competition in the sector increases – this is because various companies in the sector are
attracted by the favorable industry dynamics. This works towards driving down the
return profile of the industry.
Fig 11 - Valuations
Company P/E RoCE
Price WACC
FY11E FY12E FY11E FY12E
Power generation
Our hypothesis is that valuations for a BGR Energy 737 20.1 16.3 10.8 20.9 19.7
business model lead the anticipated BHEL 2,383 22.3 17.6 12.7 40.1 41.4
value creation of the business model Suzlon 57 NM 34.2 11.0 1.5 5.5
Techno Electric and
289 11.7 10.4 11.5 23.1 22.8
Engineering
Thermax 710 26.3 20.1 11.3 50.3 53.5
We thus believe valuations for BHEL Power transmission
will de-rate as its value creation ABB 866 31.4 26.8 11.7 28.3 27.9
potential is likely to decline from FY13E Crompton Greaves 260 20.0 18.3 12.6 33.4 31.3
Jyoti Structures 154 11.8 10.2 10.1 27.6 28.1
Kalpataru Power 1,033 15.8 13.9 9.4 18.7 18.8
KEC International 474 11.0 9.4 9.9 27.9 28.3
For SIEM , we believe valuations will re-
Siemens 731 25.8 21.1 12.1 35.3 35.0
rate, due to likely improvement in the
business model as the German parent Others
realigns its strategy for the high growth Cummins India 607 23.6 21.2 11.3 45.6 43.2
Indian subsidiary Voltas 189 17.1 15.6 12.1 46.5 40.7
Source: Company
We believe value creation potential of a business model is a function of its growth

profile, profitability and scale. Thus we also look at the EV-EBITDA and EV-EBITDA/
EBITDA growth (EVEG) to ascertain the valuations given to the company at the operating
level. Through EVEG, we can normalise for the vector of growth and ascertain the
valuations given to the company for the profitability vector.
7
Fig 12 - EV/EBITDA vs EBITDA growth
18
16 ABB
KKC
14
TMX
EV/EBITDA ( FY12E)
12 CGR SIEM
10
Voltas TEE BHEL BGR
8
KPP
6
KECI
4 JYS
2
0
0 5 10 15 20 25 30
EBITDA CAGR FY10-12E
Fig 13 - Valuation
(EV/EBITDA)/(EBITDA
Company Price EV/EBITDA EBITDA CAGR RoCE
CAGR (FY10- FY12E))
(FY10- FY12E)
FY11E FY12E FY11E FY12E FY11E FY12E
Power generation
BGR Energy 737 11.5 9.4 28.5% 0.40 0.33 20.9 19.7
BHEL 2,383 13.8 10.9 25.2% 0.55 0.43 40.1 41.4
Suzlon 57 20.7 10.8 46.9% 0.44 0.23 1.6 6.2
Techno Electric and Engineering 289 8.9 7.9 11.1% 0.81 0.71 74.2 51.1
Thermax 710 15.5 11.8 24.2% 0.64 0.49 45.7 50.1
Power transmission
ABB 866 18.9 16.3 19.2% 0.98 0.84 28.3 27.9
Crompton Greaves 260 12.6 11.7 5.9% 2.16 1.99 33.4 31.3
Jyoti Structures 154 5.5 4.8 14.4% 0.39 0.34 27.6 28.1
Kalpataru Power 1,033 8.8 7.8 16.5% 0.54 0.47 18.7 18.8
KEC International 474 5.5 4.8 14.7% 0.38 0.33 25.6 25.9
Siemens 731 13.7 11.3 19.2% 0.71 0.59 35.3 35.0
Others
Cummins India 607 17.2 15.1 12.5% 1.37 1.21 45.6 43.2
Voltas 189 10.3 8.7 6.7% 1.53 1.29 46.5 40.7
Source: Company, RCML research
SIEM currently valued at 25.8x/21.1x FY11/FY12 estimates - Buy

At our current consolidated estimates, SIEM trades at a P/E of 25.8x and 21.1x for FY11E
and FY12E respectively. The stock has historically traded between a PE band of 30x and
50x. The EV/ EBITDA for the stock is 13.7x and 11.3x. When normalised for growth, the
EVEG ratio is at 0.71x and 0.59x for FY11E and FY12E respectively. We highlight that
even as the EVEG for SIEM is in the top quartile, it needs to be noted that SIEM has one
of the most technologically advanced product profile in the sector.
We believe that given the fundamental improvement in SIEM’s business model and the
growth in the power transmission equipment market, the company trades at a discount
to other peers of a similar pedigree in the industry. We initiate coverage on SIEM with a
Buy recommendation and a target price of Rs 925, implying a target P/E of 27x based on
normalised March FY12E consolidated EPS of Rs 34.6.
8
Fig 14 - Siemens P/E band chart Fig 15 - Premium/(Discount) to BSE

Px Last 10x 20x (%) Premium/(Discount) to BSE
1,200 30x 40x 50x
300
1,000 250
800 200
150
600
100
400
50
200 0
0 (50)
Jul-03
Dec-03
Jul-06
Dec-06
Jul-05
Nov-06
May-07
Nov-07
Jul-09
Dec-09
Mar-04
Jan-06
Jun-06
May-07
Oct-07
Apr-02
Mar-08
Jul-09
Dec-09
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Apr-05
Sep-05
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Sep-08
Feb-09
Jun-10
Sep-04
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Feb-09
Jun-10
Source: Company, RCML Research Source: Company, RCML Research
BHEL’s declining fundamentals beyond FY13E to cap valuations – Hold

At our estimates, BHEL is trading at a P/E of 22.3x and 17.6x for FY11E and FY12E
respectively. The stock has historically traded between a PE band of 18x and 30x. The
EV/ EBITDA for the stock is 13.8x and 10.9x. When normalised for growth, the EVEG
ratio is at 0.55x and 0.43x for FY11E and FY12E respectively. Given the growth and
returns profile over the next two years, BHEL is attractively valued. However, if we
normalise for growth over FY10- FY13E rather than over FY10- FY12E we see that BHEL
is trading at a EVEG 0.86x and 0.68x for FY11E and FY12E respectively. Hence, even as
the growth is likely to remain robust over FY10- FY12E, we believe decline in growth,
beyond FY13E is likely to cap valuations for the company. We initiate coverage on
BHEL with a Hold rating and a target price of Rs 2400.
Fig 16 - BHEL P/E band chart Fig 17 - Premium/(Discount) to BSE

18x 24x 30x 120
3,500
3,000 100
2,500 80
2,000 60
1,500 40
1,000 20
500 0
0 (20)
Nov-06
Apr-04
Sep-04
Feb-05
Jul-05
Jan-06
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May-07
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Feb-05
Jul-05
Jun-06
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Mar-08
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9
Fig 18 - Voltas P/E band chart Fig 19 - Premium/(Discount) to BSE

18x 24x 30x 100
350
80
300
60
250 40
200 20
150 0
100 (20)
(40)
50
(60)
0 (80)
Apr-02
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Nov-06
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Aug-08
Mar-08
Feb-09
Jul-09
Dec-09
Jun-10
Fig 20 - Cummins P/E band chart Fig 21 - Premium/(Discount) to BSE

Px Last 6x 12x (%) Premium/Discount to BSE SENSEX
900 18x 24x 30x 60
800
40
700
600 20
500
400 0
300 (20)
200
100 (40)
0 (60)
Sep-02
Feb-03
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Jun-10
Fig 22 - Thermax P/E band chart Fig 23 - Premium/(Discount) to BSE

18x 24x 30x 80
1000
60
800
40
600
20
400
0
200 (20)
0 (40)
Sep-04
Jul-05
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Apr-04
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10
Fig 24 - P/E ratios

1Yr Fwd P/E Ratio P/E At
Target
CMP (Rs.) Rating Target Remarks
price 5 yrs Avg 3Yrs Avg 1Yr Avg
price
Power generation
Growth to decline beyond FY12E, leading to de-
BHEL 2,383 Hold 2,400 22.0 24.8 22.9 17.8
rating
BGR Energy 737 Hold 700 NA NA 14.1 15.0 -
The scalability of the business model has improved

Techno Electric 289 Buy 400 11.0 11.2 10.0 14.4
with the foray in the utility business
Thermax 710 Hold 710 18.5 20.4 22.0 20.1 -
Power transmission
The RoCE and growth profile of the business has
ABB 866 Hold 850 33.9 37.3 29.8 26.3 declined over the past one year. Execution period of
order backlog has increased.
The margins have improved significantly over FY09
Crompton Greaves 260 Hold 285 16.1 16.2 16.8 20.1 and FY10, leading to higher returns. Market share in
domestic transmission market has increased
The competition in the transmission tower EPC
Jyoti Structures 154 Buy 185 14.1 14.0 12.3 12.2
business has increased
Kalpataru Power 1,033 Hold 1,000 16.9 19.4 14.6 13.5
KEC International 474 Hold 500 11.3 11.9 10.7 10.1
Siemens 731 Buy 925 32.1 29.7 28.7 26.8 See limited downside from our target price
Others
Profitability of the business model has improved
Cummins 607 Hold 575 15.0 14.6 16.5 20.1
substantially over the last two years
Voltas 189 Buy 220 18.5 18.3 17.0 18.1 -
Source: Company, Bloomberg, RCML Research
11
Key risks
If the increase in competition across the transmission and generation equipment and
contracting businesses starts to play out earlier than our expectations the return and
growth profiles across our coverage could be negatively impacted. We have already
seen announcements of BTG capacity worth 11 GW in the recent past (BGR Energy,
Thermax, NTPC-BHEL Power Projects Limited), compared to 6 GW of capacity that
BHEL had at the end of FY07.
While we do not expect key rates to rise beyond the threshold level for contracting
companies, it needs to be highlighted that since power contracting is working capital
intensive business, any increase in interest rates beyond expectations is likely to impact
the margins negatively.
Across BoP and transmission tower EPC segments, we have seen new entrants over
FY08- FY10. It is critical that the projects undertaken by the new entrants proceed
without delay as any delay in one part of the power infrastructure value chain is bound
to impact others in the value chain.
12
Companies
13
ABB Ltd Initiating Coverage 21 June 2010
CMP TARGET RATING RISK

ABB Ltd
Rs 866 Rs 850 HOLD LOW
Rich valuations overshadow medium-term prospects: Hold
Even as ABB India’s (ABB) product profile in automation solutions is the BSE NSE BLOOMBERG
strongest, its market share in the power transmission related products has 500002 ABB ABB IN
declined in CY10. Moreover, while higher order inflows in the project business
reinstate a positive outlook on revenues and earnings growth in CY10, we Company data
believe that the current valuations offer limited room for upside over the Market cap (Rs mn / US$ mn) 183,417/3,953
medium term. We initiate coverage on the stock with a Hold recommendation Outstanding equity shares (mn) 212
and a target price of Rs 850. Free float (%) 31.6
A clear leader in India’s automation solutions space: In terms of capabilities, Dividend yield (%) 0.3
ABB is the leader in the domestic automation solutions industry and has been 52-week high/low (Rs) 882 / 641
consistently associated with prestigious products in this area. Besides 2-month average daily volume 466,879
automation, ABB also has a diverse offering in infrastructure verticals. However,
we believe that ABB’s business model clearly derives strength from its leadership Stock performance
in automation solutions. Even as CY09 was a disappointing year for ABB, we Returns (%) CMP 1-mth 3-mth 6-mth
note that the automation products business continued to grow and reported ABB India 866 4.4 0.5 14.1
relatively better profit margins vis-à-vis other businesses. BSECG 14,462 6.4 3.3 5.0
Sensex 17,617 4.6 0.7 4.3
Parent to focus on long-term business development in India: ABB Group,
through an open offer, intends to increase the stake in ABB by 22.89% (48.59mn
P/E comparison
shares) to 75% at a cost of Rs 1bn (a 3.9% premium to current price). Through
(x) ABB Industry
this open offer, the group aims to raise control in the Indian company – this
50
would enable it to facilitate long-term development of the group’s business in 40
38.2
31.4
26.8
India. At the current offer price, the parent is offering a P/E of 53.8x for CY09. 30 23.1
17.7 15.0
The open offer has a minimum acceptance ratio of ~48%. At current price the 20
10
break even for the open offer is at ~Rs 835. We believe the same is likely to 0
provide support to the stock over the short term. CY10E CY11E CY12E
Limited upsides – Hold: In our view, the growth in ABB’s order backlog provides
comfort in terms of its revenue growth for CY10E. However, while the outlook for Valuation matrix
revenues and earnings growth in CY10 remains positive, the current valuations (x) CY09 CY10E CY11E CY12E
leave little room for upside over the medium term. Further, given the high P/E @ CMP 51.7 38.2 31.4 26.8
concentration of power systems in the order backlog at CY10E-end, positive P/E @ Target 50.9 37.4 30.8 26.3
surprises to earnings estimates, arising from short cycle orders, are unlikely. At EV/EBITDA @ CMP 33.7 23.2 18.9 16.3
our current estimates, ABB is trading at a P/E of 38.2x and 31.4x for CY10E and
CY11E, respectively. The EV/EBITDA for the stock is at 23x and 19x; however, RCML vs consensus
when adjusted for growth, the EVEG ratio is at 0.98x and 0.74x for CY10E and CY10E CY11E
Parameter
CY11E respectively. ABB’s valuations are one of the most expensive in the sector. RCML Cons RCML Cons
We believe that given the decline in its RoCE, ABB is unlikely to trade close to its Sales (mn) 80,204 94,597 90,594
historical multiples. We initiate coverage on the stock with a Hold EPS (Rs) 22.7 27.6 28.7
recommendation and a target price of Rs 850.
Financial highlights Profitability and return ratios

(Rs mn) CY09 CY10E CY11E CY12E (%) CY09 CY10E CY11E CY12E
Revenue 62,372 80,204 94,597 109,269 EBITDA margin 8.5 9.6 9.9 10.0
Growth (%) (8.8) 28.6 17.9 15.5 EBIT margin 7.7 8.9 9.3 9.4
Adj net income 3,546 4,805 5,847 6,840 Adj PAT margin 5.7 6.0 6.2 6.3
Growth (%) (35.2) 35.5 21.7 17.0 ROE 15.6 18.2 18.8 18.5
FDEPS (Rs) 16.7 22.7 27.6 32.3 ROIC 19.8 25.1 26.1 25.7
Growth (%) (35.2) 35.5 21.7 17.0 ROCE 21.2 27.1 28.3 27.9
14
Investment rationale
An undisputed leader in India’s automation solutions industry
In terms of capabilities, ABB India (ABB) is the leader in India’s automation solutions
industry and has been consistently associated with prestigious products in this area.
Besides automation, ABB also has a diverse offering in infrastructure verticals.
However, we believe that ABB’s business model clearly derives its strength from the
company’s leadership in automation solutions. ABB’s automation products find
application across industries (see fig 2); hence, the company is essentially a play on the
industrial capex.
Fig 25 - ABB India product and service offerings in the automation segment
No. Industry Offerings in the industry
1 Automotive Automotive components
Press automation
Power train assembly
Robotics service and support
Cement, Minerals &
2 Cement Solutions
Mining
Open Pit Solutions
Minerals Solutions
Underground Solutions
Supply of automation and electrical equipment for NPK
3 Chemicals
fertilizer plants
Technology for : Air separation plants, Oxygen plants etc
Technology for composition and polymer units used in plastics
4 Marine Crane system, marine system & solutions
5 Metals Supply of coke plants, sinter plants, blast furnace,
Hot flat mills
Tandem cold rolling mills & cold rolling mills
Fully integrated package of advanced refining process
6 Oil & Gas
technologies
7 Power T&D FACTS (Flexible AC Transmission Systems),
Even as CY09 was a disappointing year for ABB, we note that the company’s automation
products business continued to grow and report relatively better profit margins. Some of
the key automation projects that ABB completed in this year are outlined in Fig. 2.
Fig 26 - Key automation projects completed by ABB in CY09

Name of the Company Projects name Brief description
Installation of Process control system,
Tata Steel Steel blast furnace Instrumentation & controllers for plant
automation
Design, supply and installation of electrical
Trans-national single
Lafarge Cement and automation system, process control
belt conveyor
system, motors etc.
Enterprise wise
ONGC Complete instrumentation & automation
automation project
Tata Motors World truck project Transfer systems, Automation & controls
Set to benefit from focus on cost savings through global sourcing

The ABB Group, ABB’s parent, has expanded its cost saving programme from US$ 2bn
to US$ 3bn in Q4CY09. In CY10, the company intends to save US$ 1.5bn (50% of the
cost savings target for CY10) by optimising global sourcing. We believe that ABB, with a
lower cost base (arising from lower labour costs), could see higher revenue growth due
15
to its focus on global sourcing. During CY09, ABB India commissioned a production
facility for ‘automation products’ – this facility is likely to support the parent’s global
sourcing initiative. Some of ABB’s other recently commissioned capacities are:
Recently commissioned factories Remarks

LV motors and instrumentation facility at High efficiency motors from this factory are
Faridabad exported to Europe
HV machines, Power Transformers, Breakers HV machines and wind generators are exported
and Auxiliary at Vadodara worldwide
LV Drives and Systems , MV Drives and
Positioned to serve South East Asia
Electronics at Nelamangala
Process Automation factory & storage facility for
Process automation at Peenya
automation components and spares
Revenue share of projects business to dwindle, support margin expansion

The revenue share of ABB’s projects business has been consistently declining from CY06
onwards. While the projects business does result in scale, margins generated from this
business tend to be lower. As ABB has exited the ‘rural electrification’ business, the
share of projects business would continue to drop, and thereby support margin
expansion.
Fig 27 - Revenues and order backlog

December year end CY06 CY07 CY08 CY09
Revenues break up (%)
Project business 51 53 48 43
Power systems 34 36 31 25
Process automation 17 17 18 18
Product business 49 47 50 56
Power products 28 26 27 29
Automation products 21 21 23 27
Order backlog (%)
Project business 66 66 61 63
Power systems 46 45 41 48
Process automation 20 21 21 15
Product business 34 34 39 37
Power products 28 26 26 23
Automation products 6 8 12 14
Outlook and valuations

Limited upsides at 31x CY11 earnings – Hold
In our view, the growth in ABB’s order backlog provides comfort in terms of revenue
visibility for CY10E. However, even as the outlook for revenues and earnings growth
remains positive in CY10, valuations at current level leave little room for upside over the
medium term. Further, given the high concentration of power systems in the order
backlog at CY10E-end, positive surprises to earnings estimates driven by short cycle
orders are unlikely.
At our current estimates, ABB is trading at a P/E of 38.2x and 31.4x for CY10E and
CY11E, respectively. The EV/EBITDA for the stock is at 23x and 19x; however, when
adjusted for growth, the EVEG ratio is at 0.98x and 0.74x for CY10E and CY11E
respectively. ABB’s valuations are one of the most expensive in the sector. We believe
that given the decline in its RoCE, ABB is unlikely to trade close to its historical
multiples. We initiate coverage on the stock with a Hold recommendation and a target
price of Rs 850.
16
Fig 28 - ABB P/E band chart Fig 29 - Premium/(Discount) to BSE

Px Last 12x 20x 28x (%)
36x 48x 56x
1,800 200
1,600
1,400 150
1,200
1,000
100
800
600
400 50
200
0 0
Apr-02
Aug-03
Nov-05
Jan-06
Sep-02
Feb-03
Jan-04
Jul-04
Dec-04
Oct-06
Apr-07
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Jul-09
Apr-04
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Feb-05
Jul-05
Jun-05
May-06
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Jan-09
Dec-09
Jun-10
Jun-06
Nov-06
May-07
Oct-07
Mar-08
Aug-08
Feb-09
Jul-09
Dec-09
Jun-10
Source: Bloomberg, RCML Research Source: Bloomberg, RCML Research
Fig 30 - Order Backlog

(Rs mn) Order backlog Order inflows
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
CY07 CY08 CY09
Fig 31 - RoCE
(%)
ROCE
60
50
40
30
20
10
0
CY06 CY07 CY08 CY09 CY10E CY11E CY12E CY13E
17
Fig 32 - Capital turnover

(x)
Capital Turnover
5
0
Fig 33 - Working Capital as % of Sales

(%)
Working capital as % of sales
30
20
10
0
Key risks
Higher than expected order inflows in the short cycle business could result in higher
revenues growth compared to our estimates, leading to upsides from current stock price
levels
Improvement in execution beyond expectations in certain slow moving orders in the

process automation segment could lead to higher earnings growth compared to our
expectations.
18
Consolidated financials
Profit and Loss statement Balance sheet
Y/E Dec (Rs mn) CY09 CY10E CY11E CY12E Y/E Dec (Rs mn) CY09 CY10E CY11E CY12E
Revenues 62,372 80,204 94,597 109,269 Cash and cash eq 5,241 2,328 4,122 6,200
Growth (%) (8.8) 28.6 17.9 15.5 Accounts receivable 28,577 35,158 41,467 47,899
EBITDA 5,290 7,696 9,407 10,944 Inventories 7,294 7,209 8,503 9,842
Growth (%) (31.7) 45.5 22.2 16.3 Other current assets 6,380 11,099 12,898 15,564
Depreciation & amortisation 485 555 598 651 Investments 169 169 169 169
EBIT 4,805 7,142 8,810 10,293 Gross fixed assets 8,793 10,706 11,706 12,706
Growth (%) (34.9) 48.6 23.4 16.8 Net fixed assets 6,731 8,090 8,492 8,841
Interest 256 319 319 319 CWIP 1,163 - - -
Other income 726 492 410 438 Intangible assets
EBT 5,274 7,315 8,901 10,412 Deferred tax assets, net 1 1 1 1
Income taxes 1,728 2,509 3,053 3,572 Other assets (1) - - -
Effective tax rate (%) 32.8 34.3 34.3 34.3 Total assets 55,556 64,054 75,652 88,516
Extraordinary items - - - - Accounts payable 29,869 35,091 41,387 47,956
Min into / inc from associates - - - - Other current liabilities - - - -
Reported net income 3,546 4,805 5,847 6,840 Provisions 1,450 466 466 466
Adjustments - - - - Debt funds - - - -
Adjusted net income 3,546 4,805 5,847 6,840 Other liabilities
Growth (%) (35.2) 35.5 21.7 17.0 Equity capital 424 424 424 424
Shares outstanding (mn) 211.9 211.9 211.9 211.9 Reserves & surplus 23,813 28,073 33,375 39,670
FDEPS (Rs) (adj) 16.7 22.7 27.6 32.3 Shareholder's funds 24,237 28,497 33,799 40,093
Growth (%) (35.2) 35.5 21.7 17.0 Total liabilities 55,556 64,054 75,652 88,516
DPS (Rs) 2.2 2.2 2.2 2.2 BVPS (Rs) 114.4 134.5 159.5 189.2
Cash flow statement Financial ratios

Y/E Dec (Rs mn) CY09 CY10E CY11E CY12E Y/E Dec CY09 CY10E CY11E CY12E
Net income + Depreciation 4,031 5,360 6,445 7,491 Profitability & Return ratios (%)
Non-cash adjustments 70 (1) - 0 EBITDA margin 9.6 9.9 10.0 10.0
Changes in working capital (631) (6,978) (3,106) (3,868) EBIT margin 8.9 9.3 9.4 9.5
Cash flow from operations 3,470 (1,618) 3,340 3,624 Net profit margin 6.0 6.2 6.3 6.3
Capital expenditure (1,546) (750) (1,000) (1,000) ROE 18.2 18.8 18.5 18.9
Change in investments 442 - - - ROCE 27.1 28.3 27.9 28.6
Other investing cash flow - - - - Working Capital & Liquidity ratios
Cash flow from investing (1,104) (750) (1,000) (1,000) Receivables (days) 171 145 148 149
Issue of equity - - - - Inventory (days) 55 45 42 42
Issue/repay debt (0) - - - Payables (days) 248 203 202 204
Dividends paid (496) (545) (545) (545) Current ratio (x) 1.5 1.6 1.6 1.6
Other financing cash flow (3) (0) 0 0 Quick ratio (x) 1.3 1.4 1.4 1.4
Change in cash & cash eq 1,867 (2,914) 1,794 2,078 Turnover & Leverage ratios (x)
Closing cash & cash eq 5,241 2,328 4,122 6,200 Gross asset turnover 1.6 1.9 2.1 2.2
Economic Value Added (EVA) analysis Total asset turnover 2.7 3.0 3.0 3.0
Interest coverage ratio 18.8 22.4 27.6 32.3
Y/E Dec CY09 CY10E CY11E CY12E
Adjusted debt/equity - - - -
WACC (%) 11.7 11.7 11.7 11.7
Valuation ratios (x)
ROIC (%) 19.8 25.1 26.1 25.7
EV/Sales 2.9 2.2 1.9 1.6
Invested capital (Rs mn) 24,237 28,497 33,799 40,093
EV/EBITDA 33.7 23.2 18.9 16.3
EVA (Rs mn) 196,847 380,707 485,457 560,159 P/E 51.7 38.2 31.4 26.8
EVA spread (%) 8.12 13.36 14.36 13.97 P/BV 7.6 6.4 5.4 4.6
19
Quarterly trend
Particulars Q1CY09 Q2CY09 Q3CY09 Q4CY09 Q1CY10
Revenue (Rs mn) 14,061 15,148 14,689 19,016 14,753
YoY growth (%) -13.8 -2.7 -33.6 35.2 -2.6
QoQ growth (%) -36.4 7.7 -3.0 29.5 -22.4
EBITDA (Rs mn) 1,367 1,254 1,248 1,671 798
EBITDA margin (%) 9.7 8.3 8.5 8.8 5.4
Adj net income (Rs mn) 859 836 831 1,217 762
YoY growth (%) -34.8 -20.2 -57.0 41.7 -8.8
QoQ growth (%) -55.5 -2.7 -0.6 46.5 -37.4
DuPont analysis
(%) CY09 CY10E CY11E CY12E CY09
Tax burden (Net income/PBT) 67.2 65.7 65.7 65.7 67.2
Interest burden (PBT/EBIT) 109.8 102.4 101.0 101.2 109.8
EBIT margin (EBIT/Revenues) 7.7 8.9 9.3 9.4 7.7
Asset turnover (Revenues/Avg TA) 274.6 304.2 303.7 295.8 274.6
Leverage (Avg TA/Avg equtiy) 100.0 100.0 100.0 100.0 100.0
Return on equity 15.6 18.2 18.8 18.5 15.6
Company profile Shareholding pattern
ABB, incorporated in December 1949 as Hindustan Electric (%) Jun-09 Sep-09 Dec-09
Company, operates in two segments i.e. power technology and Promoters 52.1 52.1 52.1
automation technology, and offers its services and products to the FIIs 12.3 11.9 10.1
power transmission as well as other industries. Its power
Banks & FIs 24.0 24.5 26.5
technology segment provides solutions for power transmission,
power distribution, and control and protection systems for power Public 11.6 11.5 11.3
plants. Under the automation technology segment, it offers
products, systems, software, and services for automation and
optimization of discrete, process, and batch manufacturing
operations, and related services. These technologies include
measurement control, instrumentation, process analysis, drives and
motors, power electronics, robots, and low-voltage products.
Recommendation history Stock performance

Date Event Reco price Tgt price Reco
900 ● Hold
21-Jun-10 Initiating Coverage 866 875 Hold
850
800
750
700
650
Jun-09
Jul-09
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Nov-09
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20
Bharat Heavy Electricals Ltd Initiating Coverage 21 June 2010

Bharat Heavy Electricals Ltd
Rs 2,383 Rs 2,400 HOLD LOW
th
Fundamentals to weaken beyond 11 plan; Hold
We initiate coverage on BHEL with a Hold recommendation (target price of BSE NSE BLOOMBERG
INR 2400) as we believe even as the company is likely to maintain market 600103 BHEL BHEL IN
share over the short to medium term, competition is likely to intensify over the
second half of the Twelfth plan period. Further, we believe that the growth is Company data
likely to slow down from FY13E onwards, as order inflows have peaked out Market cap (Rs mn / US$ mn) 5,805,782 / 125,354
and only inched up at a 3.2% CAGR over FY08-FY10. While the stock is likely Outstanding equity shares (mn) 490
to gain support from the execution profile of BHEL’s current order backlog, Free float (%) 27.9
structurally lower growth is likely to lead to a de-rating in stock valuations
Dividend yield (%) 0.7
over the long term.
52-week high/low (Rs) 2585 / 1923
Industry capacity utilisation to drop in 12th plan: BHEL is likely to have a BTG 2-month average daily volume 576,285
capacity of 20GW by FY12-end. However, with at least five domestic
manufacturers likely to set up capacities in the BTG equipment market, Stock performance
competition in this space is likely to intensify. After the new capacities come in, Returns (%) CMP 1-mth 3-mth 6-mth
most likely by the end of 11th plan, India is estimated to have an annual BTG BHEL 2,383 2.8 0.2 2.2
capacity of 35-40GW. This implies that at full capacity, the BTG industry can BSECG 14,462 6.4 3.3 5.0
cater to 175GW–200GW of incremental power generation capacity in a five- Sensex 17,617 4.6 0.7 4.3
year plan period. However, India is likely to add capacities of ~60-65GW in the
11th plan and ~90-100GW in the 12th plan period. Thus, we believe that P/E comparison
capacity utilisation levels for the industry are likely to decline, leading to margin (x) B HEL Industry
pressures for BHEL over the long term. 27.1
30 23.1 22.3
17.7 17.6
Flat order inflows – forewarning to a lower growth period: BHEL’s order 20 15.0
inflows have grown at a CAGR of 3.2% over FY08-FY10. We believe that flat 10
order inflows over the past two years are likely to pressurise growth beyond 0
FY12E. In the absence of growth, we believe that the value creation potential of FY10E FY11E FY12E
the business is likely to decline, leading to a de-rating in valuations over the
short to medium term.
Valuation matrix
Growth to slow down beyond FY12E, Hold: At our estimates, BHEL is trading at (x) FY10E FY11E FY12E FY13E
a P/E of 22.3x and 17.6x for FY11E and FY12E respectively. The stock has P/E @ CMP 27.1 22.3 17.6 15.3
historically traded between a PE band of 18x and 30x. The EV/ EBITDA for the P/E @ Target 27.2 22.4 17.8 15.4
stock is 13.8x and 10.9x. When normalised for growth, the EVEG ratio is at EV/EBITDA @ CMP 17.0 13.8 10.9 9.5
0.55x and 0.43x for FY11E and FY12E respectively. Given the growth and
returns profile over the next two years, BHEL is attractively valued. However, if RCML vs consensus
we normalise for growth over FY10- FY13E rather than over FY10- FY12E we FY11E FY12E
Parameter
see that BHEL is trading at a EVEG 0.86x and 0.68x for FY11E and FY12E RCML Cons RCML Cons
respectively. Hence, even as the growth is likely to remain robust over FY10- Sales (Rs mn) 404,834 410,626 504,512 495,025
FY12E, we believe decline in growth, beyond FY13E is likely to cap valuations EPS (Rs) 107 112.1 135.2 135.9
for the company. We initiate coverage on BHEL with a Hold rating and a target
price of Rs 2400.
(Rs mn) FY10E FY11E FY12E FY13E (%) FY10E FY11E FY12E FY13E
Growth (%) 25.6 20.6 24.6 14.5 EBIT margin 17.3 17.7 18.3 18.2
Growth (%) 37.9 21.5 26.3 15.6 ROE 29.9 29.4 29.8 27.5
FDEPS (Rs) 88.1 107.0 135.2 156.2 ROIC 39.8 40.0 41.3 37.7
Growth (%) 37.9 21.5 26.3 15.6 ROCE 40.0 40.1 41.4 37.8
21
Gas based power plants orders to start flowing in: Going ahead the competition in the
gas based thermal power plants is likely to be significantly lower than the coal based
thermal power plants. We expect order inflows from gas based power plants to flow in
from FY11E. However the margins in the same are likely to be lower as they are CKD
units (completely knocked down) and hence the potential for value addition by the
contractor is lower.
Execution to remain hampered by low capacity across value chain: BHEL has
consistently disappointed on the execution front. We believe that given the paucity of
quality contractors across the power generation contracting value chain, BHEL may not
be able to compress its execution period in the 11th plan period. Inability to do reduce
the execution period renders this important lever of growth ineffective for BHEL.
Fig 34 - BHEL P/E band chart Fig 35 - Premium/(Discount) to BSE

18x 24x 30x 120
3,500
3,000 100
2,500 80
2,000 60
1,500 40
1,000 20
500 0
0 (20)
Apr-04
Sep-04
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Apr-04
Aug-08
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May-07
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Fig 36 - RoCE
(%) ROCE
50
40
30
20
10
0
FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E
22
Fig 37 - Capital Turnover

(x) Capital Turnover
2.4
2.3
2.2
2.1
2.0
1.9
1.8
Fig 38 - Working Capital as a % of Sales

(%) Working capital as % of sales
20
10
(10)
Key upside risks

Pick up in execution: Execution is likely to pick up towards the end of the 11th plan
period. While we have built in the same in our model, further pick up in execution,
beyond expected levels, may lead to a strong quarterly performance; this can support
stock price over a longer-than-expected period.
Market share gains: Despite no significant growth in order inflows, BHEL has gained
market share in private sector orders in FY10. However, if project awarding is higher
than expectations in FY11E and FY12E (under the 12th plan), and the company continues
to maintain or gain market share, order inflows could grow better than our expectations.
.
23
Y/E March (Rs mn) FY10E FY11E FY12E FY13E Y/E March (Rs mn) FY10E FY11E FY12E FY13E
Growth (%) 25.6 20.6 24.6 14.5 Accounts receivable 206,116 252,402 314,548 360,244
Growth (%) 48.3 23.0 27.4 13.9 Other current assets 32,529 39,834 49,642 56,854
Depreciation & amortisation 4,580 5,161 5,895 6,335 Investments 798 798 798 798
Growth (%) 49.3 23.8 28.3 14.3 Net fixed assets 39,456 49,295 53,401 52,066
Interest 335 495 495 495 CWIP - - - -
Other income 8,239 9,289 10,119 12,823 Intangible assets
EBT 65,907 80,601 101,783 117,635 Deferred tax assets, net 18,403 18,403 18,403 18,403
Income taxes 22,800 28,210 35,624 41,172 Other assets - - - -
Min into / inc from associates - - - - Other current liabilities
Reported net income 43,106 52,391 66,159 76,463 Provisions 74,841 103,674 140,643 179,849
Adjustments - - - - Debt funds 1,274 1,274 1,274 1,274
Adjusted net income 43,106 52,391 66,159 76,463 Other liabilities - - - -
Growth (%) 37.9 21.5 26.3 15.6 Equity capital 4,895 4,895 4,895 4,895
Growth (%) 37.9 21.5 26.3 15.6 Total liabilities 505,090 613,727 757,551 891,265
DPS (Rs) 23.3 25.3 29.3 29.3 BVPS (Rs) 325.7 403.1 504.0 630.9

Y/E March (Rs mn) FY10E FY11E FY12E FY13E Y/E March FY10E FY11E FY12E FY13E
Non-cash adjustments - - - - EBITDA margin 18.6 19.0 19.4 19.3
Changes in working capital (4,400) (2,047) (3,724) (1,374) EBIT margin 17.3 17.7 18.3 18.2
Cash flow from operations 43,287 55,504 68,329 81,424 Net profit margin 12.8 12.9 13.1 13.2
Capital expenditure (17,763) (15,000) (10,000) (5,000) ROE 29.9 29.4 29.8 27.5
Change in investments (275) - - - ROCE 40.0 40.1 41.4 37.8
Cash flow from investing (18,038) (15,000) (10,000) (5,000) Receivables (days) 199 207 205 213
Dividends paid (13,344) (14,490) (16,781) (14,343) Current ratio (x) 1.3 1.3 1.3 1.4
Other financing cash flow 278 (0) 0 0 Quick ratio (x) 0.7 0.7 0.7 0.7
Change in cash & cash eq 11,963 26,015 41,549 62,081 Turnover & Leverage ratios (x)
Y/E March FY10E FY11E FY12E FY13E
Adjusted debt/equity 0.0 0.0 0.0 0.0
WACC (%) 12.7 12.7 12.7 12.7
ROIC (%) 39.8 40.0 41.3 37.7
EV/Sales 3.2 2.6 2.1 1.8
EV/EBITDA 17.0 13.8 10.9 9.5
EVA (Rs mn) 4,351,767 5,414,898 7,084,270 7,763,026 P/E 27.1 22.3 17.6 15.3
EVA spread (%) 27.08 27.26 28.57 25.03 P/BV 7.3 5.9 4.7 3.8
24
Quarterly trend
Particulars Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10
Revenue (Rs mn) 111,344 57,756 69,989 73,860 144,819
YoY growth (%) 34.4 22.8 20.7 14.5 30.1
QoQ growth (%) 72.5 (48.1) 21.2 5.5 96.1
EBITDA (Rs mn) 19,054 4,959 11,385 14,579 27,081
EBITDA margin (%) 17.1 8.6 16.3 19.7 18.7
Adj net income (Rs mn) 13,475 4,706 8,579 10,726 19,096
YoY growth (%) 8.4 22.4 39.3 35.7 41.7
QoQ growth (%) 70.4 (65.1) 82.3 25.0 78.0
DuPont analysis
(%) FY09 FY10E FY11E FY12E FY13E
Return on equity 26.4 29.9 29.4 29.8 27.5
BHEL is the leading BTG equipment manufacturer and contractor in (%) Sep-09 Dec-09 Mar-10
India. The company currently has a capacity of 10 MW, which is Promoters 67.7 67.7 67.7
expected to increase to 20 MW at the end of March 2012. FIIs 16.1 15.5 15.2
Banks & FIs 14.2 15.0 15.2
Public 2.0 1.8 1.9

2,600
21-Jun-10 Initiating Coverage 2,383 2,400 Hold 2,500
2,400
2,300
2,200
2,100 ● Hold
2,000
1,900
Jun-09
Oct-09
Nov-09
Dec-09
Jul-09
Aug-09
Sep-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
25
BGR Energy Systems Ltd Initiating Coverage 21 June 2010

BGR Energy Systems Ltd
Rs 737 Rs 700 HOLD HIGH
Future capital requirements a drag – Hold
BGR Energy Systems (BGR) is likely to record high growth in FY11E, driven by BSE NSE BLOOMBERG
the execution profile of its order backlog. However, we expect the company to 532930 BGRENERGY BGRL IN
raise capital in FY11E to support its high growth and as the process to set up
BTG capacities is initiated. Hence, we believe that the current valuations need Company data
to be discounted for the same. At our current estimates, the stock is trading at Market cap (Rs mn / US$ mn) 53,037/1,143
a P/E of 20.1x and 16.3x for FY11E and FY12E respectively. Given the limited Outstanding equity shares (mn) 72
upside potential from current levels, we initiate coverage on the stock with a
Free float (%) 33.0
Hold recommendation.
Sound execution, robust order inflows provide strong revenue visibility: BGR’s 52-week high/low (Rs) 765 / 256
FY09 order intake jumped 3.5x on two large EPC jobs together worth Rs 80bn 2-month average daily volume 181,928
(Kalisindh and Mettur). However, the order inflow was more subdued in FY10,
as the company concentrated on execution. Even after a decline in order Stock performance
accretion in FY10, the company’s order backlog is likely to provide revenue Returns (%) CMP 1-mth 3-mth 6-mth
visibility for around three years, second only to Bharat Heavy Electricals (BHEL) BGR Energy 737 21.5 43.8 48.6
in the capital goods sector. Further, BGR expects strong order inflows (~Rs BSECG 14,462 6.4 3.3 5.0
100bn–Rs 150bn) in FY11E, which in our view will further add to the revenues Sensex 17,617 4.6 0.7 4.3
visibility.
P/E comparison
Superior management expertise – moving from BOP to end-to-end EPC: Besides
(x) B GR Energy Systems Industry
engineering and technology skill sets, EPC and BOP contracts tend to be project
26.3
management intensive. In our view, BGR enjoys significant advantage over other 30 23.1
20.1
17.7
contractors due to its capability to execute ~18-20 packages across BoP and BTG 20 16.3 15.0
segments captively. 10
0
Diversification into supercritical boilers, turbines and generators: In April ’10, FY10E FY11E FY12E
BGR, through its subsidiaries, entered into a technical collaboration with
Hitachi to manufacture supercritical boilers, turbines and generators. We
believe this diversification is a positive for the company, as it is likely to reduce Valuation matrix
its working capital requirements once the boilers and turbines are manufactured (x) FY10E FY11E FY12E FY13E
in-house. P/E @ CMP 26.3 20.1 16.3 14.1
P/E @ Target 25.0 19.1 15.5 13.4
Positives priced in; Hold: In our opinion, BGR’s capital intensive model, which EV/EBITDA @ CMP 15.5 11.5 9.4 8.2
has high working capital requirements, will necessitate capital raising in FY11E
to support the company’s high growth. The same hypothesis also gains weight if RCML vs consensus
we build in the incremental capital required for setting up BTG capacity under FY11E FY12E
the prospective JV with Hitachi. Hence, we believe that current valuations need Parameter
RCML Cons RCML Cons
to be discounted for the same. At our current estimates, the stock is trading at a
Sales (Rs mn) 41,413 42,296 51,055 55,109
P/E of 20.1x and 16.3x for FY11E and FY12E respectively. Given the limited
EPS (Rs) 36.7 36.5 45.3 47.8
upside potential from current levels, we initiate coverage on the stock with a
Hold recommendation.
Growth (%) 74.3 31.2 23.3 15.5 ROE 30.8 30.5 28.7 25.7
FDEPS (Rs) 28.0 36.7 45.3 52.3 ROIC 22.1 20.9 19.7 19.4
Growth (%) 74.3 31.2 23.3 15.5 ROCE 22.0 20.9 19.7 19.3
26
Fig 39 - BGR P/E band chart Fig 40 - Premium/(Discount) to BSE

Px Last 6x 12x (% Premium/(Discount) to BSE
18x 24x 30x 60
1400
1200 40
1000 20
800 0
600
(20)
400
200 (40)
0 (60)
Jan-08
Oct-08
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Jun-10

120,000
102,000
95,000
100,000
86,341
80,000
60,000
37,738
40,000 27,880
20,313
20,000
0
FY08 FY09 FY10
Fig 42 - RoCE
(%) ROCE
25
20
15
10
0
27

14
12
10
0
Fig 44 - Working Capital as %Sales

60
50
40
30
20
10
0
Key risks
BGR’s order backlog has a significant concentration of two large orders. We believe
such high concentration significantly increases the risk profile of any power contracting
business.
28
EBITDA 3,487 4,674 5,762 6,583 Inventories 222 292 357 498
Interest 538 647 847 922 CWIP - - - -
Other income 205 89 148 168 Intangible assets 6 6 6 6
EBT 3,051 3,972 4,898 5,658 Deferred tax assets, net (747) (747) (747) (747)
Income taxes 1,037 1,329 1,639 1,894 Other assets
Adjusted net income 2,015 2,643 3,259 3,764 Other liabilities 44 65 90 116
Growth (%) 74.3 31.2 23.3 15.5 Equity capital 720 720 720 720
DPS (Rs) 3.0 3.0 3.0 3.0 BVPS (Rs) 103.6 137.0 178.9 227.6

Non-cash adjustments (1) - - - EBITDA margin 11.3 11.3 11.3 11.3
Cash flow from operations (7,563) (3,137) (1,723) 153 Net profit margin 6.5 6.4 6.4 6.5
Capital expenditure (721) (510) (110) (117) ROE 30.8 30.5 28.7 25.7
Change in investments - - - - ROCE 22.0 20.9 19.7 19.3
Cash flow from investing (721) (510) (110) (117) Receivables (days) 176 174 180 187
Issue/repay debt 3,409 5,000 3,000 - Payables (days) 162 118 121 125
Other financing cash flow 41 (6) (0) (11) Quick ratio (x) 2.5 2.6 2.6 2.5
Change in cash & cash eq (5,050) 1,131 952 (191) Turnover & Leverage ratios (x)
WACC (%) 10.8 10.8 10.8 10.8
ROIC (%) 22.1 20.9 19.7 19.4
EV/Sales 1.8 1.3 1.1 0.9
EV/EBITDA 15.5 11.5 9.4 8.2
EVA (Rs mn) 201,447 255,409 278,996 296,990 P/E 26.3 20.1 16.3 14.1
EVA spread (%) 11.22 10.07 8.89 8.51 P/BV 7.1 5.4 4.1 3.2
29
Quarterly trend
Revenue (Rs mn) 7,183 3,111 4,660 6,351 16,598
YoY growth (%) 24.1 1.4 9.6 33.3 131.1
QoQ growth (%) 50.7 (56.7) 49.8 36.3 161.3
EBITDA (Rs mn) 813 402 551 690 1,721
EBITDA margin (%) 11.3 12.9 11.8 10.9 10.4
Adj net income (Rs mn) 470 202 306 419 1,083
YoY growth (%) 47.2 17.4 29.0 55.2 130.6
QoQ growth (%) 74.0 (56.9) 51.0 37.1 158.5
DuPont analysis
Return on equity 22.3 30.8 30.5 28.7 25.7
BGR was incorporated in 1985 as a joint venture between GEA (%) Sep-09 Dec-09 Mar-10
Energietechnik (Germany) and the promoter of the company, Mr. Promoters 81.3 81.3 81.3
B.G. Raghupathy. In 1993, the promoter and promoter family FIIs 1.9 1.6 1.8
bought GEA Energietechnik’s stake and became the sole
Banks & FIs 7.0 8.1 8.1
shareholders of the company. In 1993, the company expanded its
range of products and services in the power and oil and gas Public 9.8 9.0 8.7
industries. Currently, it manufactures and supplies equipment and
also does turnkey engineering project contracting. In the turnkey
engineering project contracting business, the company executes
projects in the power and oil & gas sectors, wherein it takes turnkey
responsibility to supply a range of equipment and services,
including civil and other works for a project.

800
21-Jun-10 Initiating Coverage 737 700 Hold ● Hold
700
600
500
400
300
200
Jun-09
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Aug-09
Sep-09
Oct-09
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Jun-10
30
Crompton Greaves Ltd Initiating Coverage 21 June 2010

Crompton Greaves Ltd
Subsidiary portfolio to drag consolidated earnings-Hold
Crompton Greaves (CRG) is an emerging leader in the power transmission BSE NSE BLOOMBERG
space in our view. Further the company has gained market share in domestic 500093 CROMPGREAV CRG IN
transmission orders in FY10, in our view. However we believe de-growth in
subsidiary (in INR terms) is likely to result in lower growth in FY11E and FY12E Company data
for the company. At current estimates the stock trades at a P/E multiple of 20x Market cap (Rs mn / US$ mn) 166,884/13,886
and 18.3x for FY11E and FY12E respectively. We initiate coverage on the stock Outstanding equity shares (mn) 641
with a HOLD rating, with a target price of INR 285.
Free float (%) 350.8
Enhanced product profile in the power products segment: CRG has Dividend yield (%) 0.9
outperformed its peers on most counts in FY10, mainly due to the consolidation 52-week high/low (Rs) 280 / 146
of a string of acquisitions that began in FY07. Thus, the company’s enhanced 2-month average daily volume 1,697,692
product profile in the power products segment has improved its market share
through FY09 and FY10. If we track the transformer orders awarded by PGCIL in Stock performance
FY10, we note that CRG, along with Ganz, has the highest share of these orders Returns (%) CMP 1-mth 3-mth 6-mth
at 22.8%. TEE 260 5.4 4.1 8.5
BSECG 14,462 6.4 3.3 5.0
Power product margins significantly ahead of peers: CRG’s margins in the Sensex 17,617 4.6 0.7 4.3
power products segment have been way ahead of peers at the parent level. We
believe that margin expansion for CRG is likely to be a function of global
P/E comparison
sourcing and local manufacturing; we believe that the management may have
(x) Cro mpto n Greaves Industry
exploited both these levers optimally in FY10. The management has guided to
23.1
maintaining the company’s margins at the consolidated level, which we believe 25 20.2 20
17.7 18.3
20 15.0
is commendable given that pressures exist in both, the domestic and 15
international markets. 10
5
0
Exports bottom out, to grow in excess of 20% in FY11E: We believe that CRG’s FY10E FY11E FY12E
subsidiary portfolio is likely to see modest growth in FY11E and FY12E due to
pressure on the distribution transformers-based business. However, due to
expected YoY depreciation of the euro versus the rupee, CRG is likely to see a Valuation matrix
decline at the subsidiary level after translation. (x) FY10E FY11E FY12E FY13E
P/E @ CMP 20.2 20.0 18.3 17.1
Subdued margin, revenue growth ahead; Hold: While we believe that CRG is P/E @ Target 22.1 21.9 20.1 18.8
emerging as a leader in India’s power transmission and distribution equipment EV/EBITDA @ CMP 13.2 12.8 11.8 11.0
market, we expect no positive surprises on the margin front in FY11E and FY12E.
Due to sedate performance of the subsidiary business, we expect consolidated RCML vs consensus
revenues to grow modestly in FY11E and FY12E. Currently, the stock is trading at FY11E FY12E
P/E of 20x and 18.3x and an EVEG (one of the highest in the sector) of 2.2x and Parameter
RCML Cons RCML Cons
2x for FY11E and FY12E respectively. We initiate coverage on the stock with a
Sales (Rs mn) 99,216 99,880 109,914 113,312
Hold recommendation and a target price of Rs 285.
EPS (Rs) 13.0 14.0 14.2 16.2

Growth (%) 47.3 1.4 8.9 7.2 ROE 39.2 31.8 28.7 25.8
FDEPS (Rs) 12.9 13.0 14.2 15.2 ROIC 38.7 33.5 31.4 29.0
Growth (%) 47.3 1.4 8.9 7.2 ROCE 38.5 33.4 31.3 28.9
31
Fig 45 - Crompton Greaves P/E band chart Fig 46 - Premium/(Discount) to BSE

Px Last 6x 12x (%) Premium / (Discount)
400 18x 24x 30x 140
120
350 100
300 80
250 60
40
200 20
150 0
100 (20)
(40)
50 (60)
0 (80)
Apr-02
Aug-03
Nov-05
Aug-08
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Fig 47 - RoCE
(%) ROCE
45
37.0 38.5
40
33.4
35 30.4 31.3
28.9
30 27.3
24.8
25
20
15
10
5
0

8
6.9
7 6.4
6.0
6 5.6
5 4.3
3.8
4 3.5
3.1
3
2
1
0
32
Fig 49 - Working capital as % of Sales

20 18.0
18 15.7
16 14.1
14
11.2
12
10 8.8 8.3
7.5
8
6 4.6
4
2
0
Key risks
Above-expected margin growth: If CRG’s margins continue to tread upwards, it is likely
that the company will outperform our estimates. The company’s margins have been
exceptionally strong over the last six to eight quarters.
Sooner-than-expected recovery in European markets: This is likely to impact the

company in two ways. Firstly, the growth in euro terms is likely to be ahead of
expectations. Secondly, it is likely to strengthen the euro versus the rupee and thus
translate into higher-than-estimated growth in rupee terms.
33
Depreciation & amortisation 1,551 1,388 1,474 1,561 Investments 2,870 2,905 2,933 2,452
Interest 265 632 654 675 CWIP - - - -
Other income 937 1,196 1,297 1,404 Intangible assets
EBT 11,891 12,357 13,477 14,447 Deferred tax assets, net 786 1,001 1,185 1,348
Income taxes 3,650 4,024 4,394 4,709 Other assets - - 4 4
Extraordinary items (352) - - - Accounts payable 31,548 36,371 41,586 46,705
Min into / inc from associates (6) (25) (22) (22) Other current liabilities
Adjustments 352 - - - Debt funds 8,716 8,990 9,275 9,539
Growth (%) 47.3 1.4 8.9 7.2 Equity capital 1,283 1,283 1,283 1,283
DPS (Rs) 4.4 5.2 5.2 5.2 BVPS (Rs) 37.1 45.0 54.0 64.0

Non-cash adjustments 303 214 184 163 EBITDA margin 14.0 13.3 13.0 12.8
Capital expenditure 340 (1,550) (1,550) (1,550) ROE 39.2 31.8 28.7 25.8
Change in investments (1,198) (35) (28) 481 ROCE 38.5 33.4 31.3 28.9
Other investing cash flow (708) (0) (4) (0) Working Capital & Liquidity ratios
Cash flow from investing (1,565) (1,585) (1,582) (1,069) Receivables (days) 91 101 106 112
Issue of equity 550 - - - Inventory (days) 80 85 88 91
Issue/repay debt 1,534 274 285 264 Payables (days) 188 200 207 216
Other financing cash flow 30 22 19 19 Quick ratio (x) 0.9 1.0 1.0 1.0
WACC (%) 12.6 12.6 12.6 12.6
ROIC (%) 38.7 33.5 31.4 29.0
EV/Sales 1.8 1.7 1.5 1.4
EV/EBITDA 13.2 12.8 11.8 11.0
EVA (Rs mn) 848,941 792,989 826,884 832,889 P/E 20.2 20.0 18.3 17.1
EVA spread (%) 26.11 20.96 18.83 16.45 P/BV 7.0 5.8 4.8 4.1
34
Quarterly trend
Revenue (Rs mn) 24,600 21,975 21,890 22,464 25,079
YoY growth (%) 20.9 4.7 1.8 (8.7) 14.1
QoQ growth (%) 14.4 (10.7) (0.4) 2.6 11.6
EBITDA (Rs mn) 2,988 2,105 2,679 2,805 3,630
EBITDA margin (%) 12.1 9.6 12.2 12.5 14.5
YoY growth (%) 58.2 33.5 56.8 2.9 68.5
QoQ growth (%) 57.2 (17.3) 20.6 3.2 35.3
DuPont analysis
Return on equity 35.7 39.2 31.8 28.7 25.8
CRG is a leading power transmission equipment manufacturer in (%) Sep-09 Dec-09 Mar-10
India. After successful acquisition in Europe in FY2007 and Promoters 40.9 40.9 40.9
FY2008, the company also has presence in the western world. CRG FIIs 13.9 15.7 15.7
also manufactures industrial products like motors and drives and
Banks & FIs 36.2 34.9 34.4
consumer products like fans.
Public 9.0 8.5 8.9

300 ● Hold
250
200
150
100
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
35
Cummins India Ltd Initiating Coverage 21 June 2010

Cummins India Ltd
Stretched valuations limit upside potential; Hold
While revenue growth for Cummins India (KKC) is likely to be robust in FY11E, BSE NSE BLOOMBERG
margin pressures are expected to mute bottomline growth during the year. 500480 CUMMINSIND KKC IN
Though we like KKC’s business model that is characterised by a strong product
profile, we believe that the current valuations leave limited room for upsides. Company data
Currently, the stock is trading at a P/E of 23.6x and 21.2x its F11E and FY12E Market cap (Rs mn / US$ mn) 120,146 /2,594
earnings respectively. We initiate coverage on KKC with a Hold rating and a Outstanding equity shares (mn) 198
target price of Rs 575. Free float (%) 41.0
Mining related growth to drive demand for mobile power: Demand for mobile Dividend yield (%) 1.5
power is primarily driven by demand for industrial and construction machinery 52-week high/low (Rs) 614 / 235
that is used in mining activities. We believe that the demand in mining related 2-month average daily volume 260,178
areas is set to grow in the backdrop of the government’s renewed thrust on
infrastructure development. This, in turn, would increase demand for Stock performance
construction and industrial machinery and benefit established players like KKC. Returns (%) CMP 1-mth 3-mth 6-mth
Cummins India 607 7.7 27.7 48.4
Margins headed southwards: In FY10, KKC reported an EBITDA margin of 20.1% BSECG 14,462 6.4 3.3 5.0
(up by 550bps YoY) at the standalone level. Excluding Cummins Sales and Sensex 17,338 2.0 1.0 1.4
Service (CSS), the EBIT margin stood at 18.2% (up 290bps YoY). According to the
management, commodity prices have already inched up, thus ruling out the
P/E comparison
chances of this lever playing out in favour of the company in FY11E. We concur
(x) Cummins India Industry
with the management’s view and believe that though KKC had surprised
25.7
positively on the margin front in FY09 and FY10, the probability of the same 30 23.1 23.6
21.2
17.7
happening in FY11E is lower. 20 15.0
10
Exports bottom out; set to grow in FY11E: KKC is the global source for V28,
0
K38, and K50 engines used for genset applications; the company also has FY10E FY11E FY12E
exclusive manufacturing rights for V38 and K38 engines. Moreover, KKC is a net
exporter of such machines to the Cummins group. KKC, however, reported a
staggering 66.3% YoY decline in its exports to Rs 4.3bn in FY10. In our opinion, Valuation matrix
the company’s exports may have bottomed out in Q2FY10, at a level of (x) FY10E FY11E FY12E FY13E
Rs 723mn. We believe that while exports are unlikely to touch the previous highs P/E @ CMP 25.7 23.6 21.2 18.8
of FY09 (Rs 12.8bn), the probability of a ~20% export growth is high. P/E @ Target 24.4 22.4 20.1 17.8
EV/EBITDA @ CMP 19.9 17.9 15.7 13.8
Limited upside potential; initiate with Hold: Even as we like KKC’s business
model (characterised by a strong product profile that leads to superior return RCML vs consensus
ratios), we believe that the current valuations offer limited upside potential. At FY11E FY12E
our current estimates, the stock trades at a P/E of 23.6x and 21.2x its FY11E and Parameter
RCML Cons RCML Cons
FY12E earnings. Historically, the stock has traded in a PE band of 12x-18x, one-
Sales (Rs mn) 35,673 37,375 40,980 44,434
year forward. We assign a target price of Rs 575 to the stock, implying a target PE
EPS (Rs) 25. 27.3 28.7 32.7
of 20x. We initiate coverage on KKC with a Hold recommendation.

Growth (%) 5.3 9.0 11.5 12.5 ROE 29.5 28.4 27.6 26.8
FDEPS (Rs) 23.6 25.7 28.7 32.3 ROIC 34.4 34.0 33.6 34.3
Growth (%) 5.3 9.0 11.5 12.5 ROCE 48.4 45.6 43.2 42.5
36
Fig 50 - Cummins P/E band chart Fig 51 - Premium/(Discount) to BSE

900 18x 24x 30x 60
800
40
700
600 20
500
400 0
300 (20)
200
100 (40)
0 (60)
Apr-02
Sep-02
Feb-03
Aug-03
Jan-04
Jul-04
Dec-04
Oct-06
Sep-07
Feb-08
Jun-05
Nov-05
May-06
Apr-07
Aug-08
Jan-09
Jul-09
Dec-09
Jun-10
Apr-04
Nov-06
Sep-04
Feb-05
Jul-05
Oct-07
Aug-08
Jan-06
Jun-06
May-07
Mar-08
Feb-09
Jul-09
Dec-09
Jun-10
Source: Bloomberg, RCML Research Source: Bloomberg, RCML research
Fig 52 - RoCE
(%) ROCE
60
50
40
30
20
10
0
FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY13E

3.0
2.5
2.0
1.5
1.0
0.5
0.0
37

30
25
20
15
10
0
Key risks
Above-expected hike in policy rates: High inflation may prod the RBI to hike key policy
rates. We believe that if policy rates increase beyond a threshold, capacity expansion
across the industry could be lower-than-expectations. This could impact our FY11 and
FY12 revenue and earnings estimates for KKC.
38
Revenues 32,071 35,673 40,980 47,279 Cash and cash eq 764 1,570 2,335 4,256
Depreciation & amortisation 528 585 703 535 Investments 4,417 4,417 4,417 4,417
Interest 18 13 13 17 CWIP
Other income 1,040 997 999 728 Intangible assets
Income taxes 2,023 2,204 2,450 2,749 Other assets (32) (32) (32) (32)
Adjustments - - - - Debt funds 87 87 87 87
DPS (Rs) 12.0 12.0 12.0 12.0 BVPS (Rs) 84.6 96.2 110.9 129.1

Non-cash adjustments 68 - - - EBITDA margin 18.8 18.8 18.6 18.4
Changes in working capital (897) (1,192) (1,934) (1,319) EBIT margin 17.1 17.1 16.9 17.3
Capital expenditure (1,167) (900) (900) (900) ROE 29.5 28.4 27.6 26.8
Cash flow from investing (1,167) (900) (900) (900) Receivables (days) 91 95 92 89
Issue of equity (1) - - - Inventory (days) 81 72 71 71
Dividends paid (1,782) (2,376) (2,376) - Current ratio (x) 2.0 2.2 2.4 2.5
Other financing cash flow (998) (404) (404) (2,780) Quick ratio (x) 1.4 1.5 1.6 1.5
Change in cash & cash eq 250 806 765 1,921 Turnover & Leverage ratios (x)
Closing cash & cash eq 764 1,570 2,335 4,256 Gross asset turnover 3.9 3.9 4.1 4.3
WACC (%) 11.3 11.3 11.3 11.3
ROIC (%) 34.4 34.0 33.6 34.3
EV/Sales 3.7 3.4 2.9 2.5
EV/EBITDA 19.9 17.9 15.7 13.8
EVA (Rs mn) 388,186 434,122 491,327 589,140 P/E 25.7 23.6 21.2 18.8
EVA spread (%) 23.06 22.68 22.29 22.97 P/BV 7.2 6.3 5.5 4.7
39
Quarterly trend
Revenue (Rs mn) 10,714 6,256 6,191 8,279 7,883
YoY growth (%) - (11.5) (23.4) 7.4 (26.4)
QoQ growth (%) 39.0 (41.6) (1.1) 33.7 (4.8)
EBITDA (Rs mn) 1,674 948 1,036 1,822 1,512
EBITDA margin (%) 15.6 15.2 16.7 22.0 19.2
Adj net income (Rs mn) 1,182 897 877 1,481 1,183
YoY growth (%) - 1.7 (6.6) 29.8 0.1
QoQ growth (%) 3.5 (24.1) (2.2) 68.9 (20.1)
DuPont analysis
Return on equity 32.5 29.5 28.4 27.6 26.8
KKC is a subsidiary of Cummins, US, which holds 51% stake in the (%) Sep-09 Dec-09 Mar-10
company. It is a leading manufacturer of medium-high HP range of Promoters 51.0 51.0 51.0
diesel engines in India with manufacturing facilities in Pune and FIIs 10.0 10.7 10.8
Daman.
Banks & FIs 28.8 28.4 28.3
Public 10.2 10.0 9.9

600
500
400
● Hold
300
200
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
40
Jyoti Structures Ltd Initiating Coverage 21 June 2010

Jyoti Structures Ltd
Rs154 Rs 185 BUY HIGH
Steady performer
Jyoti Structures (JYS) is our preferred pick in the domestic power transmission BSE NSE BLOOMBERG
EPC segment. We like the company as we believe it has a higher concentration 513250 JYOTISTRUC JYS IN
of revenues from domestic utilities and its market share in orders awarded by
the key transmission utility, PGCIL, has been higher than its listed peers. Company data
Currently, the stock is trading at a P/E of 11.8x and 10.2x its FY11E and FY12E Market cap (Rs mn / US$ mn) 12,661 /8,123
earnings respectively. We initiate coverage on JYS with a Buy recommendation. Outstanding equity shares (mn) 82
Free float (%) 69.5
Pure play on power T&D EPC space: Unlike its listed peers, JYS is a pure play on
India’s power T&D EPC space. While KEC International (KEC) has significant Dividend yield (%) 0.6
international presence, Kalpataru Power and Transmission (KPP) has a presence 52-week high/low (Rs) 197 / 114
across several business verticals besides power T&D EPC. We believe that JYS 2-month average daily volume 247,055
can be the preferred choice for investors who seek to play on India’s power T&D
story. Stock performance
Returns (%) CMP 1-mth 3-mth 6-mth
Highest market share in the listed transmission tower EPC space: JYS’ market Jyoti Structures 154 6.8 (6.3) 2.2
share in PGCIL orders over FY08-FY10, at 12.8%, has been the highest amongst BSECG 14,462 6.4 3.3 5.0
the three listed EPC contractors for power transmission towers: KEC and KPP Sensex 17,617 4.6 0.7 4.3
have trailed with a share of 9.3% and 9.2% in these orders respectively.
Importantly, the market share of JYS has remained more stable than peers over
P/E comparison
this period. While this metric does not capture the dynamics of the entire
(x) Jyo ti Structures Industry
transmission tower EPC market, we believe that it gives a fair idea about the
23.1
competitive positioning of each player, as PGCIL continues to be the most 25
17.7
20 15.0
preferred customer for all top companies. 15
13.7
11.8 10.2
10
Conservative approach: marginal international exposure lowers risk: Post FY07, 5
0
while most transmission tower EPC companies have faltered in terms of revenues FY10E FY11E FY12E
growth and margins, JYS’ EBITDA margin has shrunk by only ~100bps from its
peak levels of 12.9% in FY07. Further, since JYS has marginal exposure to
international markets, it is cushioned against the risks emanating from fixed price Valuation matrix
contracts and unfavourable cross currency movements. (x) FY10E FY11E FY12E FY13E
P/E @ CMP 13.7 11.8 10.2 8.8
Good revenue visibility, significant upside potential – Buy: JYS has a robust P/E @ Target 16.5 14.1 12.2 10.5
order book of Rs 41.5bn (or ~2x its FY10 revenues) which provides good revenue EV/EBITDA @ CMP 6.4 5.6 4.9 4.4
visibility. On our current EPS of Rs 13.1 and Rs 15.2, the stock trades at P/E of
11.8x and 10.2x its FY09E and FY10E earnings, respectively. Historically, the RCML vs consensus
stock has traded in a PE band of 12 and 18. We assign a target FY12E PE of 12x FY11E FY12E
to the stock, implying a target price of Rs 185. We believe that the stock holds Parameter
RCML Cons RCML Cons
significant upside potential from current levels. We initiate coverage on JYS with
Sales (Rs mn) 23,889 25,257 27,295 29,680
a Buy recommendation.
EPS (Rs) 13.1 14.9 15.2 17.3

Adj net income 919 1,071 1,243 1,437 Adj PAT margin 4.6 4.5 4.6 4.6
Growth (%) 15.3 16.5 16.1 15.6 ROE 20.1 19.6 19.0 18.5
FDEPS (Rs) 11.2 13.1 15.2 17.6 ROIC 28.0 27.6 28.1 27.8
Growth (%) 15.1 16.5 16.1 15.6 ROCE 28.3 27.6 28.1 27.8
41
Fig 55 - Jyoti Structures P/E band chart Fig 56 - Premium/(Discount) to BSE

18x 24x 30x 40
450
400
350 20
300
0
250
200 (20)
150
100 (40)
50
0 (60)
Aug-04
Jul-07
Nov-07
Nov-06
Mar-04
Dec-04
Apr-08
Aug-08
Jul-05
Oct-07
Aug-08
Jul-09
May-05
Sep-05
Oct-06
Jan-06
Jun-06
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Dec-08
May-09
Sep-09
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Jun-10
Mar-04
Sep-04
Feb-05
Jan-06
Jun-06
May-07
Mar-08
Feb-09
Dec-09
Jun-10

(Rs mn) Order backlog Order inflow
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
FY08 FY09 FY10
Fig 58 - RoCE
(%) ROCE
40
35
30
25
20
15
10
5
0
42

7
0
Fig 60 - Working Capital as a % of Sales

38
37
36
35
34
33
32
31
30
29
28
27
Key risks
Higher proportion of substation orders: We believe that substation orders entail higher
working capital than EPC orders for transmission towers. While the proportion of
substation orders has remained constant in JYS’ order backlog over the past few years,
any increase in this proportion has the potential to impact cash flows negatively.
Risk of dilution: We expect the company to generate negative cash flows at the
operating level over the next few years, due to a) the high growth phase that company is
currently in b) the high working capital requirement of its business model. Negative
operating level cash flows are likely to increase the risk of equity dilution for the
company.
43
Revenues 20,185 23,889 27,295 31,333 Cash and cash eq 189 184 254 320
Interest 786 912 1,028 1,080 CWIP 52 52 52 52
Income taxes 524 576 669 774 Other assets 12 12 12 12
Reported net income 919 1,071 1,243 1,437 Provisions 289 359 410 473
Adjusted net income 919 1,071 1,243 1,437 Other liabilities
DPS (Rs) 1.0 1.0 1.0 1.0 BVPS (Rs) 61.0 72.9 87.0 103.4

Cash flow from operations (212) 205 315 352 Net profit margin 4.6 4.5 4.6 4.6
Change in investments 141 - - - ROCE 28.3 27.6 28.1 27.8
Issue/repay debt 700 128 128 128 Payables (days) 144 129 134 133
Other financing cash flow (0) - - - Quick ratio (x) 2.1 1.9 2.0 1.9
Change in cash & cash eq (82) (5) 71 66 Turnover & Leverage ratios (x)
Closing cash & cash eq 189 184 254 320 Gross asset turnover 10.1 9.9 10.2 10.5
WACC (%) 10.1 10.1 10.1 10.1
ROIC (%) 28.0 27.6 28.1 27.8
EV/Sales 0.8 0.6 0.6 0.5
EV/EBITDA 6.4 5.6 4.9 4.4
EVA (Rs mn) 155,888 171,409 199,278 221,912 P/E 13.7 11.8 10.2 8.8
EVA spread (%) 17.86 17.44 17.94 17.65 P/BV 2.5 2.1 1.8 1.5
44
Quarterly trend
Revenue (Rs mn) 4,736 4,858 4,730 5,121 5,477
YoY growth (%) 17.9 15.4 9.2 8.1 12.7
QoQ growth (%) 9.4 2.6 (2.6) 8.3 6.9
EBITDA (Rs mn) 498 509 505 552 655
EBITDA margin (%) 10.5 10.5 10.7 10.8 12.0
Adj net income (Rs mn) 210 224 209 234 253
YoY growth (%) 2.3 11.2 15.6 11.1 13.0
QoQ growth (%) 16.3 6.5 (6.7) 11.9 8.2
DuPont analysis
Return on equity 21.1 20.1 19.6 19.0 18.5
JYS is a leading power transmission tower EPC company in India. (%) Sep-09 Dec-09 Mar-10
The company provides EPC and contracting services across the Promoters 26.9 26.8 26.8
power transmission and distribution value chain. Transmission FIIs 17.5 16.2 14.1
tower EPC contributes about ~60% to the order backlog. The
Banks & FIs 37.8 37.7 40.6
remainder is equally distributed between sub-station and
distribution contracting. Public 17.9 19.3 18.5

210 ● Buy
21-Jun-10 Initiating Coverage 154 185 Buy
190
170
150
130
110
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
45
Kalpataru Power Transmission Ltd Initiating Coverage 21 June 2010

Kalpataru Power Transmission Ltd
Rs 1,033 Rs 1,000 HOLD HIGH
Dilution to mute earnings growth; Hold
Kalpataru Power Transmission (KPP) is one of India’s leading contractors in the BSE NSE BLOOMBERG
power transmission tower EPC space with interests in the pipeline infrastructure 522287 KALPATPOWR KPP IN
contracting and logistics space. We believe that even as the profitability of the
company has improved in Q4FY10, flat order backlog and dilution pose as Company data
potential risks to earnings growth. We initiate coverage on the stock with a Market cap (Rs mn / US$ mn) 27,363/589
Hold recommendation and a target price of Rs 1000. Outstanding equity shares (mn) 27
Free float (%) 36.3
Changing business mix to lower risk profile: KPP is an active player in the power
T&D EPC, pipeline EPC, and logistics segments; it now intends to enter the Dividend yield (%) 0.7
private BOT transmission projects space. We believe that over the long term, KPP 52-week high/low (Rs) 1250 / 636
would graduate from a pure EPC play to an EPC contractor plus asset developer. 2-month average daily volume 26,135
The change in the business mix is likely to lower the company’s risk profile
arising from concentration on a pure EPC business. Stock performance
Order backlog flat with high concentration of fixed-price international orders: KPP 1,033 (2.4) 2.9 0.1
During Q4FY10, KPP’s revenues grew by a sharp 50.1% and EBITDA by 60% BSECG 14,462 6.4 3.3 5.0
YoY. However, in our opinion, overemphasis on a strong headline number can Sensex 17,617 4.6 0.7 4.3
conceal the company’s flat YoY growth in its order backlog – this may lead to
lower growth in FY11E and FY12E. Further, the order backlog at Rs 50bn
P/E comparison
includes 30% international orders that are likely to be fixed contracts. This
(x) Kalpataru P o wer Industry
enhances the risk on negative margin surprises if commodity prices move up in
23.1
FY11E. 25
20 16.1 15.8 17.7
13.9 15.0
15
Dilution to negate profit growth at the EPS level: KPP raised Rs 4.4bn through a 10
QIP at Rs 1074.2/ share, implying a dilution of 15.8%. The proceeds from the 5
0
QIP are to be utilised for capacity expansion in tower manufacturing and FY10E FY11E FY12E
investments in BOOT projects. We believe that even as revenues are likely to
grow ~20% in FY11E, the same are unlikely to translate into significant EPS
growth due to equity dilution. Valuation matrix
(x) FY10E FY11E FY12E FY13E
No positive triggers; Hold: Competition in the power transmission tower EPC P/E @ CMP 16.1 15.8 13.9 12.1
business has increased over the last few years. Even as the pie of orders has P/E @ Target 15.5 15.3 13.5 11.7
grown, heightened competition is likely to pressurise margins. After excluding EV/EBITDA @ CMP 11.0 9.2 8.1 7.2
the impact for the shareholding in JMC Projects, the stock is trading at a P/E of
15.2x and 13.4x for FY11E and FY12E respectively. While execution and order RCML vs consensus
inflows have picked up for the company and are likely to remain strong over FY11E FY12E
FY11E, in absence of any major triggers, the stock is likely to underperform its Parameter
RCML Cons RCML Cons
peers. At our target price of Rs 1000, we imply a one-year target PE of 13x for the
Sales (Rs mn) 31,193 32,713 35,299 38,495
stock. We initiate coverage on the stock with a Hold rating.
EPS (Rs) 65.3 82.3 74.2 73.6

Growth (%) 80.6 17.6 13.5 15.2 ROE 18.7 18.7 18.0 17.7
FDEPS (Rs) 64.3 65.3 74.2 85.5 ROIC 16.6 17.5 17.7 17.9
Growth (%) 80.6 1.6 13.5 15.2 ROCE 17.9 18.7 18.8 18.8
46
Fig 61 - Kalpataru Power Transmission P/E band chart Fig 62 - Premium/(Discount) to BSE
2500 18x 24x 30x
150
2000
100
1500
50
1000
0
500
(50)
0
(100)
Aug-04
Feb-05
Jul-05
Dec-05
Oct-07
Jun-06
Nov-06
Apr-07
Mar-08
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Jan-09
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Feb-09
Jul-09
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60,000
50,000
40,000
30,000
20,000
10,000
0
FY08 FY09 FY10
Fig 64 - RoCE
(%) ROCE
50
40
30
20
10
0
47

7
0

60
50
40
30
20
10
0
Key risks
Fixed price contracts in the international geography: International order constitute 30%
of KPP’s order backlog. While a large portion of international contracts are hedged
against any hike in the commodity prices, any significant increase in commodity prices
would negatively impact margins and thus pose a risk to our estimates.
48
Revenues 25,974 31,193 35,299 39,863 Cash and cash eq 220 895 1,147 1,886
Interest 723 790 892 949 CWIP - - - -
Income taxes 571 668 759 874 Other assets - - - -
DPS (Rs) 7.5 7.5 7.5 7.5 BVPS (Rs) 371.4 378.6 444.0 520.6

Cash flow from operations 458 1,001 622 1,109 Net profit margin 6.6 6.4 6.4 6.6
Issue of equity - 42 - - Inventory (days) 96 94 97 97
Other financing cash flow 0 (37) (0) (0) Quick ratio (x) 1.8 1.8 1.8 1.8
Change in cash & cash eq (225) 674 252 739 Turnover & Leverage ratios (x)
Closing cash & cash eq 220 895 1,147 1,886 Gross asset turnover 6.1 6.1 6.3 6.5
WACC (%) 9.4 9.4 9.4 9.4
ROIC (%) 16.6 17.5 17.7 17.9
EV/Sales 1.3 1.1 0.9 0.8
EV/EBITDA 11.0 9.2 8.1 7.2
EVA (Rs mn) 123,166 155,999 180,208 206,412 P/E 16.1 15.8 13.9 12.1
EVA spread (%) 7.19 8.08 8.30 8.43 P/BV 2.8 2.7 2.3 2.0
49
Quarterly trend
Revenue (Rs mn) 5,584 4,873 5,525 7,192 8,383
YoY growth (%) (11.3) 2.6 27.7 72.0 50.1
QoQ growth (%) 33.6 (12.7) 13.4 30.2 16.6
EBITDA (Rs mn) 503 502 630 715 818
EBITDA margin (%) 9.0 10.3 11.4 9.9 9.8
YoY growth (%) (54.0) 10.6 65.5 120.9 147.7
QoQ growth (%) 16.1 38.4 15.1 19.4 30.2
DuPont analysis
Return on equity 11.8 18.7 18.7 18.0 17.7
Kalpataru Power Transmission (KPP), located at Gandhinagar, (%) Sep-09 Dec-09 Mar-10
Gujarat, was promoted by Mr. Mofatraj Munot, Mr. Mahendra Promoters 63.7 63.7 63.7
Punatar, and Mr. Imtiaz Kanga. The company has three business FIIs 7.5 5.5 5.1
divisions viz. transmission line division, biomass energy division,
Banks & FIs 23.8 24.4 24.0
and pipelines division. Transmission line business contributed
~84% to sales while the pipelines business contributed ~14% to Public 5.0 6.4 7.2
sales in FY10 at the parent level. KPP also has a ~51% stake in JMC
Projects.

1,400 ● Hold
21-Jun-10 Initiating Coverage 1,033 1,000 Hold
1,200
1,000
800
600
400
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
50
KEC International Ltd Initiating Coverage 21 June 2010
KEC International Ltd CMP TARGET RATING RISK

Rs 474 Rs 500 HOLD HIGH
Heightened competition reins in valuation upside; Hold
KEC International (KECI) is amongst the world’s leading power transmission BSE NSE BLOOMBERG
tower EPC companies, with strong project management capabilities. However, 532714 KEC KECI IN
even as order inflows are expected to increase in FY11E across the power
transmission spectrum, we believe that competition has intensified considerably Company data
in the domestic transmission tower sector. We thus believe that Market cap (Rs mn / US$ mn) 22959 / 496
sector/company valuations are unlikely to touch earlier highs. At our current
Outstanding equity shares (mn) 48
estimates, the stock is trading at a P/E of 11x and 9.4x its FY11E and FY12E
Free float (%) 87.3
earnings respectively. We initiate coverage on KECI with a Hold and a target
price of Rs 500, implying a target PE of 10x FY10.
52-week high/low (Rs) 684 / 335
Global EPC play in the power T&D space: Apart from India, KECI has a 2-month average daily volume 33,318
significant presence in Africa, Central Asia, and the Middle East. The company
has executed orders in ~40 countries and is currently working on ~100 projects Stock performance
concurrently. KECI also has the most diversified client base across the industry, Returns (%) CMP 1-mth 3-mth 6-mth
both domestically and globally. These metrics clearly point out to the vastness of KEC International 474 (8.3) (15.9) (19.0)
company’s scale of operations. BSECG 14,462 6.4 3.3 5.0
Sensex 17,617 4.6 0.7 4.3
Strong project management capabilities: KECI has executed projects in diverse
terrains such as Kazakhstan, Saudi Arabia, Iraq, and Afghanistan. While operating
P/E comparison
in such high-risk zones has heightened its business risk profile, the company, in the
process, has acquired the necessary skill sets to manage and execute projects in (x) KEC Internatio nal Industry
23.1
such difficult geographies. The company has a fleet of 69 stringing equipment, 25
17.7
higher than its peers which add capacity for project management. 20
15
12.9 11
15.0
9.4
10
Diversifying into EPC for railways: In the 11th plan, Indian Railways (IR) has 5
earmarked ~Rs 430bn for capacity expansion. KECI brings to the table its strong 0
FY10E FY11E FY12E
project management capabilities – the mainstay for securing contracts from IR.
Not surprisingly, the company has recently secured a signalling related order
worth Rs 1.3bn from IR. Further, KECI also has pre-qualifications from IR as the Valuation matrix
company was earlier involved in setting up railway infrastructure for IR. We (x) FY10E FY11E FY12E FY13E
believe that diversification into the railway EPC space would increase KECI’s P/E @ CMP 12.9 11.0 9.4 7.7
revenue visibility once the orders from IR pick up in a non-crowed market. P/E @ Target 13.6 11.6 9.9 8.1
EV/EBITDA @ CMP 6.8 6.0 5.2 4.3
Valuations may not touch previous highs; Hold : KECI’s order backlog has grown
at a ~15% CAGR FY08- FY10. However, we expect that growth in order inflows
RCML vs consensus
would in sync with the improvement in outlook for order inflows in FY11E and
FY11E FY12E
FY12E. At our current estimates, the stock is trading at a P/E multiple of 11.2x and Parameter
RCML Cons RCML Cons
9.6x for FY11E and FY12E respectively. On a three-year basis, the stock has traded
Sales (Rs mn) 45,594 46,121 52,294 53,159
at an average one-year forward PE band of 6x-12x. We believe that valuations are
EPS (Rs) 43.1 42.4 50.4 51.7
unlikely to touch earlier highs, given the heightened competition in the power
transmission tower EPC space. We initiate coverage on KECI with a Hold.

Growth (%) 62.4 16.8 16.9 22.8 ROE 29.4 26.7 24.9 24.4
FDEPS (Rs) 36.9 43.1 50.4 61.9 ROIC 28.5 27.6 28.0 28.9
Growth (%) 55.8 16.8 16.9 22.8 ROCE 28.4 27.9 28.3 29.2
51
Fig 67 - KEC International P/E band chart Fig 68 - Premium/(Discount) to BSE

15x 21x 27x 40
1600
1400 20
1200 0
1000 (20)
800 (40)
600
(60)
400
200 (80)
0 (100)
Mar-06
Sep-06
Mar-07
Feb-08
Jan-09
Aug-07
Jul-08
Jul-09
Dec-09
Jun-10
Aug-07
Mar-06
Sep-06
Mar-07
Feb-08
Jul-08
Jan-09
Jul-09
Dec-09
Jun-10

60000
50000
40000
30000
20000
10000
0
FY08 FY09 FY10
Fig 70 - RoCE
(%) ROCE
40 36.8 37.1
28.4 27.9 28.3 29.2

30
24.0
22.1
20
10
0
52

10 9.4
7.6
8 7.1
6.6
6.0
6 5.5
5.0 4.9
0

30
20.9 21.1 21.3 21.3 21.3

20
14.8
11.5
10
1.6
0
Key risks
Delay in order awarding by PGCIL: KECI’s order backlog has grown by only ~10% YoY
in FY10, particularly as order inflows from PGCIL have fallen below-expectations. In
case of a delay in the anticipated capacity expansion plans of PGCIL, growth in the
company’s order backlog could be below expectations in FY11E, negatively impacting
the earnings estimates for FY12E.
53
Revenues 39,082 45,594 52,294 63,196 Cash and cash eq 623 710 1,631 2,799
Interest 865 1,054 1,155 1,331 CWIP - - - -
Other income - 2 3 6 Intangible assets
Reported net income 1,897 2,215 2,590 3,182 Provisions 385 472 541 654
DPS (Rs) 4.8 4.8 4.8 4.8 BVPS (Rs) 142.8 180.2 225.0 281.3

Non-cash adjustments (476) - - - EBITDA margin 10.4 10.2 10.2 10.2
Cash flow from operations (1,500) 1,076 1,510 1,256 Net profit margin 4.9 4.9 5.0 5.0
Issue/repay debt 1,300 (200) 200 700 Payables (days) 208 178 180 175
Other financing cash flow 131 (0) 0 (0) Quick ratio (x) 1.4 1.4 1.5 1.5
Change in cash & cash eq (788) 87 921 1,168 Turnover & Leverage ratios (x)
Closing cash & cash eq 623 710 1,631 2,799 Gross asset turnover 5.8 6.1 6.5 7.4
WACC (%) 9.9 9.9 9.9 9.9
ROIC (%) 28.5 27.6 28.0 28.9
EV/Sales 0.7 0.6 0.5 0.4
EV/EBITDA 6.8 6.0 5.2 4.3
EVA (Rs mn) 276,439 293,592 345,632 432,146 P/E 12.9 11.0 9.4 7.7
EVA spread (%) 18.60 17.70 18.11 19.05 P/BV 3.3 2.6 2.1 1.7
54
Quarterly trend
Revenue (Rs mn) 11,350 7,266 8,745 9,377 13,451
YoY growth (%) 10 21 8 6 19
QoQ growth (%) 28 (36) 20 7 43
EBITDA (Rs mn) 1,022 797 838 860 1,167
EBITDA margin (%) 9.0 11.0 9.6 9.2 8.7
YoY growth (%) 33 50 (1) 1 (33)
QoQ growth (%) 94 (53) 10 (0) 30
DuPont analysis
Return on equity 22.4 29.4 26.7 24.9 24.4
KEC International is one of the leading power transmission tower (%) Sep-09 Dec-09 Mar-10
EPC companies in the world. The company has executed projects Promoters 41.9 41.9 42.0
across ~40 countries and has the capability of executing ~100 FIIs 5.7 5.6 5.4
projects simultaneously. International orders constitute about ~50%
Banks & FIs 41.9 42.4 42.7
of the current order backlog.
Public 10.5 10.1 9.9

650
21-Jun-10 Initiating Coverage 474 500 Hold 600
550
500
450 ● Hold
400
350
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
55
Siemens Ltd Initiating Coverage 21 June 2010

Siemens Ltd
Rs 731 Rs 925 BUY LOW
At an inflection point
Siemens’s (SIEM’s) business model is backed by a strong product profile. We BSE NSE BLOOMBERG
believe that over the next two years, capital goods players with a superior 500550 SIEMENS SIEM IN
product profile and contracting abilities are likely to outperform. At the current
estimates, the stock trades at a P/E of 25.8x and 21.1x its FY11E and FY12E Company data
earnings respectively. We believe that the company’s FY11E earnings have a Market cap (Rs mn / US$ mn) 246,481/5,312
potential to surprise positively, driven by higher-than-expected order inflows in Outstanding equity shares (mn) 337
FY10E. We initiate coverage on SIEM with a BUY recommendation and a one Free float (%) 29.3
year target price of INR 925, implying 27% upside from current levels.
Broadest product offering in the capital goods sector: SIEM has the broadest 52-week high/low (Rs) 766 / 376
product offering in India’s capital goods sector, with its products addressing the 2-month average daily volume 525,386
requirement of most process industries. Further, the company has a strong
presence in the infrastructure space through the power, water, and railway Stock performance
verticals. We believe that the company is well-placed to leverage on its expertise Returns (%) CMP 1-mth 3-mth 6-mth
in these high-growth infrastructure verticals, and thus ensure continued growth in Siemens 731 5.0 (0.5) 30.6
its overall business profile. BSECG 14,462 6.4 3.3 5.0
Sensex 17,617 4.6 0.7 4.3
Large ticket international projects may aid growth: At H1FY10-end, SIEM’s
order backlog stood at Rs 134.4bn, higher 39% YoY. This growth was driven a
P/E comparison
sharp 161% YoY increase in order inflows during Q1FY10 to Rs 51.6bn. Further,
(x) Siemens Industry
SIEM, in a consortium with Siemens AG, has secured a repeat order worth
Rs 29.5bn from Qatar General Electricity & Water Corporation in January ’10. 40 31.5
30 23.1 25.8
With the growth in the order backlog and order inflows picking up, the revenue 17.7
21.1
15.0
20
growth prospects for SIEM look bright over the foreseeable future.
10
0
Domestic presence to strengthen: SIEM aims to strengthen position in the FY10E FY11E FY12E
renewable energy and value priced products in India over the next three years at
an outlay of INR 16 bn. Further the company intends to make India the hub for
six categories of value priced products. SIEM will have complete responsibility Valuation matrix
for design, development, production and sale of these products for India and for (x) FY10E FY11E FY12E FY13E
the world market. The company also intends to strengthen the workforce from P/E @ CMP 31.5 25.8 21.1 18.5
17000 currently to 25000 by 2012. P/E @ Target 39.8 32.7 26.8 23.4
EV/EBITDA @ CMP 18.5 15.4 12.7 11.1
Strong potential upsides; Buy: At the current estimates, the stock trades at a P/E
of 25.8x and 21.1x its FY11E and FY12E earnings respectively. The EV/ EBITDA RCML vs consensus
for the stock is 15.4x and 12.7x. When normalised for growth, the EVEG ratio is FY11E FY12E
at 0.71x and 0.59x for FY11E and FY12E respectively. We note that even as the Parameter
RCML Cons RCML Cons
EVEG ration for SIEM are in the top quartile, SIEM has one of the most
Sales (Rs mn) 117,858 115,369 145,510 128,366
technologically advanced product profile in the sector. We initiate coverage on
EPS (Rs) 28.3 27.4 34.6 29.8
the stock with a Buy recommendation.

Growth (%) 41.3 21.8 22.2 14.5 ROE 25.4 25.3 25.1 23.3
FDEPS (Rs) 23.2 28.3 34.6 39.6 ROIC 35.5 35.3 35.0 32.5
Growth (%) 41.3 21.8 22.2 14.5 ROCE 35.5 35.3 35.0 32.5
56
Investment rationale
Superior product profile
Broadest product offering in the capital goods sector
Siemens (SIEM) has the broadest product offering in India’s capital goods sector with its
products addressing the needs of most process industries (see Fig 1). The company also
has a strong presence in the infrastructure space through the power, water and railway
verticals. We believe that the company is in excellent position to leverage on its
expertise in these high-growth verticals.
Fig 73 - Detailed product profile of SIEM

No. Industry served Offerings for the industry Business unit classification
1 Automotive Control cabinet construction Industry solutions

Assembly Industry solutions
Start up assistance Industry solutions
2 Cement Process instrumentation Industry solutions

Weighers and analytical devices Industry solutions
Electric automation, drives and instrumentation systems Industry automation and drive technologies
Building system engineering Industry solutions
3 Glass industry Manufacturing execution systems Industry solutions

Process control technology, Industry solutions
Motive power engineering Industry solutions
Instrumentation and analysis Industry solutions
4 Pulp & Paper industry SIPAPER product family Industry solutions

Electrical engineering systems, Industry solutions
Automation and Industrial IT Industry automation
Diesel-electric propulsion systems for cargo ships through the
5 Marine Industry solutions
product Siemens-Schottel-Propulsor (SSP)
SSP for offshore vessels Industry solutions
SINAVY product family for naval vessels Industry solutions
6 Metals Continuous Casting for converting steel from liquid to solid state Industry solutions
Siemens IS Metal technologies product family for iron/steel making Industry solutions
Rolling mills Industry solutions
Steel processing lines Industry solutions
Mining and material material operation, excavation, transportation, beneficiation, power
7 Industry solutions
handling supply, water treatment, security systems and communication
8 Sugar Power distribution and supply within the company Industry solutions
Life cycle services Industry solutions
9 Water Waste Water Treatment Industry solutions

Process Water (High Purity Systems) Industry solutions
Drinking Water treatment ( Chemical Feed & Disinfection Systems) Industry solutions
Treatment Plants Service Industry solutions
Energy And Automation in Water Systems Industry automation
57
Fig 74 - Detailed product profile of SIEM

No. Industry served Offerings for the industry Business unit classification
Bogies- SF 2000 motor and SF 2100 motor. Used in mass rapid
10 Railway Mobility
transit vehicles such as urban rail vehicles and metro cars
Auxiliary power supply to feed air conditioner, heater etc in trains Mobility
Propulsion System including Traction Converter and Traction Motor Mobility
Signaling and Control Equipment for automation of mainline and
Mobility
metro projects
Siemens K50 relay for signaling circuits Mobility
Track vacancy detection systems Mobility
Auxiliary Warning System Mobility
11 Power Generation Process compressors Power Generation
Turbines and generators Power Generation
Siemens combined cycle plants Power Generation
Instrumentation and controls Power Generation
12 Power transmission 3AP SF6- High voltage circuit breakers up to 800 kV Power transmission and distribution
Instrument transformers from 72.5 V to 800 kV Power transmission and distribution
Medium voltage switchgears- Air insulated switchgear, gas insulated
Power transmission and distribution
switchgear and air insulated metal clad switchgear
Turnkey solutions for substation and switchyards Power transmission and distribution
13 Healthcare Diagnostic imaging and therapy Healthcare
Laboratory diagnostics Healthcare
Impressive product profile in the infrastructure vertical

Infrastructure-related verticals contributed 51% of SIEM’s revenues in FY09. It may be
noted that the contribution from the mobility vertical stood at 11% in FY09, up by
300bps YoY; the growth in this vertical was significantly higher at 47.6% YoY in FY09.
We highlight the same due to the company’s product profile in the railways facing
vertical.
Fig 75 - Business Vertical wise Revenue Contribution

Siemens Ltd, September Y/E FY08 FY09
Industry 44% 47%
Industry Automation 11% 10%
Drive Technologies 11% 13%
Bulding Technologies 1% 1%
Industry Solutions 13% 12%
Mobility 8% 11%
Energy 48% 46%
Fossil Power Generation 1% 5%
Oil & Gas 6% 6%
Power Transmission 32% 26%
Power Distribution 9% 9%
Healthcare 7% 6%
Real Estate 1% 1%
One of the key growth drivers for the mobility vertical is the spend in ‘Mass rapid
transport system’ through Jawaharlal Nehru National Urban Renewal Mission
(JNNURM). Under this scheme, 478 projects worth Rs 520bn have been sanctioned
from 2005 (see Fig 3). Of this, 9.2% funds have been sanctioned for 20 Mass Rapid
Transit System (MRTS) projects. Detailed project reports (DPR) have also been submitted
for additional ~500 projects under JNNURM.
58
Fig 76 - Sanctioned projects under the JNNURM scheme

Cost of
Number of % of cost of Funds
% of projects projects % of Funds
Sr Sector projects projects released
sanctioned sanctioned released
sanctioned sanctioned (Rs bn)
(Rs bn)
1 Drainage/Storm Water Drainage 62 13.0 78.6 15.1 12.1 12.5
2 Roads/Flyovers 76 15.9 35.1 6.7 8.0 8.3
3 Water Supply 143 29.9 190.4 36.6 38.5 39.7
4 Sewerage 105 22.0 131.4 25.3 21.3 22.0
5 Urban Renewal 10 2.1 4.7 0.9 0.6 0.7
6 Mass Rapid Transport System 20 4.2 47.7 9.2 10.7 11.0
7 Other Urban Transport 14 2.9 8.1 1.6 1.3 1.4
8 Solid Waste Management 40 8.4 21.9 4.2 3.7 3.9
9 Development of Heritage Areas 2 0.4 0.5 0.1 0.4 0.4
10 Preservation of Water Bodies 4 0.8 1.2 0.2 0.2 0.2
11 Parking 2 0.4 1.1 0.2 0.2 0.2
Total 478 100.0 520.5 100.0 97.1 100.0
Source: RCML Research
Indian railways (IR) is also one of SIEM’s largest customers in this vertical. IR first
introduced its diesel-electric freight / passenger locomotives (4000 HP) with three-phase
AC traction technology in 1999. SIEM has been supplying the traction equipment for
these locomotives ever since, and has upgraded to the latest Insulated Gate Bipolar
Transistors (IGBT) technology in 2006. Through these upgrades, SIEM has enhanced the
locomotive power of this product to 4500HP from 4000HP. The company has already
supplied the enhanced product to IR in February ’10; an additional 200 units of the
upgraded product are expected to be supplied in 2010-11.
Large ticket international projects may aid growth

Bags repeat order worth ~Rs 29bn from Qatar
At H1FY10-end, SIEM’s order backlog stood at Rs 134.4bn, a growth of 39% YoY driven
by a sharp 161% YoY increase in order inflows in Q1FY10 to Rs 51.6bn. The company,
in a consortium with Siemens AG, also secured a repeat order worth Rs 29.5bn from
Qatar General Electricity & Water Corporation in January ’10. The contract value of this
order for SIEM is Rs 24.9bn, while the execution period is at 39 months. We believe that
the revenue growth prospects for SIEM look bright over the foreseeable future, given the
improving order book position. Some of the recent orders secured by the company are
outlined below.
59
Fig 77 - Recently secured orders

Date Awarded by Ticket size (Rsmn) Brief description
Feb 2010 Prakash Industries 550 Supply of 100 MW Turbo Generators
Power Grid Corporation of India Supply of high end technology products like circuit breakers , current
Feb 2010 1000
ltd. & voltage transformers , capacitors etc.
Qatar General Electricity & Water Complete design, engineering, supply, erection, civil, testing and
Jan 2010 24910
Corporation commissioning of substations
Qatar General Electricity & Water Supply, design, erection, testing and commissioning of 132kV &
Nov 2009 6080
Corporation 66kV high voltage cables
Ezdan International Housing
Oct 2009 4030 Supply, design, erection, testing and commissioning of substations
Project, Qatar
Power Grid Corporation of India Supply, design, engineering, erection, testing and commissioning of
Sep 2009 3600
ltd. substations
Power Grid Corporation of India Supply, design, engineering, erection, testing and commissioning of
July 2009 1090
ltd. substations
June 2009 Vedanta Aluminum ltd. 1120 To provide high voltage power distribution system
Apr 2009 Adani Power ltd. 7200 To install a bipolar HVDC transmission system
Source: Company
Domestic expansion on the cards

Outlay of Rs 16bn earmarked for domestic expansion
SIEM aims to strengthen its domestic presence in segments such as renewable energy
and value-priced products over the next three years, at an outlay of Rs 16bn. Of this,
Rs 5bn will be incurred on building plants for manufacturing high-end wind technology
turbines. The company expects this plant to commence operations by 2012. SIEM is also
likely to make India the hub for six categories of value-priced products (see fig. 5).
Fig 78 - India – SIEM’s new hub for value- priced products

No Value priced products Business unit classification
1 Low-end signalling system Mobility
2 Ring main units Mobility
3 Steam turbine generator greater than 45 MW Power generation
4 Iron and steel making equipment Industry solutions
5 Wind power engineering Power generation
6 EPC execution for full turnkey power plants solution Power generation
The company targets to generate revenues of Rs 65bn from value-priced products

business by 2020. SIEM will have complete responsibility for design, development,
production and sale of these products for India and for the world market. The company
also intends to strengthen the workforce from 17000 currently to 25000 by 2012 to
support its expanded presence in India.
Subsidiaries – positive surprise likely

Some subsidiaries offer high growth potential
Historically, investors have been disappointed with the manner in which SIEM has
handled its subsidiary portfolio. While we do not rule out that the company could
undertake actions which may not be in the best interests of the minority shareholders,
we believe some of the current subsidiaries offer high potential in terms of growth and
returns.
Flender, a wholly owned subsidiary, is engaged in manufacturing and marketing

industrial gearboxes and related accessories. This acquisition has strengthened SIEM’s
automation and drives business by adding gear systems to its product profile.
60
Siemens Building Technologies Pvt. Ltd. focuses on design, development and

manufacture of embedded control systems, building automation systems, fire safety
solutions, and security solutions – areas with high-growth potential.
Fig 79 - Financial performance snapshot of consolidated, parent and subsidiaries

Particulars , INRmn 2007 2008 2009
Siemens Consolidated
Revenues 94,175 97,296 93,491
PBT 9,071 8,187 9,382
PBT margin (%) 9.6% 8.4% 10.0%
PAT 6929 5995 7046
PAT margin (%) 7.4% 6.2% 7.5%
Siemens Standalone
Revenues 77,660 83,577 84,585
PBT 7,959 7,672 10,030
PBT margin (%) 10.2% 9.2% 11.9%
PAT 5965 5933 10449
PAT margin (%) 7.7% 7.1% 12.4%
Flender Ltd
Revenues - - 389
PBT - - 68
PBT margin (%) - - 17.5%
PAT - - 44
PAT margin (%) - - 11.3%
Siemens Buliding Technologies Pvt. ltd.
Revenues 363 2086 1773
PBT (9) 125 (143)
PBT margin (%) -2.4% 6.0% -8.1%
PAT (7) 93 (146)
PAT margin (%) -1.8% 4.5% -8.3%
Fig 80 - Stake in subsidiaries

Name of Subsidiary 2007 2008 2009
Siemens Information System 100.0% 100.0% -
Flender - 50.0% 100.0%
Siemens Information Processing Services 51.0% 51.0% -
Siemens Industrial Turbomachinery Services 100.0% - -
Siemens Rolling Stock - 100.0% 100.0%
Siemens Building Technologies 77.0% 79.3% 86.2%
61
Valuations
Valued at 25.8x/21.1x FY11/FY12E earnings
At our current consolidated estimates SIEM trades at a P/E multiple of 25.8 and 21.1x for
FY11E and FY12E respectively. The stock has historically traded between a PE band of
20x and 30x. The EV/ EBITDA for the stock is 13.7x and 11.3x. When normalized for
growth the EVEG is at 0.71x and 0.59x for FY11E and FY12E respectively. We highlight
that even as the EVEG metrics for SIEM is in the top quartile, it needs to be noted that
SIEM has one of the most technologically advanced product profile in the sector.
We believe given the fundamental improvement in the business model of the company
and the growth in the power transmission equipment market, the company trades at a
discount to other peers of a similar pedigree in the industry. We initiate coverage on
SIEM with a BUY recommendation, with a target price of INR 925, implying a target P/E
of 27x.
Fig 81 - Siemens P/E band chart Fig 82 - Premium/(Discount) to BSE 1 year forward PE
1,200 30x 40x 50x
300
1,000 250
800 200
600 150
400 100
200 50
0
0
(50)
Apr-02
Sep-02
Feb-03
Jul-03
Dec-03
Oct-04
May-04
Apr-05
Sep-05
Feb-06
Jul-06
Dec-06
May-07
Nov-07
Apr-08
Sep-08
Feb-09
Jul-09
Dec-09
Jun-10
Jul-05
Nov-06
Oct-07
Aug-08
Mar-04
Sep-04
Feb-05
Jan-06
Jun-06
May-07
Mar-08
Feb-09
Jul-09
Dec-09
Jun-10
Source: Bloomberg, RCML Research Source: Bloomberg

(Rs mn) Order inflows Order backlog
105000
100000
95000
90000
85000
80000
75000
FY07 FY08 FY09
Source: Company
62
Fig 84 - ROCE
(%) ROCE
70
60
50
40
30
20
10
0

7
0
Fig 86 - Working capital as % of Sales

4
2
0
(2)
(4)
(6)
(8)
(10)
(12)
(14)
(16)
63
Key risks
Margins profile on international orders: SIEM’s order inflows have been robust in
H1FY10, driven by orders from the international markets. Historically, the company has
generated significantly lower margins in the international orders, which led to lower-
than-expected earnings growth and RoCE. While we believe that the probability of this
happening is low, the margin accretion for these orders needs to be keenly watched.
Order backlog mix and order inflows: Currently, the order backlog has high
concentration of orders from Qatar General Electricity & Water Corporation. Any
significant delay in execution of these orders is likely to impact growth estimates
negatively.
64
Y/E September (Rs mn) FY10E FY11E FY12E FY13E Y/E September (Rs mn) FY10E FY11E FY12E FY13E
Interest CWIP - - - -
Other income 571 726 856 1,042 Intangible assets
EBT 11,550 14,069 17,183 19,674 Deferred tax assets, net - - - -
Income taxes 3,811 4,643 5,671 6,492 Other assets (0) (0) (0) (0)
Adjustments - - - - Debt funds 9 9 9 9
DPS (Rs) 5.0 5.0 5.0 5.0 BVPS (Rs) 100.4 123.4 152.5 186.6

Y/E September (Rs mn) FY10E FY11E FY12E FY13E Y/E September FY10E FY11E FY12E FY13E
Non-cash adjustments 1,196 - - - EBITDA margin 13.6 12.8 12.6 12.6
Changes in working capital 2,884 (2,646) (2,038) 100 EBIT margin 11.9 11.3 11.2 11.2
Capital expenditure 406 (1,378) (1,436) (1,503) ROE 25.4 25.3 25.1 23.3
Cash flow from investing 406 (1,378) (1,436) (1,503) Receivables (days) 146 132 134 139
Issue/repay debt 2 - - - Payables (days) 261 242 235 242
Other financing cash flow 9,240 10,370 12,633 10,509 Quick ratio (x) 1.2 1.3 1.3 1.4
Y/E September FY10E FY11E FY12E FY13E
WACC (%) 12.1 12.1 12.1 12.1
ROIC (%) 35.5 35.3 35.0 32.5
EV/Sales 2.5 2.0 1.6 1.4
EV/EBITDA 18.5 15.4 12.7 11.1
EVA (Rs mn) 795,003 966,757 1,181,970 1,288,178 P/E 31.5 25.8 21.1 18.5
EVA spread (%) 23.43 23.20 22.95 20.45 P/BV 7.3 5.9 4.8 3.9
65
Quarterly trend
Revenue (Rs mn) 23,830 19,177 25,180 18,666 22,261
YoY growth (%) 11.2 6.0 53.5 (21.7) 16.1
QoQ growth (%) 45.3 (19.5) 31.3 (25.9) 19.3
EBITDA (Rs mn) 3,304 2,374 2,255 3,421 2,624
EBITDA margin (%) 13.9 12.4 9.0 18.3 11.8
YoY growth (%) 13,501.8 (0.8) (39.5) 90.5 (19.7)
QoQ growth (%) 81.7 (25.5) (18.9) 73.5 (23.4)
DuPont analysis
Return on equity 21.9 25.4 24.3 23.2 21.8
SIEM is a 55% subsidiary of Siemens AG, Germany, which has (%) Sep-09 Dec-09 Mar-10
presence in more than 190 countries. The company offers diverse Promoters 55.2 55.2 55.2
products and services solutions in power generation, transmission FIIs 3.5 3.6 3.6
and distribution, automation & drives, industrial solution, and
Banks & FIs 25.1 25.4 25.8
healthcare. It has a nation-wide sales and service network, 17
manufacturing plants, and a 500 strong network of channel Public 16.2 15.8 15.4
partners.

820
720
620
520
● Buy
420
320
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
66
Suzlon Energy Ltd Initiating Coverage 21 June 2010

Suzlon Energy Ltd
Rs 57 Rs 45 SELL HIGH
Uncertain prospects; Sell
A reduction in leverage and a pick up in domestic order inflows have been the BSE NSE BLOOMBERG
key positives for SUEL in FY10. However, in terms of operating performance, it 532667 SUZLON SUEL IN
has been lagging in critical markets of US and China; this is likely to impact the
company’s future order inflows. We estimate that SUEL’s financials would remain Company data
under pressure over the medium term. At our diluted EPS estimate of Rs 1.5 for Market cap (Rs mn / US$ mn) 139,982 / 3,022
FY12E, the stock is trading at a P/E of 34.2x. We believe given the extended and Outstanding equity shares (mn) 1,764
uncertain path to recovery, the current valuations are unwarranted. We initiate
Free float (%) 833.2
coverage on the stock with a Sell recommendation.
Dividend yield (%) -
Domestic market share loss in FY10 likely: Globally, wind power capacity 52-week high/low (Rs) 125 / 52
addition in CY09 was at 37.4GW (up 32.9% YoY), 22.3% higher than the 2-month average daily volume 22,709,480
estimates of Global Wind Energy Council at the beginning of the year. This
increase was primarily driven by incremental capacities in the US and Chinese Stock performance
markets, as capacity addition lagged estimates in most other top ten global Returns (%) CMP 1-mth 3-mth 6-mth
markets. In FY10, SUEL delivered 1460MW globally, a drop of 47.7% YoY, Suzlon 57 (11.1) (22.9) (30.7)
implying a loss of market share in the year. Based on proforma calculations, we BSECG 14,462 6.4 3.3 5.0
estimate that the company lost market share in all three of its main markets, i.e. Sensex 17,617 4.6 0.7 4.3
India, US, and China. However, the most critical market share loss for SUEL may
have been in India – according to industry estimates, India added 1271MW of P/E comparison
wind power capacity in CY09, while SUEL delivered only 688MW of wind (x) Suzlo n Energy Industry
power capacity in India in FY10.
40 34.2
Financial leverage still high: With the stake sale of Hansen Transmissions, few 30 23.1
17.7
rounds of funds raising and refinancing options have been exercised by SUEL. 20 15.0
This mitigates the risk of bankruptcy in our view. At the consolidated level, 10
however, the company still carries a debt of ~Rs 126.7bn, leading to a D/E ratio 0
of ~1.7x at FY10-end. Hence, we believe that even as the company is likely to FY10E FY11E FY12E
turn positive at the operating level in FY11E, high financial leverage may
translate into losses for the consolidated entity during the year. Valuation matrix
Declining order inflows in international markets – a concern: The implied order
P/E @ CMP - - 34.2 28.3
inflows from the international geography for the parent stood at 281MW in FY10,
P/E @ Target - - 26.8 22.2
(a significant drop from the highs of FY08), even as the wind power capacity
EV/EBITDA @ CMP 23.3 20.7 10.8 9.6
addition exceeded expectations in the two largest markets – US and China on
stimulus spending. However, the order inflows for the company have picked in
RCML vs consensus
the domestic geography, particularly on significant inflows in H2FY10. In fact, on
FY11E FY12E
a YoY basis, domestic order inflows grew 26.9% to 843MW in FY10, after Parameter
declining 23.4% in FY09. RCML Cons RCML Cons
Sales (Rs mn) 210,409 226,011 234,531 275,332
EPS (Rs) (3.4) 0.6 1.7 4.3

Adj net income (11,945) (5,336) 2,618 3,159 Adj PAT margin (5.7) (2.5) 1.1 1.3
Growth (%) (205.4) (55.3) (149.1) 20.7 ROE (14.7) (7.2) 3.6 4.2
FDEPS (Rs) (7.7) (3.4) 1.7 2.0 ROIC 1.3 1.6 6.2 6.6
Growth (%) (201.4) (55.3) (149.1) 20.7 ROCE 1.1 1.5 5.5 6.0
67
Unfavourable cross-currency movements to offset RE Power performance: The

performance of RE Power has been encouraging in FY10. The company’s order backlog
grew by 41.1% to € 2.1bn at FY10-end, driven by a 17.2% YoY growth in order inflows.
Further, its EBITDA margin expanded 90bps YoY to 8.6% in FY10. We believe that even
as RE Power may sustain its performance, the appreciation in the rupee versus the euro
would offset the impact of this performance at the consolidated level.
Rich valuations unwarranted; Sell: We believe that SUEL’s financials are likely to
remain under pressure over the medium term and with a current financial leverage of
~1.7x, it will have to grow across geographies to breakeven. At our diluted EPS estimate
of Rs 1.7 for FY12E, the stock is trading at a P/E of 34.2x. We believe that given the
extended and uncertain path to recovery, the current valuations are unwarranted.
Hence, we initiate coverage on the stock with a Sell.
Fig 87 - RoCE
(%) ROCE
60
50
40
30
20
10
0

4
0
68
Fig 89 - Working Captial as % of Sales

60
50
40
30
20
10
0
Key risks
Pick up in order inflows from international geography: While order inflows from the
domestic geography have improved, an uptick in order inflows from the international
geography could present an upside risk to our estimates. According to our proforma
calculations, SUEL lost market share in FY10 in its international markets.
69
Interest 11,950 9,965 10,165 11,131 CWIP 19,840 19,840 19,840 19,840
Other income 695 1,221 906 607 Intangible assets
EBT (8,455) (5,469) 3,043 3,699 Deferred tax assets, net (510) (510) (510) (510)
Income taxes 3,561 - 548 666 Other assets 2,540 - - -
Effective tax rate (%) (42.1) - 18.0 18.0 Total assets 321,085 334,671 345,158 379,680
Extraordinary items (2,119) - - - Accounts payable 84,270 108,230 106,139 122,641
Reported net income (9,826) (5,336) 2,618 3,159 Provisions 9,950 9,786 9,597 11,088
Adjustments 2,119 - - - Debt funds 127,057 122,057 132,057 146,217
Adjusted net income (11,945) (5,336) 2,618 3,159 Other liabilities 23,224 23,351 23,500 23,660
Growth (%) (205.4) (55.3) (149.1) 20.7 Equity capital 4,064 4,064 4,064 3,114
Shares outstanding (mn) 1,556.8 1,556.8 1,556.8 1,556.8 Reserves & surplus 72,520 67,184 69,801 72,960
FDEPS (Rs) (adj) (7.7) (3.4) 1.7 2.0 Shareholder's funds 76,584 71,247 73,865 76,074
Growth (%) (201.4) (55.3) (149.1) 20.7 Total liabilities 321,085 334,671 345,158 379,680
DPS (Rs) - - - - BVPS (Rs) 49.2 45.8 47.4 48.9

Net income + Depreciation (5,315) 1,974 10,672 11,821 Profitability & Return ratios (%)
Non-cash adjustments (1,358) - - - EBITDA margin 4.5 5.0 8.7 9.2
Changes in working capital (9,570) 6,211 14,812 23,496 EBIT margin 1.3 1.6 5.2 5.7
Cash flow from operations (16,243) 8,184 25,484 35,317 Net profit margin (5.7) (2.5) 1.1 1.3
Capital expenditure 35,644 (21,340) (46,340) (46,340) ROE (14.7) (7.2) 3.6 4.2
Other investing cash flow 1,440 2,540 - - Working Capital & Liquidity ratios
Cash flow from investing 37,026 (18,800) (46,340) (46,340) Receivables (days) 102 102 80 69
Issue of equity 117 - - (950) Inventory (days) 176 173 166 147
Issue/repay debt (21,639) (5,000) 10,000 14,160 Payables (days) 255 250 257 261
Other financing cash flow 2,275 193 216 226 Quick ratio (x) 1.2 1.0 1.0 0.8
Change in cash & cash eq 1,469 (15,489) (10,706) 2,346 Turnover & Leverage ratios (x)
WACC (%) 11.0 11.0 11.0 11.0
ROIC (%) 1.3 1.6 6.2 6.6
EV/Sales 1.1 1.0 0.9 0.9
EV/EBITDA 23.3 20.7 10.8 9.6
EVA (Rs mn) (1,976,724) (1,804,340) (992,845) (965,036) P/E - - 34.2 28.3
EVA spread (%) (9.71) (9.33) (4.82) (4.34) P/BV 1.2 1.3 1.2 1.2
70
Quarterly trend
Revenue (Rs mn) 92,079 41,714 48,352 56,084 61,642
YoY growth (%) 33.3 (30.7) (19.2) (33.1)
QoQ growth (%) 32.6 (54.7) 15.9 16.0 9.9
EBITDA (Rs mn) 6,185 (1,503) (668) 1,074 3,898
EBITDA margin (%) 6.7 (3.6) (1.4) 1.9 6.3
Adj net income (Rs mn) 2,547 (4,344) (3,353) (2,296) (1,951)
YoY growth (%) (281.6) (231.5) (159.8) (176.6)
QoQ growth (%) (33.7) (270.5) (22.8) (31.5) (15.0)
DuPont analysis
Interest burden (PBT/EBIT) 71.9 (301.9) (167.0) 24.7 26.0
Return on equity 13.5 (14.7) (7.2) 3.6 4.2
Suzlon is one of the leading wind power and turbine company in (%) Sep-09 Dec-09 Mar-10
the world with a presence in over 21 countries. The company has a Promoters 53.1 53.1 53.1
strong presence in the markets of India, Australia, US, Portugal and FIIs 15.2 15.5 13.6
Spain. Through its subsidiary the company has strong presence in
Banks & FIs 15.2 13.5 13.5
France and other parts of Europe.
Public 16.6 17.9 19.9

130
21-Jun-10 Initiating Coverage 57 45 Sell ● Sell
110
90
70
50
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
71
Techno Electric & Engineering Company Ltd Initiating Coverage 21 June 2010

Techno Electric & Engineering Company Ltd
Strong fundamentals, attractive valuations – Buy
Techno Electric (TEE) has one of the most profitable business models in India’s BSE NSE BLOOMBERG
power contracting value chain. We believe that the business model derives its 505397 TECHNOELEC TEE IN
strength from the company’s superior project management skills and its
selective approach in servicing clients. The stock, currently trading at a P/E of Company data
11.7x and 10.4x its FY11E and FY12E earnings, offers significant upsides from Market cap (Rs mn / US$ mn) 16,482/355
current levels. We initiate coverage on TEE with a Buy and a target price of Rs Outstanding equity shares (mn) 57
400.
Free float (%) 33.9
High growth likely in power generation EPC, the key addressable market: TEE Dividend yield (%) 0.3
has the expertise to cater to ~17–20% of the total required spend in power 52-week high/low (Rs) 319 / 107
generation plants. The company’s addressable market in this vertical is expected 2-month average daily volume 25,011
to increase by ~183% in the 11th plan (over the 10th Plan) to ~Rs 450bn, given
the planned increase in generation capacity. Stock performance
Foray into renewable energy to provide scalability to business: TEE acquired TEE 289 5.4 28.9 65.7
wind energy assets of 95MW in April ’09. Through these wind farms, the BSECG 14,462 6.4 3.3 5.0
company supplies power to state distribution utilities in Karnataka and Tamil Sensex 17,617 4.6 0.7 4.3
Nadu. In addition to this, TEE is setting up biomass-based power plants of
~40MW capacity in the eastern India. These plants would start coming on stream
P/E comparison
from FY12E onwards. While the returns from the utilities business are lower than
(x) TEEC Industry
that from the contracting business, we believe that this diversification is a logical
23.1
progression for the company, given its strong capital position. 25
17.7
20 15.0
13.4 11.7
15 10.4
Selective approach leads to superior working capital management: At FY09-end, 10
TEE, at the parent level, had a gross block of Rs 100mn, implying a fixed asset 5
0
turnover of ~101.4x. The company has been significantly ahead of the industry FY10E FY11E FY12E
in managing working capital (working capital turnover of ~15x in FY09),
primarily by catering to a select set of clients. Though this selective approach
may result in subdued topline growth vis-à-vis the industry, it is likely to yield Valuation matrix
higher returns (RoCEs) due to a superior working capital turnover. (x) FY10E FY11E FY12E FY13E
P/E @ CMP 13.4 11.7 10.4 9.1
Strong upside potential; Buy: TEE has one of the most profitable business models P/E @ Target 18.6 16.3 14.4 12.6
in India’s power contracting value chain. We have valued the subsidiary EV/EBITDA @ CMP 10.7 9.8 8.7 7.8
portfolio (using the NPV method) at Rs 50/share. Hence, the implied P/E of the
parent business is at 12.1x and 10.8x for FY11E and FY12E respectively. We RCML vs consensus
believe that TEE’s increasing exposure to the utility space is likely to complement FY11E FY12E
the cash flows of its contracting business. At a consolidated level, the stock is Parameter
RCML Cons RCML Cons
trading at P/E of 11.7x and 10.4x its FY11E and FY12E earnings respectively. We
Sales (Rs mn) 8,053 8,606 9,521 10,166
believe that the stock offers significant upside potential from current levels. We
EPS (Rs) 24.6 20.9 27.7 26.3
initiate coverage on TEE with a Buy rating and a target price of Rs 400.

Growth (%) 89.0 14.3 12.4 14.3 ROE 43.0 34.2 28.5 25.2
FDEPS (Rs) 21.5 24.6 27.7 31.7 ROIC 25.5 18.5 18.8 18.8
Growth (%) 89.0 14.3 12.4 14.3 ROCE 36.7 23.1 22.8 22.3
72
Fig 90 - P/E Band Chart
Px Last 6x 12x 18x 24x 30x

700
600
500
400
300
200
100
0
Dec-05
May-06
Oct-06
Apr-07
Sep-07
Mar-08
Aug-08
Jan-09
Jul-09
Dec-09
Jun-10
Source: Bloomberg, RCML Research
Fig 91 - RoCE
(x) ROCE
180
160
140
120
100
80
60
40
20
0

9
8
7
6
5
4
3
2
1
0
73

(x) Working capital as % of sales
20
15
10
(5)
(10)
Key risks
Execution risks: Capacity expansion in India’s power sector under the 11th plan is likely
to be higher than under the 8th, 9th and 10th plans combined. Earlier, utilities (customers)
condoned execution delays. However, going ahead, timely execution will be critical for
contractors. While TEE has been improving its execution capabilities and has not
suffered any financial damage in this regard, we believe all EPC contractors in the power
sector space run the risk of not executing projects as per stipulated specifications and
with the scheduled time frame.
Increase in competition could hurt margins: EPC jobs in the power sector essentially
have low capital and technology requirements, thus entry barriers are relatively lower.
Only softer issues like managing customer relationships and project management skills
may pose as barriers to entrants. However, risks in form of higher competition – and its
negative impact on margins – exist, given the high return ratios that the industry is
generating in the current cycle.
74
EBITDA 1,537 1,679 1,895 2,127 Inventories 4 4 5 6
Growth (%) 169.8 9.3 12.9 12.2 Other current assets 86 99 116 135
Interest 303 228 208 176 CWIP - - - -
Income taxes 246 304 342 391 Other assets - - - -
Reported net income 1,228 1,404 1,578 1,805 Provisions 75 87 101 118
DPS (Rs) 1.0 1.0 1.0 1.0 BVPS (Rs) 60.3 83.8 110.3 140.8

Changes in working capital 1,163 (182) 11 23 EBIT margin 17.7 17.3 16.7 16.0
Issue/repay debt 3,280 (500) (550) (500) Payables (days) 111 102 93 91
Other financing cash flow 149 149 149 149 Quick ratio (x) 1.8 2.4 2.7 3.0
Change in cash & cash eq 1,277 929 870 1,184 Turnover & Leverage ratios (x)
WACC (%) 11.5 11.5 11.5 11.5
ROIC (%) 25.5 18.5 18.8 18.8
EV/Sales 2.3 2.1 1.7 1.5
EV/EBITDA 10.7 9.8 8.7 7.8
EVA (Rs mn) 99,811 55,597 64,971 73,983 P/E 13.4 11.7 10.4 9.1
EVA spread (%) 13.98 6.97 7.27 7.27 P/BV 4.8 3.4 2.6 2.1
75
Quarterly trend
Revenue (Rs mn) 1,171 1,235 1,487 1,512 2,040

YoY growth (%) 1.7 (5.0) 20.7 29.1 65.2
QoQ growth (%) (4.9) 5.4 20.4 1.7 34.9
EBITDA (Rs mn) 206 121 198 216 237
EBITDA margin (%) 17.6 9.8 13.3 14.3 11.6
YoY growth (%) 95.0 6.7 88.9 18.5 41.7
QoQ growth (%) 55.7 (9.7) 34.4 (2.3) 7.9
DuPont analysis

Return on equity 32.5 43.0 34.2 28.5 25.2
TEE was incorporated in 1963 by the Mohankas of Jamshedpur to (%) Sep-09 Dec-09 Mar-10
provide EPC services to core sector industries in India. The Promoters 55.0 55.0 55.0
company went public in 1973. In 1995, Mr. P.P. Gupta became the FIIs 1.1 0.7 0.6
sole promoter. Broadly, TEE addresses the power generation, power
Banks & FIs 38.8 39.0 39.3
transmission and distribution and industrial sectors. TEE addresses
roughly ~17–20% of the total project requirements of power Public 5.1 5.3 5.2
generation plants. TEE has been involved in mechanical and
electrical auxiliary systems for utilities and upto ~67MW captive
power plants on turnkey basis.

300
250
200
150 ● Buy
100
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
76
Thermax Ltd Initiating Coverage 21 June 2010

Thermax Ltd
Rs710 Rs 710 HOLD LOW
Positives priced in; Hold
Order inflows have been the bright spot for Thermax (TMX) in FY10. We BSE NSE BLOOMBERG
believe that the growth in order inflows revs up the company’s revenue growth 500411 THERMAX TMX IN
outlook for FY11E and FY12E. However, even as we believe that TMX has one
of the most superior business models in India’s power and industrial contracting Company data
space, the current valuations factor in most of the positives and therefore hold Market cap (Rs mn / US$ mn) 84,642/1,823
limited upside potential. At the current estimates, the stock trades at a P/E of Outstanding equity shares (mn) 119
26x and 20x its FY11E and FY12E earnings respectively. We initiate coverage on
Free float (%) 33.9
TMX with a Hold recommendation and a target price of Rs 710.
Diversification into supercritical boilers – a key milestone: In March ’10, TMX 52-week high/low (Rs) 750 / 367
announced a JV with Babcock and Wilcox (B&W) for manufacturing supercritical 2-month average daily volume 53,815
boilers. The plant’s annual capacity is planned at 3GW and is slated to
commence operations by FY12-end. We believe that this diversification will Stock performance
emerge as a key long-term positive for the company, as it has imparted higher Returns (%) CMP 1-mth 3-mth 6-mth
scalability to TMX’s business model and filled the void in large size utility Thermax 710 6.1 4.1 23.6
boilers. In the initial years though, working capital requirement in this business is BSECG 14,462 6.4 3.3 5.0
likely to be higher and margins lower, which in turn would impact return ratios, Sensex 17,617 4.6 0.7 4.3
going ahead. However, we believe that the potential growth from this
diversification may more than offset the impact of lower return ratios in future P/E comparison
years. (x) Thermax Industry
Growth in order backlog to keep execution strong in FY11E: TMX’s revenues 40 33.0
26.5
30 23.1
have jumped 62.9% QoQ in Q4FY10, significantly higher than the trend seen in 17.7 20.4
15.0
20
the last three years. Further, the scope of some large orders (Essar and Brahmani
10
Steel orders) was reduced in Q4FY09, resulting in a lower order backlog at the 0
FY09-end. We believe that execution would remain strong in the subsequent FY10E FY11E FY12E
quarters as the company’s order inflows have started to pick up sharply from
Q2FY10 onwards. At FY10-end, the order backlog at the standalone level was at
Valuation matrix
Rs 53.8bn, up 86.1% YoY.
Valuations factor in most positives – Hold: At the current estimates, TMX trades P/E @ CMP 32.5 26.1 20.1 15.6
at a P/E of 26x and 20x its FY11E and FY12E earnings respectively. The EVEG P/E @ Target 32.5 26.1 20.1 15.6
ratio for the company is at 0.64x and 0.49x for FY11E and FY12E respectively, on EV/EBITDA @ CMP 21.1 16.1 12.3 10.6
the higher side in the sector. We believe that even as the company’s business
model attains higher scalability with the diversification into supercritical boilers, RCML vs consensus
the current valuations leave limited room for upside. We initiate coverage on the FY11E FY12E
Parameter
stock with a Hold recommendation and a target price of Rs 710. RCML Cons RCML Cons
Sales (Rs mn) 42,130 55,090
EPS (Rs) 26.8 34.9

Growth (%) (10.4) 24.8 29.9 28.8 ROE 26.1 28.3 28.9 29.2
FDEPS (Rs) 21.5 26.8 34.9 44.9 ROIC 35.1 41.0 42.5 39.0
Growth (%) (10.4) 24.8 29.9 28.8 ROCE 41.8 50.3 53.5 38.6
77
Leadership position in industrial boilers, captive power plants: TMX has a robust
business model that is driven by its leadership position in industrial boilers (30-32%
market share) and captive power plant (~20% share) segments. One of the key strengths
of its business model is its robust cash flows. This strength is particularly commendable
in the light of the company’s business mix – TMX, as primarily a contracting company,
derives ~70% of its revenues from projects and the remaining ~30% from products. We
believe that TMX has been able to sustain healthy cash flows due to its selective
approach in servicing clients, which in our view is an important characteristic of its
business model.
Fig 94 - Thermax P/E band chart Fig 95 - Premium/(Discount) to BSE

18x 24x 30x
1000 80
800 60
40
600
20
400
0
200 (20)
0 (40)
Sep-09
Apr-02
Dec-02
Aug-03
Apr-04
Dec-04
Aug-05
May-06
Jan-07
Sep-07
May-08
Jan-09
Jun-10
Apr-04
Jul-05
Sep-04
Feb-05
Jan-06
Jun-06
Nov-06
May-07
Oct-07
Mar-08
Aug-08
Jul-09
Feb-09
Dec-09
Jun-10
Source: Bloomberg, RCML Research Source: Bloomberg, RCML research
Fig 96 - RoCE
(%) ROCE
60
50
40
30
20
10
0
78

4
0
Fig 98 - Working capital as a % of Sales

60
50
40
30
20
10
0
Key risks
Execution of large ticket size projects: TMX will be executing large projects (of over >Rs
10bn ticket size) for the first time. While the company’s project management skill sets
are best-in-class, we believe that any slippage on the execution front can negatively
impact our earnings estimates for the company.
79
Interest 15 28 60 31 CWIP - - - -
Income taxes 1,356 1,659 2,141 2,549 Other assets - - - -
Extraordinary items (1,149) - - - Accounts payable 10,493 12,393 16,213 19,544
Min into / inc from associates - 96 96 (292) Other current liabilities
Adjustments 1,149 - - - Debt funds - - - -
Growth (%) (10.4) 24.8 29.9 28.8 Equity capital 238 238 238 238
Growth (%) (10.4) 24.8 29.9 28.8 Total liabilities 21,526 26,212 33,967 41,992
DPS (Rs) 5.0 5.0 5.0 13.0 BVPS (Rs) 83.8 105.6 135.4 172.0

Changes in working capital (231) (52) (97) (19) EBIT margin 10.8 11.0 11.1 10.8
Change in investments - (1,000) (750) - ROCE 41.8 50.3 53.5 38.6
Cash flow from investing (367) (1,500) (1,500) (500) Receivables (days) 62 51 49 60
Issue/repay debt - - - - Payables (days) 197 153 145 14
Dividends paid - - - - Current ratio (x) 1.3 1.4 1.4 3.6
Other financing cash flow (2,195) (601) (601) (989) Quick ratio (x) 0.8 0.8 0.8 0.8
Change in cash & cash eq 175 1,470 2,437 4,364 Turnover & Leverage ratios (x)
Adjusted debt/equity - - - -
WACC (%) 11.3 11.3 11.3 11.3
ROIC (%) 35.1 41.0 42.5 39.0
EV/Sales 2.6 1.9 1.5 1.2
EV/EBITDA 21.1 16.1 12.3 10.6
EVA (Rs mn) 237,357 373,714 503,549 567,328 P/E 32.5 26.1 20.1 15.6
EVA spread (%) 23.77 29.70 31.20 27.68 P/BV 8.5 6.7 5.2 4.1
80
Quarterly trend
Revenue (Rs mn) 9,483 5,376 6,804 7,482 12,193
YoY growth (%) 2.8 (25.0) (15.4) (5.9) 28.6
QoQ growth (%) 19.3 (43.3) 26.6 10.0 62.9
EBITDA (Rs mn) 1,233 594 689 790 1,365
EBITDA margin (%) 13.0 11.0 10.1 10.6 11.2
YoY growth (%) 18.5 (27.0) (5.0) (21.8) 6.7
QoQ growth (%) 28.6 (50.0) 16.4 4.5 75.5
DuPont analysis
Return on equity 33.7 26.1 28.3 28.9 29.2
TMX provides solutions in the energy and environment space. The (%) Sep-09 Dec-09 Mar-10
energy business contributes ~80% to revenues, whereas the Promoters 62.0 62.0 62.0
environment business contributes ~20%. Further, 20% of revenues FIIs 6.5 7.4 8.3
are from products and 80% of revenues are from projects. The
Banks & FIs 18.2 17.6 16.8
company’s market share for chillers is 90%, 35-38% for boilers and
heaters, 8% for water and waste water, 35% for chemicals, and Public 13.4 13.0 12.9
~60% for air treatment divisions.

750
650
550
450 ● Hold
350
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
81
Voltas Ltd Initiating Coverage 21 June 2010

Voltas Ltd
Attractive valuations-Buy
We believe that the business model of Voltas (VOLT) has inherent strengths in BSE NSE BLOOMBERG
the form of the company’s superior project management skills that lead to a 500575 VOLTAS VOLT IN
light balance sheet and a high RoCE. Our target price for the stock is at Rs 220,
implying a 17% upside from current levels. The stock has historically traded Company data
between a one year forward PE band of 18-30x. At our target price of Rs 220, Market cap (Rs mn / US$ mn) 62,471/1,346
the implied target P/E is 18x. We initiate coverage on VOLT with a Buy. Outstanding equity shares (mn) 331
Order accretion shoots up in Q4FY10: Even as the order backlog in the Electro Free float (%) 63.5
Mechanical Projects & Services (EMPS) segment remained flat YoY, VOLT’s order Dividend yield (%) 0.8
accretion of Rs 19bn in Q4FY10 is commendable. The order backlog for the 52-week high/low (Rs) 194 / 105
company at the end of FY10 was at INR 47.2 bn. VOLT is likely to see further 2-month average daily volume 997,192
improvement in order booking during FY11E, driven by its focused efforts
towards increasing market share in segments like industrial and infrastructure Stock performance
projects. Returns (%) CMP 1-mth 3-mth 6-mth
Completion of key projects leads to strong pre-qualification in FY10: VOLT has VOLTAS 189 5.9 12.3 14.9
been associated with several prestigious projects in the recent past, particularly BSECG 14,462 6.4 3.3 5.0
in the Middle Eastern market. These include the Burj Khalifa in Dubai, the Sensex 17,617 4.6 0.7 4.3
Formula 1 race track in Abu Dhabi, the Ferrari Experience Theme Park and
Etihad Towers Complex in Abu Dhabi, UAE. We believe that with the experience P/E comparison
of these projects, the company is likely to have gained pre-qualifications for (x) Vo ltas Industry
other high-end projects – a key long-term positive for the company. 25
23.1
17.5 17.1 17.7
20 15.6 15.0
EAS recovery could surprise, UCL to lead growth: VOLT’s engineering and 15
agency services (EAS) was significantly hit by the domestic slowdown, leading to 10
5
a 10% decline in revenues in FY10. In contrast, the UCL division posted a high 0
growth of 28.7% YoY in FY10 in the backdrop of a severe summer season and FY10E FY11E FY12E
improving realisations on high-end products. Further, we believe that the EAS
segment could surprise positively going ahead due to a revival in mining and
Valuation matrix
construction equipment demand.
Strong long-term bet; Buy: At our consolidated estimates, the stock trades at a P/E @ CMP 17.5 17.1 15.6 14.3
P/E of 17.1x and 15.6x its FY11E and FY12E earnings respectively. We believe P/E @ Target 20.4 20.0 18.1 16.7
that while upsides to the current valuations may not be immediate, expectations EV/EBITDA @ CMP 12.5 12.2 11.0 10.0
of positive surprises on order wins are likely to support valuations. We believe
that VOLT looks attractive over the long term, given its light balance sheet RCML vs consensus
(inorganic growth likely) and impressive return ratios. Our target price for the FY11E FY12E
stock is at Rs 220, implying a 17% upside from current levels. The stock has Parameter
RCML Cons RCML Cons
historically traded between a one year forward PE band of 18-30x. We initiate
Sales (Rs mn) 53,072 54,849 58,866 63,309
coverage on VOLT with a Buy.
EPS (Rs) 11.0 10.6 12.1 12.4

Growth (%) 58.0 2.4 10.1 8.7 ROE 42.2 33.7 29.9 26.7
FDEPS (Rs) 10.8 11.0 12.1 13.2 ROIC 46.4 37.6 34.3 31.4
Growth (%) 58.0 2.4 10.1 8.7 ROCE 61.1 46.5 40.7 36.1
82
Fig 99 - Voltas P/E band chart
Px Last 6x 12x 18x 24x 30x

350
300
250
200
150
100
50
0
Apr-02
Sep-02
Feb-03
Aug-03
Jan-04
Jul-04
Dec-04
Jun-05
Nov-05
May-06
Oct-06
Aug-08
Apr-07
Sep-07
Feb-08
Jan-09
Jul-09
Dec-09
Jun-10
Source: Bloomberg, RCML Research

50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
FY08 FY09 FY10
Fig 101 - RoCE

(%) ROCE
80
70
60
50
40
30
20
10
0
83

9
8
7
6
5
4
3
2
1
0

2
1
0
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
84
Revenues 45,570 50,139 55,639 61,276 Cash and cash eq 8,488 11,311 14,458.3 17,987
Growth (%) 13.0 10.0 11.0 10.1 Accounts receivable 8,741 9,056 10,048.9 11,067
EBITDA 4,122 4,188 4,648 5,118 Inventories 10,460 9,799 9,236.6 8,369
Growth (%) 55.9 1.6 11.0 10.1 Other current assets 2,562 2,764 3,052.5 3,348
Depreciation & amortisation 164 220 233 274 Investments 2,358 2,358 2,358.0 2,358
EBIT 3,958 3,968 4,414 4,845 Gross fixed assets 3,439 3,939 4,689.3 5,439
Growth (%) 59.7 0.3 11.2 9.7 Net fixed assets 1,944 2,224 2,740.9 3,217
Interest 70 89 64 67 CWIP - - - -
EBT 4,493 4,687 5,204 5,662 Deferred tax assets, net 216 216 215.9 216
Effective tax rate (%) 31.5 32.7 33.7 33.7 Total assets 34,770 37,727 42,111.2 46,563
Extraordinary items 364 - - - Accounts payable 19,583 19,730 20,803.0 21,708
Reported net income 2,714 3,155 3,451 3,755 Provisions 4,129 4,437 4,911.6 5,325
Adjustments (364) - - - Debt funds 1,474 1,517 1,599.1 1,673
Adjusted net income 3,078 3,155 3,451 3,755 Other liabilities - 1 - -
Growth (%) 39.5 2.5 9.4 8.8 Equity capital 331 331 330.7 331
Shares outstanding (mn) 330.7 330.7 330.7 330.7 Reserves & surplus 9,253 11,711 14,465.7 17,524
FDEPS (Rs) (adj) 9.3 9.5 10.4 11.4 Shareholder's funds 9,583 12,042 14,796.4 17,855
Growth (%) 39.5 2.5 9.4 8.8 Total liabilities 34,770 37,727 42,110.2 46,562
DPS (Rs) 1.7 1.8 1.8 1.8 BVPS (Rs) 29.0 36.4 44.7 54.0

Changes in working capital 2,216 600 828 873 EBIT margin 8.7 7.9 7.9 7.9
Other financing cash flow (127) 1 (1) 0 Quick ratio (x) 0.5 0.5 0.5 0.5
WACC (%) 12.1 12.1 12.1 12.1
ROIC (%) 40.3 32.2 29.5 27.0
EV/Sales 1.3 1.2 1.1 1.0
EV/EBITDA 14.5 14.3 12.9 11.7
EVA (Rs mn) 311,774 272,758 284,466 289,959 P/E 20.3 19.8 18.1 16.6
EVA spread (%) 28.20 20.12 17.35 14.85 P/BV 6.5 5.2 4.2 3.5
85
Quarterly trend
Revenue (Rs mn) 12,425 11,789 10,043 9,135 14,603
YoY growth (%) 47.5 17.1 8.2 5.5 17.5
QoQ growth (%) 43.5 (5.1) (14.8) (9.0) 59.8
EBITDA (Rs mn) 636 968 1,068 754 1,167
EBITDA margin (%) 5.1 8.2 10.6 8.3 8.0
YoY growth (%) 52.8 14.5 36.5 39.5 43.7
QoQ growth (%) 58.2 5.2 13.8 (26.3) 62.9
DuPont analysis
(%) Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10
Tax burden (Net income/PBT) 12,425 11,789 10,043 9,135 14,603
EBIT margin (EBIT/Revenues) 43.5 (5.1) (14.8) (9.0) 59.8
Asset turnover (Revenues/Avg TA) 636 968 1,068 754 1,167
Return on equity 674 709 807 594 968
VOLT, is a leading air conditioning and engineering services (%) Sep-09 Dec-09 Mar-10
provider based in India. Tata group holds a stake of 27.9% in the Promoters 27.7 27.7 27.7
company. VOLT offers heating, cooling, ventilation and other FIIs 10.9 11.3 9.0
engineering services through three different business segments.
Banks & FIs 38.5 39.0 41.1
Public 23.0 22.0 22.2

200
180
160
140
● Buy
120
100
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
86
Coverage Profile
By recommendation By market cap (US$)
(%) (%)
80 60 55
59
60 39
40
40 33
20
20 8 6
0 0
Buy Hold Sell > $1bn $200mn - $1bn < $200mn
Recommendation interpretation
Recommendation Expected absolute returns (%) over 12 months
Buy More than 15%
Hold Between 15% and –5%
Sell Less than –5%
Recommendation structure changed with effect from March 1, 2009
Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a
12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary
mismatch between upside/downside for a stock and our recommendation.
Religare Capital Markets Ltd

4th Floor, GYS Infinity, Paranjpe ‘B’ Scheme, Subhash Road, Vile Parle (E), Mumbai 400 057.
Disclaimer
This document is NOT addressed to or intended for distribution to retail clients (as defined by the FSA).
This document is issued by Religare Capital Markets plc (“RCM”) in the UK, which is authorised and regulated by the Financial Services Authority in connection with its UK
distribution. RCM is a member of the London Stock Exchange.
This material should not be construed as an offer or recommendation to buy or sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or
the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action or any other matter. The material in this report is based
on information that we consider reliable and accurate at, and share prices are given as at close of business on, the date of this report but we do not warrant or represent
(expressly or impliedly) that it is accurate, complete, not misleading or as to its fitness for the purpose intended and it should not be relied upon as such. Any opinion
expressed (including estimates and forecasts) is given as of the date of this report and may be subject to change without notice.
RCM, and any of its connected or affiliated companies or their directors or employees, may have a position in any of the securities or may have provided corporate finance
advice, other investment services in relation to any of the securities or related investments referred to in this document. Our asset management area, our proprietary trading
desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this briefing note.
RCM accepts no liability whatsoever for any direct, indirect or consequential loss or damage of any kind arising out of the use of or reliance upon all or any of this material
howsoever arising. Investors should make their own investment decisions based upon their own financial objectives and financial resources and it should be noted that
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This document is confidential and is supplied to you for information purposes only. It may not (directly or indirectly) be reproduced, further distributed to any person or
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Capital Goods Sector Report 21 June 2010

Sector Report 21 June 2010

Realign for the change ahead ABB 866 Hold 850

BHEL 2,383 Hold 2,400

Leaders to outperform: In our view higher competitive intensity is likely to

Misal Singh Arun Aggarwal

Section Page No.

Bright long-term prospects 2

Heightened competition to impact margins post FY12E 2

Power generation: wide scope, varied dynamics 4

Power transmission outlay set to surge 5

Power transmission sees higher order flows, competition 5

Outlook and Valuations 7

Bharat Heavy Electricals Ltd 21

BGR Energy Systems Ltd 26

Crompton Greaves Ltd 31

Cummins India Ltd 36

Jyoti Structures Ltd 41

Kalpataru Power Transmission Ltd 46

KEC International Ltd 51

Suzlon Energy Ltd 67

Techno Electric & Engineering Company Ltd 72

Fig 1 - Comparative Valuation Sheet

Bright long-term prospects

Heightened competition to impact margins post FY12E

Impact of intensifying competition on new entrants to be lower

Fig 5 - Details of new entrants in the BTG equipment industry

Larsen and Toubro- 2X 660 MW- Jaypee Group at Singrauli-

Bharat Forge- Alstom

Project was financially closed in

BGR Energy- Foster

Thermax- Babcock and Land acquisition in process. To

Source: RCML Research

Power generation: wide scope, varied dynamics

Fig 6 - Power generation plant- Scope of work

3 Ash handling system Indure, DC Industrial Plant Services, Mecawber Beekay 5- 6%

4 Cooling tower Paharpur Cooling Towers, Gammon India 1.5- 2%

NBCC, Gammon India, Simplex, North West Power Construction Co.

8 HVAC system ABB, Blue Star, Voltas 0.75- 1.0%

9 Fuel oil system BHEL, Techno Electric, 1.0- 1.5%

10 Control system BHEL, ABB, Yogokawa, Emerson 0.3- 0.5%

Minimax GMBH, KIDDE India, Nohmi Bosai – Japan, Wormald Fire

Scale to remain a constraint for BoP segment

Power transmission outlay set to surge

India’s eastern/north eastern belt to see significant capacity addition

Fig 8 - Base power requirement and supply- Region wise

Power transmission sees higher order flows, competition

Fig 10 - Increasing competition in power transmission orders

Outlook and Valuations

We believe value creation potential of a business model is a function of its growth

Fig 12 - EV/EBITDA vs EBITDA growth

Source: Company, RCML Research

SIEM currently valued at 25.8x/21.1x FY11/FY12 estimates - Buy

Fig 14 - Siemens P/E band chart Fig 15 - Premium/(Discount) to BSE

BHEL’s declining fundamentals beyond FY13E to cap valuations – Hold

Fig 16 - BHEL P/E band chart Fig 17 - Premium/(Discount) to BSE

Source: Company, RCML Research Source: Company, RCML Research

Fig 18 - Voltas P/E band chart Fig 19 - Premium/(Discount) to BSE