ESS Public Sector Hopes

MARKET UPDATE
India | Capital Goods | 31-July-2013
Capital Goods
Public sector will not save the day
The Finance Ministers budget promise to rein in the fiscal deficit doesnt leave the government with much firepower to make up for a shortfall in capex as the private sector stays on the sidelines, weighed down by overleveraged balance sheets. The governments unimpressive track record in project execution and order awards does not inspire much confidence either. Almost half the public sector projects are behind schedule the highest in the last 15 years. Moreover, we are not enthused by governments FY14 targets for project awards, as these do not take into account the issues facing various sectors, e.g. land acquisition, environmental hurdles, new bidding guidelines and lack of private sector interest. With elections set for 2014, new project announcements and decision making could slow down further, as was seen in 2004 and 2009.
Time overruns in government projects the highest over past 15 years
A recent study by the Ministry of Statistics and Programme Implementation has reinforced our belief that government capex will remain muted in the near term. Of the total 566 projects analysed (costing Rs1.5bn or above) as on April 2013, almost half were behind schedule (Figure 2) the highest in the last 15 years. Coal, steel, hydro power and roads sectors have seen significant delays and are the worst affected. Delays are not merely on account of sluggish execution, but more attributable to land acquisition and environmental hurdles and therefore may not be easy to reverse. While only a quarter of railway projects are running behind schedule, cost overruns are massive, with 84% of projects facing cost overruns and expenditure expected to be 3x the sanctioned cost. We also note that projects in the North East and J&K are most susceptible to time and cost overruns. This is partly on account of the higher concentration of hydro power projects. Tougher topography and the relatively poorer law and order scenario could have also played a part.
Figure 1 GFCF as a % of GDP: Public Sector spending more stable than private sector, household
15 14 13 12 11 12.5 12.7 (%)
13.5 13.7
10
9 8 7 7.9 8.5 9.1 7.4
10.9 10.3
9.7
6.9
6
Public sector FY05
Private corporates FY07 FY09
Households FY12
Source: Espirito Santo Investment Bank Research, RBI
Figure 2 Government infra projects status: Close to half are delayed (Apr-13)
Date finalised later 3% Ahead 1%
No date 22%
On Schedule 26%
Delayed 48%
Source: Espirito Santo Investment Bank Research, Ministry of Statistics and Programme Implementation
Project award trends not very encouraging either

While the government has announced aggressive targets for infrastructure project awards in FY14, we dont think they take into account the structural issues facing various sectors (land acquisition, environmental hurdles for highways and airport sectors, new UMPP bidding guidelines requirement, lack of private sector interest in BOT awards). In any case, the governments track record of meeting its targets does not infuse much confidence (Figure 17).
Figure 3 Proportion of public sector infra projects facing time overruns: the highest in last 15 years (March year ends)
% of projects delayed 65 60 55 50 45
63 58 58 53
48 48 45 42 39 38 32 FY95 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 54 55 52
47
Impact of elections: slower decision making, lower awards

We also see a risk of order placement by public sector entities slowing down further a few months before the general elections. This trend was visible in the last two elections (Figure 18 and 19). We note that order inflow at L&T and BHEL also slowed in 2009 (Figure 21 and 22). Thermaxs Chairman has already cautioned investors of this risk in the companys FY13 annual report.
40 35 30
39 39 37 34
We do not expect a quick capex cycle recovery

As we argued in our recent capital goods sector thematic U-shaped recovery (link), the capex cycle recovery seems at least 18 months away from here. We believe private sector investments are moderating due to overleveraged balance sheets and the government is in no position to pick up this slack. We maintain our SELL stance on BHEL and Thermax. We prefer L&T (should emerge stronger from the downturn) and Voltas (strong room AC franchise; the business should account for >40% of revenues over FY13E-16E).
Analysts Aditya Bhartia +91 22 4315 6832 aditya.bhartia@espiritosantoib.co.in Espirito Santo Securities India Private Limited
476959
FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE FINAL PAGES OF THIS REPORT - Please refer to the final pages of this report for important disclosures, analyst certifications and additional information. Espirito Santo Investment Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA (v1.0.5.2)
Private sector weak; public sector unlikely to pick-up the slack

In our recent capital goods sector thematic (U-shaped recovery, 5 July 2013, link), we had argued that it will take at least 18 months for any meaningful signs of capex cycle recovery to emerge. Our key concern was that private sector investment is moderating due to overleveraged balance sheets and the government is in no position to pick up this slack.
Figure 4
Company
Instances of private sector players walking away from planned investments

Project/ order Comments
Source: Espirito Santo Investment Bank Research, Company Data
GMR
Krishangarh-UdaipurAhmedabad highway Shivpuri-Dewas highway Cuttak-Angul highway
This is the larget highway project in India. GMR emerged as the L1 for this project in Jul-2011, quoting an annual premium of Rs6.4bn (12% of the project cost). This was 23% higher than the L2 bidder (GVK-Balfour Betty). GMR now has walked out of this project, citing NHAI's inability to acquire complete land and secure environmental clearances. GVK had won this project in 2011 on a seemingly aggressive bid. It served a termination notice to NHAI in Jan-2012, as Madhya Pradesh High Court had reportedly quashed the land acquisition done by NHAI for this project. Ashoka Buildcon walked out of this c.Rs11bn project, citing land acquisition and environmental approval delays from NHAI. It had already reportedly tied-up debt for this project from Axis Bank. BGR had won the order in Sep-2011, quoting an extremely aggressive price (Rs9m/MW, 10% lower than the L2). It cancelled this project earlier this year as NTPC was unable to acquire land. Pricing bids were opened in Jun-2011, but the concession agreement was not signed until a year later with the highest bidder, ABG Infra-PSA. There was a dispute on who would bear the stamp duty. Subsequently, JNPTdecided to terminate the contract due to delay in signing the concession agreement. R-Infra has expressed its inability to run the Delhi Airport Link metro to DMRC. The company had earlier suspended service in July 2012 for about six months, and media articles indicate that ridership had almost halved on resumption in service.
GVK Ashoka Buildcon BGR
NTPC's Darlipalli TG order JNPT Container Terminal IV Delhi Airport Metro
PSA-ABG
Reliance Infra
Source: Espirito Santo Investment Bank Research, Company data, media articles.
Our belief that government spending is highly unlikely to drive a capex cycle recovery was underpinned by two reasons. First, the governments contribution to GFCF does not change materially in response to economic cycles it has remained largely stable over the last 10 years, unlike private corporates and households. Even in the last few quarters, the governments GFCF as a proportion to GDP has stayed at its normal level of 7-8%, and its share in overall GFCF has ranged between 24% and 26%.
Figure 5
15 14 13 12 11 12.5 12.7 (%)
GFCF as a % of GDP: public sector spending largely stable
Figure 6
Public sector has accounted for 22-26% of Indias GFCF

(%)
27
13.5 13.7
25
23
10.9 10.3
9.7 9.1 8.5 7.9
10
9 8 7
21
19
6.9
6
7.4
17
Private corporates FY07 FY09 Households FY12
Public sector FY05
15 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Source: Source: Espirito Santo Investment Bank Research, RBI
Source: Espirito Santo Investment Bank Research, RBI
Second, the government is under pressure to rein in the fiscal deficit and thus is not in a position to sanction any massive investment surge. For instance, the government has spent 12.3% of its FY14 plan expenditure targets in April and May alone (versus 8.6% in FY13) and 13.1% of overall expenditure target (versus 12.8% in FY13). Conversely, revenues in April and May have been only 3.3% of FY14 projections (5% in FY13). Consequently, the fiscal deficit has ballooned to Rs1.8tn in the first two months, already 33.3% of FY14 projections (27.6% in first two months of FY13).
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Figure 7
Governments accounts for April and May 2013

FY14 budget estimates (Rsbn) Actuals upto May 2013 (Rsbn) 360 6 367 683 1,490 2,174 1,807 % of budget estimates in the first two months FY14 FY13 3.4 1.0 3.3 12.3 13.4 13.1 33.3 5.1 3.4 5.0 8.6 15.1 12.8 27.6
Revenue receipts Non-debt capital receipts Total receipts Plan Expenditure Non-Plan Expenditure Total expenditure Fiscal deficit
10,563 665 11,228 5,553 11,100 16,653 5,425
The government has spent 13% of its targeted total FY14 expenditure while revenues are only 3.3% of FY14 projections Consequently, fiscal deficit in the first two months is already a third of FY14 target We believe that government will have to cut on its Plan Expenditure to come close to achieving its fiscal deficit target of 4.8%.
Source: Espirito Santo Investment Bank Research, Controller General of Accounts
In this context, we believe that the government will have to incur lower plan expenditure compared to its Budgeted Estimates (BE) in FY14 if it has to come even close to achieving its fiscal deficit target of 4.8%. Thus, the public sectors scope of increasing its infrastructure spending in FY14 is limited. We note that government had pruned its Plan Expenditure (compared to initial budgets) in FY13 as well, evident from Revised Estimates (RE) being sharply lower than initially Budgeted Estimates (BE).
Figure 8
(Rsbn) Plan expenditure Non-plan expenditure Total expenditure Fiscal deficit (Rsbn) Fiscal deficit (% of GDP)
Governments expenditure over years: Plan expenditure was cut in FY13 to meet fiscal deficit target; a repeat is likely in FY 14
FY12 4,124 8,920 13,044 5,160 5.8 FY13 (BE) 5,210 9,699 14,909 5,140 5.1 FY13 (RE) 4,292 10,016 14,308 5,209 5.2 FY14 (BE) 5,553 11,100 16,653 5,425 4.8 % growth over FY13 BE (% YoY) 6.6 14.4 11.7 % growth over FY13 RE (% YoY) 29.4 10.8 16.4
Source: Espirito Santo Investment Bank Research, Planning Commission
Time overruns in government projects at highest level in last 15 years

A recent study by the Ministry of Statistics and Programme Implementation further reinforces our belief that government capex will remain muted, with new project announcements hampered by procedural delays, environmental and land acquisition hurdles, and execution on already-awarded projects significantly delayed. Of the total 566 projects analysed (costing Rs1.5bn or above), 273 projects (48%) were running behind schedule as at the end of April 2013. Only three projects are ahead of schedule, while 149 (26%) are on schedule. Interestingly, 124 projects do not yet have fixed dates of commissioning while for 17 projects dates of completion were finalised only subsequent to their sanction by relevant authorities. This is shown in Figure 9 below.
Figure 9 Status of government infra projects: roughly half of government projects are delayed (Apr-13)
Date finalised later 3% Ahead 1%
Almost half of public sector projects are running behind schedule This is the highest proportion in the last 15 years
Figure 10 Break-up of delayed projects (number of months of delay): more than half of delayed projects are running at least two years behind schedule
60+ month 22%

No date 22%
1-12 month 25%
On Schedule 26%
Delayed 48%
25-60 month 29%
13-24 month 24%
Worryingly, time overruns in government projects (costing Rs1.5bn or above) now stand at the highest level in the last 15 years. We though note that there has been some improvement in controlling cost overruns over the last decade.
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Figure 11
65 60 55 50 45
Proportion of public sector infra projects facing time overruns
Figure 12 Extent of cost overruns in public sector infra projects

60 Cost overrun as a % of original approved cost (%)
% of projects delayed
63 58 58 53
48 48 45 42 39 38 32 54 55 52
51
50 40 30 20 47
45
41 37 36 36 26 22 22 18 17 15 19 18 17
47
40 35 30
FY95 FY97 FY99
39 39 37 34
15 12 13
10 0
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
Coal, steel, power, road projects see significant execution delays; railways susceptible to cost overruns Sectors that have seen the most significant delays are coal, steel, power (mainly hydro projects) and roads. Delays in these sectors are not merely on account of sluggish execution, but more attributable to land acquisition and environmental hurdles and therefore may not be easy to reverse.
Figure 13 Sector-wise overview of time and cost overruns in public sector projects
Sector # of projects Time overrun projects (#) 2 2 29 0 15 1 40 51 33 88 7 5 0 0 273 Time overrun % of total projects 50 33 56 0 88 100 57 51 26 59 37 38 0 0 48 Avg time overrun (month) 3 - 11 13 - 35 12 - 72 0 4 - 44 20 1 - 120 1 - 102 3 - 235 2 - 111 5 - 87 27 - 55 0 0
Coal, steel, power, road projects are seeing significant execution delays
Atomic energy Civil aviation Coal Fertilizers Steel Petrochemicals Petroleum Power Railways Roads, highways Shipping, ports Telecom Urban development Water resources Total
4 6 52 1 17 1 70 100 129 149 19 13 4 1 566
Cost overrun projects (#) 2 2 7 0 6 1 18 18 108 11 9 2 2 1 187
Cost overrun % of total projects 50 33 13 0 35 100 26 18 84 7 47 15 50 100 33
Cost overrun (%) 38 16 24 0 26 63 36 34 228 64 30 15 81 119 71
Surprisingly, only a quarter of railway projects are running behind schedule. However, cost overruns are massive, with 84% projects facing cost overruns and expenditure on projects under execution now expected to be 3x the sanctioned cost. Further, amongst the projects that are delayed, most are running significantly behind schedule. Has it got to do something with geography? Another interesting observation is that projects in the North East and Jammu and Kashmir are the most susceptible to time and cost overruns. This is partly on account of hydro power projects being concentrated in these areas which have seen significant delays. Also, tougher topography and the relatively poorer law and order could have possibly played a part.
Massive projects
cost
overruns
in
railway
Projects in the North East and Jammu and Kashmir are the most susceptible to time and cost overruns
Page 4 of 20
Figure 14 State-wise overview of time and cost overruns in public sector projects
Sector # of projects Time overrun projects (#) 13 3 31 11 1 5 4 5 7 10 5 9 25 1 0 2 1 16 2 7 2 11 2 14 12 0 9 10 4 51 273 Time overrun % of total projects 38 75 91 37 100 23 50 100 70 37 71 45 52 100 0 100 100 53 33 50 100 34 67 50 44 0 38 43 80 46 48 Avg time overrun (month) 4 - 44 25 - 87 12 - 120 2 - 98 13 9 - 15 4 - 50 26 - 102 10 - 201 6 - 106 5 - 58 9 - 69 2 - 144 72 0 7 - 35 24 3 - 136 7 - 64 3 - 59 15 - 35 5 - 87 10 - 21 8 - 84 3 - 141 0 12 - 59 5 - 60 5 - 50 1 - 235 Cost overrun projects (#) 14 2 12 15 0 5 2 4 6 10 3 3 15 1 0 1 1 12 2 3 1 14 2 10 15 0 5 7 2 20 187 Cost overrun % of total projects 41 50 35 50 0 23 25 80 60 37 43 15 31 100 0 50 100 40 33 21 50 44 67 36 56 0 21 30 40 18 33 Cost overrun (%) 68 72 128 1 64 0 20 130 34 253 106 33 45 52 512 0 285 188 22 177 25 152 39 43 113 58 0 78 197 138 71
Andhra Pradesh Arunachal Pradesh Assam Bihar Goa Gujarat Haryana Himachal Pradesh Jammu and Kashmir Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Odisha Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh West Bengal Delhi Chhatisgarh Jharkhand Uttarakhand Multi-state Total
34 4 34 30 1 22 8 5 10 27 7 20 48 1 2 2 1 30 6 14 2 32 3 28 27 4 24 23 5 112 566
CCIs powers diluted; it cannot be a game changer The Cabinet Committee on Investments (CCI) has been advertised by the government as a remedy to all execution hurdles. Whilst we do believe that the CCI has shown intent and has smoothed some procedural bottlenecks, it has so far not been able to solve sector-specific issues. We recall that the CCI was initially conceptualised as the National Investment Board (NIB). It was perceived to have powers to overrule decisions of other ministries (including the environment ministry) and thereby expedite execution on stalled mega-projects (project value >Rs10bn). However, this was not to be. The CCI ended up becoming a watered-down NIB. Its role was limited to reviewing projects facing delays and facilitating the removal of bottlenecks in the process by co-ordinating with various ministries. It can prescribe time limits for decisions on approvals and clearances and will subsequently monitor the process to ensure that those deadlines are met. It cannot overrule the decisions of other ministries. Interestingly, it replaces the Cabinet Committee on Infrastructure, which had a similar role.
CCI so far not been able to solve sector-specific issues
The CCI ended up becoming a watered down NIB
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Figure 15 Details of projects reviewed and cleared by CCI since inception

Particulars Oil and gas blocks Power T&D Projects reviewed (#) 40 19 Projects cleared (#) 31 12 Project value (US$bn) 15.9 3.3 Investment made (US$bn) 13.4 New investment Comment (US$bn) 2.5 3.3 Bulk of the investment has already been made. CCI cleared transmission networks which needed clearances mainly from the environment ministry. The remaining seven projects that have not been cleared are facing delays over land acquisition, fuel supply and environmental clearances. NTPC's North Karanpura project (3x660MW) was stuck due to dispute with Ministry of Coal. The CCI decided, in principle, to restore the original coal linkage granted with certain stipulations. SAIL had applied for forest clearance of its Gua iron ore mine. Over three-fourth of investment had already been made. Fast tracked environment and forest approvals for 12 coal mining projects which are expected to contribute 37mtpa coal production.
Power generation
2.7
0.1
2.6
Iron ore Coal mining Total
1 40
1 12
7.8 0.2 30.0
6.0
1.8 0.2
19.5
10.5
Source: Espirito Santo Investment Bank Research, PIB, CCI
To its credit, the CCI has shown some urgency, clearing 31 oil blocks (mainly relates to resolving objections raised by the Ministry of Defence). It also discussed how the issues in the power and highways sectors can be addressed, and cleared NTPCs North Karanpura power project (resolving the dispute with Ministries of Coal). Overall, it has cleared projects involving US$30bn investment in six months since its inception. Whilst prima facie this looks very impressive, we note that the new investment as a result of these clearances will be sharply lower than the project value of US$30bn. This is because a significant proportion of investment has already been made in the last few years. For instance, investment of c.US$16bn has already been made in the oil and gas blocks approved by CCI. Similarly, SAIL had already spent US$7.3bn in the Gua Iron ore mines in Jharkhand (total investment: US$7.8bn), for which forest clearance was pending. Thus, fresh investments attracted by CCI approvals would be limited to only c.US$10bn. We also note that whilst the CCI has managed to de-link environment and forest clearances for linear highway and power transmission projects, it has not been able to otherwise ease environmental and land acquisition hurdles for highway projects and consequently execution continues to be delayed. Also, not much progress has been made in expediting slow-moving power projects. Thus, while CCI can help smoothe procedural bottlenecks and bring about better coordination between ministries, but it cannot resolve sectorspecific issues. In this sense, a watered down version of NIB, whilst still helpful, does not come with a magic wand.
CCI has shown urgency and removed some procedural bottlenecks
fresh investments attracted by CCI approvals limited only to US$10bn
CCI has failed to ease environmental and land acquisition hurdles for highway projects and consequently execution continues to be delayed
Project award trends are not very encouraging either

The Prime Minister Office (PMO) has come up with aggressive targets for award of infrastructure projects in FY14. We believe the PMOs office in coming up with these targets did not take into account the structural issues facing various sectors, like land acquisition and environmental hurdles for highways and airport sectors, requirement of new bidding guidelines for ultramega power projects and lack of private sector interest for BOT awards etc. This is discussed in more detail in Figure 16 below. In any case, governments track record of meeting its infrastructure targets does not infuse much confidence and we recall that FY13 targets were missed by a wide margin, see Figure 17 below. Indias FY14 infrastructure targets are aggressive award
These do not take into account the structural issues facing various sectors FY13 targets were missed by a wide margin
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Figure 16 Governments FY14 targets do not take into account structural issues facing various sectors
Sector Airports Targets - To award two new international airports (at Bhubaneswar and Imphal). - 50 new low cost small airports will be taken up by Airports Authority of India. - 8 Greenfield Airports are to be awarded this year in PPP mode: Navi Mumbai, Juhu (Mumbai), Goa, Kannur, Pune, Sriperumbudur, Bellary and Raigarh - Airport operations and maintenance through PPP contracts will be introduced in AAI airports - To award highway projects aggregating 5,000km in FY14. - To focus on awarding some expressway projects Constraints - We do not see private sector being very enthusiastic about bidding for airport projects on PPP basis. - Navi Mumbai airport is facing land acquisition and environmental hurdles for the last five-six years and as per media articles, 495 acres still remains to be acquired.
Roads
- Land acquisition and environmental hurdles are still delaying commencement of execution on some projects that were awarded 18-24 months back. - Land acquisition is going to be a major challenge for Expressway projects, which are greenfield as opposed to all other highway projects (which involve upgradration of existing highways). - Private sector has not shown much interest in bidding for PPP projects and consequently BOT awards in highway sector could get delayed. - Progress on port concession awards have beene xtremely poor in the last 10 years. - We note that RFQ for the two locomotives facories has been issued. - However, we are not very hopeful of the award of Mumbai Elevated Corridor. The RFQ for this project needs to reinvited. The project has seen significant delays due to differences between the state government and railway ministry. - As discussed in our recent capital goods sector thematic (U-shaped recovery, 5th July) , we believe resolving power sector issues will take time.
Ports
- To award port concessions at Sagar (West Bengal) and Durgarajapatnam (Andhra Pradesh) ports on PPP basis - To award two locomotives manufacturing projects (Rs50bn) - To award the Mumbai Elevated Rail Corridor (Rs300bn) - To award elevated rail corridor and monitor the progress at Dedicated Freight Corridor (DFC) and station redevelopment. - To resolve issues in the power sector. - To expedite progress at Rs400bn worth of transmission projects
Railways
Power
Source: Espirito Santo Investment Bank Research, Press Information Bureau, media articles
Figure 17 Governments track record does not infuse much confidence: FY13 targets were missed by a wide margin
Sector Airports FY13 Target The government was targeting to award three new greenfield airport projects in FY13, at Navi Mumbai, Goa and Kannur. Moreover, additional PPP projects were planned to be finalised for 10-12 existing airports and for 10-12 greenfield airports. PPP in airport operations was also targeted to be explored in FY13. Achievement No major progress in greenfield airports. Most of the FY13 targets are now the FY14 targets.
Roads
PMO had set a target of awarding highway projects aggregating Only c.1,300km projects were awarded in FY13. This was the lowest in the last 9,500km in FY13. This implied 19% growth over FY12, which had four years. Moreover, a number of projects awarded in FY11-12 have seen little been the strongest year in terms of project awards until then. progress on execution. An extremely aggressive target was set for FY13. Capacity augmentation was aimed at 42 projects (244mtpa). Two new greenfield major ports were planned at Andhra Pradesh and West Bengal (116mtpa, Rs205bn project cost). The Sonnanagar-Dankuni stretch of DFC, Elevated Road Corridor in Mumbai and twp locomotive manufacturing units were planned to be awarded in FY13. Station redevelopment was also targeted at 4-5 stations on PPP basis. 18GW capacity addition target No progress on greenfield major port projects. Even on brownfield expansions, progress was very slow and very few concessions were awarded. JNPT Container Terminal IV and Chennai Mega Container Terminal are yet to be awarded.
Ports
Railways
None of the high-value projects got awarded in FY13 and are now targeted to be awarded in FY14.
Power
Capacity addition target is a function of projects announced 3-4 years back. This target was achieved.
Source: Espirito Santo Investment Bank Research, Press Information Bureau, media articles
Impact of elections: slower decision making, lower awards

We also see a risk of order placements as well as execution by public sector entities slowing down further a few months before the general elections. This trend was visible in the last two general elections, according to data collated by the Centre for Monitoring Indian Economy (CMIE). Risk of slower decision making and order awards as we approach elections
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Figure 18 New project announcements by Private and Public sector

9 (Rs tn) Elections held here Elections held here
Figure 19 New project announcements by Public sector

3 (Rs tn) Elections held here Elections held here
8 7
6 5 4 3 2 1 0
Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
0
Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Source: Espirito Santo Investment Bank Research, CMIE
Government
Private sector
10 year average
Source: Espirito Santo Investment Bank Research, CMIE
Order flow pace for BHEL as well as L&T moderated in 2HFY09 and 1HFY10, partly due to elections held in 1QFY10. L&Ts management, in its FY10 annual report, had commented: In the year under review, L&T weathered the impact of the global economic slowdown that began in FY08, and whose after effects continued well into FY10. The past year was also characterised by a period of political uncertainty due to the General Elections in the first half of the year, and a prolonged bout of inactivity when orders for infrastructure and hydrocarbon projects were deferred, and customers slowed down their ongoing expansion initiatives.
Figure 21 L&Ts domestic E&C order flow growth over years
160 140 120 (% YoY) 132 110 86 65 44 24 Elections held here 40 16 19 88 60 36 70
Figure 20 Election calendar (pre Lok Sabha elections)

Year 2H2013 2014 pre Lok Sabha elections States Rajasthan, Delhi, MP, Mizoram Chhattisgarh, Sikkim
Source: Espirito Santo Investment Bank Research
Figure 22 BHELs order flow growth over years

160 (% YoY) 121
100
80
38 1
50
Elections held here
62
60
40 20 0 (20)
42
25
10
(9)
(40)
(7)
(1)
(14)
(41)
(40)
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY08
(28) 1Q
(90)
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY10
FY09
FY08
FY09
FY10
In Thermaxs FY13 Annual Report, its Chairman Meher Padumjee has also warned: With elections looming, not many large projects will see the light of the day in immediate future.
Dont expect a near-term capex cycle recovery. Prefer L&T and Voltas over BHEL and Thermax
The macro capex environment is clearly unfavourable in India. We believe that order flow growth for engineering companies will remain muted and operating margins will come under increasing pressure. This is discussed in more detail in our detailed capital goods sector thematic (U-shaped recovery, 5 July 2013). Does this mean that investors should ignore this sector altogether? No, we dont think so. Whilst further earnings downgrades cannot be entirely ruled out, the concerns we discussed are also reflected in the valuation of some stocks. Moreover, we think this is a good time to build positions in stocks that are likely to emerge stronger (more diversified business models, more compelling competitive advantages, weaker competitors) from the downturn. We highlight L&T (LT IN, Rs850, BUY, FV: Rs1,065, click for our last update) as one such stock, which should continue expanding its domestic market share and
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improving its geographic presence in the next few years. Moreover, its growth prospects are not contingent on the health of a particular sector and therefore we think it is much better positioned than companies that have a higher sector-concentration (like BHEL).
Figure 23 L&Ts domestic E&C revenues as a % of Indias GFCF
1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 (%)
Figure 24 Net gearing of L&T and its competitors (FY13)

2.5 2.0
1.5
Net gearing (x)
2.1 1.9
2.0
1.3
1.0 0.5 0.0 0.8
0.3
0.9
0.8 0.7
L&T
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Era FY11
Gammon
IVRCL
NCC FY13
Simplex
-0.5
FY12
Source: Espirito Santo Investment Bank Research, Company Data, RBI
Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg. Note: standalone entities considered.
Our positive stance on Voltas (VOLT IN, Rs79, BUY, FV: Rs97) is underpinned by its strong franchise in the room AC market and attractive valuations (12.1x FY14/ 9.6x FY15 P/E). We believe that while its EMP margins may remain lumpy in the near term, over a two year period we expect a recovery as client certifications come through and order flow picks up. Its UCP business is underpinned by strong structural drivers, thanks to a modest 2% penetration of room ACs in India, and we argue this business should be valued at multiples higher than the cyclical projects business.
Figure 25 Voltas market share in the room AC market
20 18 (%) 18
Figure 26 Voltas FY14 PE comparison with peers

25 (x)
17
16 14 14 12 10 8 11
17
17
17
20
15 10
16 15 13
5
0
6
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Source: Espirito Santo Investment Bank Research, Company Data, Factset
Conversely, we retain our SELL recommendations on BHEL and Thermax. BHEL (BHEL IN, Rs153, SELL, FV: Rs162) is facing structural issues and its reliance on the power sector means that its order inflows are likely to remain weak. We expect revenues to decline by c.12% CAGR over FY13-15E, which coupled with intense domestic competition will, we feel, exert further margin pressure (we model 650bps EBITDA margin contraction by FY16E). While the valuation looks undemanding at 8.6x FY14E P/E, we expect earnings to fall at c.23% CAGR over FY13-15E and see downside risks to consensus.
Page 9 of 20
Figure 27 BHELs order backlog coverage over years

1,800
1,600 1,400
Figure 28 BHELs margins correlation with revenue growth

(x)
(Rsbn)
5.0 4.5
20
(%)
(% YoY)
50 40 30 20
18
1,200
1,000
4.0 3.5 3.0 2.5

12 16 14 10 0 -10 -20
800
600 400 200 0
2.0 1.5
10 8
FY96
FY99
FY02
FY05
FY08
FY11
FY14E
Order backlog
Order backlog coverage (RHS)
Revenue growth (RHS)
EBITDA margin (LHS)
Source: Espirito Santo Investment Bank Research for estimates, Company Data
Source: Espirito Santo Investment Bank Research for estimates, Company Data
In the case of Thermax (TMX IN, Rs588, SELL, FV: Rs534, click for our last update), whilst we recognise the company as one of the best plays on Indias capex story, we find its valuation rich and at a sharp premium to its peers. While a large petrochem order (announced in July beginning) had boosted order flow in Q1 (+90% YoY), management highlighted order finalisations are now taking longer than before and there are only a few large orders in the pipeline. With competition intensifying, its margin resilience will also be tested, while we think the B&W JV is likely to be a drag on its profitability for at least the next two years.
Figure 29 Split of Thermaxs order inflows over quarters
30 (Rsbn)
Figure 30 Thermaxs P/E versus Indias GFCF growth

35
PE (x)
25 20
15
30
25 20 15
India's real GFCF growth (% YoY)
25
20
15 10 5 0
10
10
5 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY10 FY11 FY12 FY13 FY14 Base orders (Energy) Environment Large orders (Energy)
5
0 Apr-05
(5)
(10) Apr-13
Apr-07
Apr-09
Apr-11
India's real GFCF growth (RHS)

Source: Espirito Santo Investment Bank Research, Company Data. Note: order backlog coverage computed as order backlog divided by trailing 12 month sales Source: Espirito Santo Investment Bank Research, Company Data, RBI
Thermax's 12m fwd PE
Figure 31 Stocks covered in the report

Company BHEL L&T Thermax Voltas Ticker BHEL IN LT IN TMX IN VOLT IN Recommendation Sell Buy Sell Buy CMP (Rs/sh) 153 850 588 79 FV (Rs/sh) 162 1065 534 97
Source: Source: Espirito Santo Investment Bank Research, Bloomberg
Page 10 of 20
Figure 32 Global valuation matrix EPC companies

Company Ticker Price (Local cy) M-cap (US$m) EV (US$m) FY12 PE (x) FY13 FY14E FY15E FY12 EV/EBITDA (x) FY13 FY14E FY15E FY12 P/B (x) FY13 FY14E FY15E FY12 RoE (%) FY13 FY14E FY15E
Indian EPC/ capital goods L&T (consol) BHEL Siemens ABB India Cummins Reliance Infra Havells Thermax Crompton Greaves Voltas BGR Mean (ex ABB) Median LT IN BHEL IN SIEM IN ABB IN KKC IN RELI IN HAVL IN TMX IN CRG IN VOLT IN BGRL IN 850 153 501 502 416 338 660 588 85 79 77 13,029 6,207 2,832 1,769 1,914 1,475 1,369 1,165 908 435 93 22,962 5,248 2,954 1,811 1,743 4,680 1,462 1,122 1,050 363 334 15.9 5.3 32.7 67.0 23.3 9.8 19.3 17.4 23.7 9.6 10.5 16.7 17.4 15.0 5.7 72.7 105.3 18.0 3.8 13.9 21.9 na 13.1 8.4 19.2 14.5 15.0 7.1 39.4 37.5 16.0 5.9 16.5 20.4 13.4 11.7 3.3 14.9 15.0 12.6 9.6 28.2 28.9 14.2 5.5 13.8 18.2 9.5 9.3 3.2 12.4 12.6 13.0 3.4 23.4 45.6 20.3 12.8 11.4 10.5 11.1 5.9 6.8 11.9 11.4 13.1 3.6 32.8 51.6 17.0 9.2 12.1 12.6 17.7 7.1 6.3 13.2 12.6 13.2 4.2 21.1 19.9 12.9 10.2 10.2 11.1 7.9 5.9 5.8 10.3 10.2 12.3 5.0 14.7 16.2 11.1 9.7 8.5 9.7 6.0 4.5 6.4 8.8 9.7 2.7 1.5 7.5 4.9 6.7 0.7 7.5 4.3 2.5 1.8 2.1 3.7 2.7 2.3 1.2 6.1 5.7 5.8 0.3 5.6 3.8 1.7 1.6 1.1 2.9 2.3 2.1 1.1 4.2 3.8 4.3 0.4 4.4 3.3 1.4 1.5 0.4 2.3 2.1 1.9 1.0 3.9 3.4 3.8 0.4 3.6 2.9 1.3 1.3 0.4 2.0 1.9 18.0 30.9 24.5 7.4 30.7 6.8 46.0 27.4 10.9 19.3 21.7 23.6 21.7 16.5 23.7 8.8 5.5 34.5 9.1 48.5 18.3 (1.0) 12.8 13.8 18.5 13.8 14.8 16.3 10.7 10.1 26.6 6.8 26.7 17.2 10.5 13.1 12.6 15.5 13.1 15.9 11.1 13.7 11.9 26.5 6.9 25.8 17.1 13.3 14.9 11.9 15.7 13.7
Korea EPC Hyundai Heavy Samsung C&T Hyundai E&C Samsung E&C Daelim Daewoo E&C GS E&C Mean Median 009540 KS 000830 KS 000720 KS 028050 KS 000210 KS 047040 KS 006360 KS 211,000 56,000 59,200 77,200 90,900 7,720 31,150 11,611 7,399 5,919 2,562 2,840 2,848 1,386 20,936 10,962 6,194 2,676 3,561 4,650 2,800 5.5 25.0 12.3 14.5 9.5 24.4 10.8 14.6 12.3 13.6 20.5 15.3 11.7 8.6 23.1 27.8 17.2 15.3 14.5 13.4 7.9 13.4 17.9 22.2 11.0 13.9 18.2 9.1 9.8 7.1 11.2 13.2 11.8 11.2 4.2 31.7 9.7 10.4 9.3 25.3 12.6 14.8 10.4 8.7 26.6 9.1 7.6 6.1 21.8 22.7 14.7 9.1 14.9 10.9 10.6 18.0 6.6 38.1 5.3 11.1 9.3 15.0 5.4 6.6 4.4 9.6 11.1 8.8 9.3 1.0 1.1 1.9 5.5 0.7 1.3 1.2 1.8 1.2 0.9 0.8 1.7 3.5 0.6 1.2 0.8 1.4 0.9 0.9 0.8 1.3 1.9 0.7 0.9 0.5 1.0 0.9 0.8 0.7 1.1 1.7 0.6 0.8 0.5 0.9 0.8 17.0 4.4 16.5 43.9 7.8 5.3 11.6 15.2 11.6 5.9 4.3 11.7 33.9 7.7 5.3 2.7 10.2 5.9 4.9 3.4 11.7 (1.5) 8.5 6.6 (23.4) 1.5 4.9 6.0 4.0 12.6 16.8 8.7 7.4 3.8 8.5 7.4
Japan EPC JGC Chiyoda Mean Median 1963 JP 6366 JP 3,500 1,182 9,012 3,123 6,163 1,297 16.6 19.0 17.8 17.8 13.2 16.9 15.0 15.0 17.6 17.0 17.3 17.3 16.5 16.5 16.5 16.5 5.8 4.1 4.9 4.9 4.7 3.6 4.2 4.2 7.4 5.3 6.4 6.4 6.5 5.3 5.9 5.9 2.2 1.6 1.9 1.9 1.8 1.4 1.6 1.6 2.4 1.6 2.0 2.0 2.2 1.5 1.9 1.9 14.1 8.9 11.5 11.5 14.8 9.0 11.9 11.9 13.8 9.5 11.6 11.6 13.4 9.3 11.3 11.3
Middle East/ Asia EPC Arabtec Drake & Scull Swiber Depa Mean Median ARTC UH DSI UH SWIB SP DEPA DU 2 1 1 0 1,137 718 356 249 1,152 865 1,236 251 9.4 8.8 6.7 17.4 10.5 9.1 16.0 16.8 13.7 17.0 12.9 16.0 24.9 16.8 6.3 17.0 17.9 6.3 17.0 16.0 5.5 4.4 7.1 12.4 5.5 7.4 6.3 10.3 9.8 9.4 10.7 8.6 9.3 9.8 11.3 9.8 11.1 10.7 6.4 10.8 9.3 5.7 0.8 0.6 0.6 0.6 0.6 0.6 1.2 0.6 0.6 0.5 0.7 0.6 0.9 0.9 0.7 0.7 1.1 0.9 0.7 0.9 0.6 9.2 7.5 9.1 3.3 7.3 8.3 4.7 3.5 10.8 (7.3) 2.9 4.1 7.4 6.2 8.3 8.3 6.2 5.1 10.8 5.3 11.2
America EPC Flour Jacobs KBR Foster Wheeler McDermott Mean Median FLR US JEC US KBR US FWLT US MDR US 61 58 31 21 9 9,833 7,578 4,552 2,150 2,054 8,348 6,790 3,806 1,849 1,763 14.8 12.4 8.8 14.2 16.9 13.4 14.2 21.7 13.8 30.8 19.1 12.7 19.6 19.1 14.6 17.7 11.5 14.8 21.0 15.9 14.8 13.0 15.6 10.1 10.5 10.1 11.9 10.5 6.0 6.2 6.6 6.3 6.6 6.3 6.3 8.6 6.8 6.8 8.8 4.8 7.1 6.8 5.8 8.6 5.6 6.4 6.6 6.6 6.4 5.2 7.3 4.3 4.6 4.4 5.1 4.6 2.5 1.2 1.7 3.0 1.6 2.0 1.7 2.9 1.4 1.7 3.6 1.4 2.2 1.7 2.5 1.8 1.6 2.5 1.0 1.9 1.8 2.2 1.6 1.3 2.0 1.0 1.6 1.6 17.2 10.7 20.2 19.6 9.7 15.5 17.2 13.5 10.8 5.7 19.4 11.5 12.2 11.5 17.4 10.3 13.5 16.7 4.9 12.6 13.5 16.6 10.3 13.3 18.7 9.5 13.7 13.3
Europe EPC Technip (France) Saipem (Italy) Petrofac (UK) Skanska (Sweden) Hochtief (Germany) Bilfinger (Germany) AMEC (UK) Tecnicas Reunidas (Spain) Strabag (Austria) Balfour Betty (UK) Mean Median TEC FP SPM IM PFC LN SKAB SS HOT GR GBF GR AMEC LN TRE SM STR AV BBY LN 84 15 13 124 58 73 11 37 17 2 12,297 8,855 6,806 7,771 5,707 4,293 4,927 2,627 2,290 2,627 14,134 9,048 6,522 9,051 11,001 4,900 5,103 1,831 2,725 3,337 12.5 14.3 11.5 12.6 9.7 12.5 12.6 15.5 15.6 14.5 6.2 17.7 14.3 13.9 15.3 20.4 11.7 15.0 14.1 35.2 42.8 20.0 15.2 10.5 14.5 18.1 13.0 12.4 14.0 16.0 11.0 13.9 14.0 15.6 12.6 12.0 9.0 13.5 14.7 11.5 11.1 12.8 13.0 9.2 11.9 12.3 9.3 8.3 8.4 8.8 4.8 6.3 8.9 4.8 5.0 6.3 7.1 7.3 10.7 7.9 10.0 13.3 4.8 7.7 9.8 8.0 6.5 10.4 8.9 8.9 7.9 15.1 7.1 8.4 3.1 5.3 8.2 8.0 3.4 6.5 7.3 7.5 6.3 6.3 6.1 8.1 2.9 4.7 7.5 6.9 3.2 5.8 5.8 6.2 2.2 3.1 6.9 2.4 1.3 1.6 2.2 4.4 0.8 1.5 2.6 2.2 2.4 2.4 5.8 2.3 1.2 1.6 2.8 4.4 0.7 1.5 2.5 2.3 2.2 1.4 3.5 2.5 1.5 1.6 2.8 4.1 0.6 1.3 2.1 1.9 2.0 1.3 2.8 2.4 1.4 1.5 2.6 3.5 0.6 1.3 1.9 1.7 14.9 21.0 55.6 37.9 (5.8) 12.3 15.7 38.4 6.5 15.3 21.2 15.5 14.1 17.8 47.8 14.8 6.0 14.4 17.2 34.5 2.1 3.5 17.2 14.6 14.1 (6.5) 33.5 17.2 8.2 12.0 22.7 29.3 3.7 11.9 14.6 13.1 15.5 10.5 31.3 17.5 9.6 12.9 23.6 27.6 4.4 13.6 16.7 14.5
Source: Espirito Santo Investment Bank Research estimates, Company Data, Factset. Note: ESIB estimates for BHEL, L&T, Thermax and Voltas. Consensus estimates from Factset used for other companies.
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Figure 33 Global valuation matrix capital goods companies

Company Ticker Price (Local cy) M-cap (US$m) EV (US$m) FY12 PE (x) FY13 FY14E FY15E FY12 EV/EBITDA (x) FY13 FY14E FY15E FY12 P/B (x) FY13 FY14E FY15E FY12 RoE (%) FY13 FY14E FY15E
Indian EPC/ capital goods L&T (consol) BHEL Siemens ABB India Cummins Reliance Infra Havells Thermax Crompton Greaves Voltas BGR Mean (ex ABB) Median LT IN BHEL IN SIEM IN ABB IN KKC IN RELI IN HAVL IN TMX IN CRG IN VOLT IN BGRL IN 850 153 501 502 416 338 660 588 85 79 77 13,029 6,207 2,832 1,769 1,914 1,475 1,369 1,165 908 435 93 22,962 5,248 2,954 1,811 1,743 4,680 1,462 1,122 1,050 363 334 15.9 5.3 32.7 67.0 23.3 9.8 19.3 17.4 23.7 9.6 10.5 16.7 17.4 15.0 5.7 72.7 105.3 18.0 3.8 13.9 21.9 na 13.1 8.4 19.2 14.5 15.0 7.1 39.4 37.5 16.0 5.9 16.5 20.4 13.4 11.7 3.3 14.9 15.0 12.6 9.6 28.2 28.9 14.2 5.5 13.8 18.2 9.5 9.3 3.2 12.4 12.6 13.0 3.4 23.4 45.6 20.3 12.8 11.4 10.5 11.1 5.9 6.8 11.9 11.4 13.1 3.6 32.8 51.6 17.0 9.2 12.1 12.6 17.7 7.1 6.3 13.2 12.6 13.2 4.2 21.1 19.9 12.9 10.2 10.2 11.1 7.9 5.9 5.8 10.3 10.2 12.3 5.0 14.7 16.2 11.1 9.7 8.5 9.7 6.0 4.5 6.4 8.8 9.7 2.7 1.5 7.5 4.9 6.7 0.7 7.5 4.3 2.5 1.8 2.1 3.7 2.7 2.3 1.2 6.1 5.7 5.8 0.3 5.6 3.8 1.7 1.6 1.1 2.9 2.3 2.1 1.1 4.2 3.8 4.3 0.4 4.4 3.3 1.4 1.5 0.4 2.3 2.1 1.9 1.0 3.9 3.4 3.8 0.4 3.6 2.9 1.3 1.3 0.4 2.0 1.9 18.0 30.9 24.5 7.4 30.7 6.8 46.0 27.4 10.9 19.3 21.7 23.6 21.7 16.5 23.7 8.8 5.5 34.5 9.1 48.5 18.3 (1.0) 12.8 13.8 18.5 13.8 14.8 16.3 10.7 10.1 26.6 6.8 26.7 17.2 10.5 13.1 12.6 15.5 13.1 15.9 11.1 13.7 11.9 26.5 6.9 25.8 17.1 13.3 14.9 11.9 15.7 13.7
China capital goods SANY Heavy Shanghai Electric Dongfang Harbin China High Speed Transmission Mean Median 600031 CH 2727 HK 1072 HK 1133 HK 658 HK 7 3 11 5 4 8,496 4,299 2,780 834 622 12,029 3,809 2,521 15 1,367 11.0 11.6 12.5 6.3 6.9 9.7 11.0 14.1 12.7 11.7 5.3 24.1 13.6 12.7 8.4 8.9 7.5 4.8 14.3 8.8 8.4 7.4 8.5 7.2 4.8 9.8 7.5 7.4 9.5 4.5 8.0 0.4 5.9 5.7 5.9 11.2 4.2 6.6 1.2 7.1 6.1 6.6 7.0 2.9 2.3 (1.6) 6.9 3.5 2.9 5.7 2.3 2.1 (2.1) 5.8 2.8 2.3 4.8 1.3 2.7 0.7 0.5 2.0 1.3 3.5 1.1 1.6 0.6 0.4 1.5 1.1 1.8 0.8 0.9 0.4 0.5 0.9 0.8 1.5 0.8 0.8 0.4 0.5 0.8 0.8 55.8 11.7 24.5 12.1 7.5 22.3 12.1 26.6 9.0 14.7 12.4 1.8 12.9 12.4 22.1 9.1 12.6 8.3 3.5 11.1 9.1 20.4 9.0 11.7 7.7 4.9 10.7 9.0
Japan capital goods Mitsubishi Kawasaki Hitachi Construction Sumitomo Toshiba Mean Median 7011 JP 7012 JP 6305 JP 6302 JP 1983 JP 543 364 1,973 454 1,585 18,582 6,207 4,264 2,842 1,575 26,732 10,903 8,358 3,483 937 54.9 18.1 16.8 14.5 13.3 23.5 16.8 18.7 16.0 18.1 38.8 10.9 20.5 18.1 15.0 15.9 12.6 12.8 16.3 15.7 11.9 16.1 14.5 12.5 10.5 13.0 9.7 7.6 7.5 4.8 3.0 6.5 7.5 9.1 10.5 8.8 5.8 3.1 7.5 8.8 7.2 7.0 6.4 6.3 7.7 8.8 6.1 6.2 7.1 7.9 5.5 5.3 1.1 1.4 1.2 1.0 1.0 1.1 1.1 1.3 1.5 1.2 0.8 1.1 1.2 1.2 1.2 1.2 1.1 1.1 1.2 1.7 1.1 0.9 1.2 1.5 1.0 0.9 1.9 7.8 7.3 7.1 7.9 6.4 7.3 7.4 9.6 6.8 2.1 10.8 7.3 7.4 8.3 8.4 9.1 8.9 7.6 10.6 9.3 5.8 7.9 12.0 9.8 6.8
Other Asia capital goods Doosan (Korea) IJM (Malaysia) Mean Median 034020 KS IJM MK 46,050 6 3,682 2,529 15,388 4,060 21.3 18.9 20.1 20.1 105.9 18.1 62.0 62.0 17.1 15.1 16.1 16.1 10.8 13.3 12.1 12.1 12.8 13.6 13.2 13.2 8.5 13.4 11.0 11.0 9.2 9.3 9.3 9.3 7.9 8.2 8.0 8.0 1.2 1.5 1.3 1.3 0.9 1.4 1.1 1.1 1.0 1.4 1.2 1.2 1.0 1.3 1.1 1.1 18.2 7.9 13.0 13.0 0.8 7.7 4.3 4.3 6.0 9.0 7.5 7.5 8.8 9.5 9.2 9.2
America capital goods GE Honeywell Caterpillar Emerson Eaton Cummins Mean Median GE US HON US CAT US EMR US ETN US CMI US 25 83 83 60 68 120 255,614 65,168 54,408 43,664 31,998 22,795 514,807 69,150 88,542 46,807 41,430 21,943 14.5 20.8 12.2 12.6 11.0 9.2 13.4 12.4 15.6 17.2 10.6 18.1 15.7 12.5 14.9 15.6 14.8 16.8 13.0 17.3 15.7 15.2 15.5 15.4 13.5 15.0 11.2 15.5 13.1 12.4 13.5 13.3 11.8 11.0 8.7 7.2 8.1 6.7 8.9 8.4 12.2 9.6 7.6 7.8 13.4 8.7 9.9 9.2 8.2 10.0 6.9 9.6 11.8 8.5 9.2 9.0 7.2 8.7 6.3 8.5 10.0 7.1 8.0 7.9 1.6 3.9 4.6 2.9 1.9 3.1 3.0 3.0 1.8 3.8 3.3 3.4 1.7 3.1 2.9 3.2 2.0 4.3 2.9 3.9 2.0 3.0 3.0 2.9 1.9 3.7 2.4 3.6 1.8 2.6 2.7 2.5 11.1 17.3 41.6 24.3 18.2 36.4 24.8 21.3 12.3 24.6 37.4 19.0 10.8 27.2 21.9 21.8 13.6 25.4 21.9 22.7 12.7 19.8 19.3 20.8 14.1 24.6 21.6 23.3 13.9 21.0 19.8 21.3
Europe capital goods Siemens (Germany) ABB (Switzerland) Schneider (France) Atlas (Sweden) Sandvik (Sweden) Ingersoll Rand (Ireland) MAN (Germany) LeGrand (France) Alstom (France) Alfa Laval (Sweden) Mean Median SIE GR ABB SS SU FP ATCOA SS SAND SS IR US MAN GR LR FP ALO FP ALFA SS 81 21 58 170 82 62 86 39 26 148 91,563 50,787 42,361 31,463 15,659 18,184 16,683 13,797 10,581 9,473 106,443 53,557 48,090 33,294 20,000 21,188 22,109 15,554 13,988 10,198 9.7 14.5 12.0 13.9 18.2 27.2 42.4 13.6 11.8 17.0 18.0 14.2 15.2 16.9 16.2 15.6 15.9 14.5 67.3 16.6 11.9 17.8 20.8 16.0 14.7 15.1 14.3 16.1 13.5 17.1 78.4 18.8 8.1 18.9 21.5 15.6 11.1 13.2 12.9 15.1 11.7 14.6 20.4 17.4 7.6 17.0 14.1 13.9 6.3 7.2 7.4 9.8 6.9 6.7 5.0 7.8 6.0 11.2 7.4 7.1 8.0 8.6 8.5 10.4 8.4 9.1 13.3 8.8 6.2 12.3 9.4 8.7 9.5 8.4 9.1 10.0 7.5 10.0 14.5 11.0 5.4 11.9 9.7 9.8 7.3 7.2 8.0 9.4 6.6 8.8 9.2 10.1 4.7 10.6 8.2 8.4 1.9 2.7 1.4 6.2 3.1 1.3 1.8 2.2 2.0 3.7 2.6 2.1 2.2 2.8 1.8 6.2 3.6 2.0 2.1 2.6 2.0 3.7 2.9 2.4 2.3 2.8 1.8 5.1 2.8 2.4 2.2 3.0 1.4 3.7 2.7 2.6 2.1 2.5 1.7 4.5 2.5 2.2 2.1 2.8 1.2 3.3 2.5 2.3 22.8 19.6 11.9 44.8 16.9 5.4 11.8 16.9 17.5 22.7 19.0 17.2 16.2 16.8 11.3 43.5 23.6 14.6 3.2 16.5 17.2 21.1 18.4 16.6 15.5 18.3 12.7 31.7 20.7 14.1 2.8 16.0 17.3 19.6 16.9 16.6 18.6 19.0 13.2 29.7 21.3 15.0 10.1 15.8 16.4 19.7 17.9 17.5
Global MEP/ HVAC Ingersoll Rand (Ireland) Daikin (Japan) Drake & Scull (UAE) Voltas (India) Blue Star (India) Mean Median IR US 6376 JP DSI UH VOLT IN BLSTR IN 62 1,240 1 79 154 18,184 976 718 435 230 21,188 1,239 865 363 305 27.2 20.4 8.8 9.6 na 16.5 15.0 14.5 12.5 16.8 13.1 36.4 18.7 14.5 17.1 18.2 17.9 11.7 15.8 16.2 17.1 14.6 16.6 16.0 9.3 10.4 13.4 14.6 6.7 9.2 7.1 5.9 na 7.2 6.9 9.1 9.4 11.3 7.1 21.1 11.6 9.4 10.0 8.1 10.7 5.9 9.7 8.9 9.7 8.8 7.3 9.3 4.5 6.6 7.3 7.3 1.3 1.4 0.6 1.8 4.3 1.9 1.4 2.0 1.5 0.6 1.6 3.5 1.8 1.6 2.4 1.3 0.9 1.5 2.9 1.8 1.5 2.2 1.2 0.9 1.3 2.6 1.6 1.3 5.4 6.8 7.5 19.3 (23.2) 3.1 6.8 14.6 12.9 3.5 12.8 9.8 10.7 12.8 14.1 6.9 5.1 13.1 18.3 11.5 13.1 15.0 7.1 5.3 14.9 24.8 13.4 14.9
Source: Espirito Santo Investment Bank Research, Company Data, Factset. Note: ESIB estimates for BHEL, L&T, Thermax and Voltas. Consensus estimates from Factset used for other companies.
Page 12 of 20
BHEL
Recommendation: Fair Value: Share Price Upside / (Downside) 3 Month ADV ($m) Free Float 52 Week Low / High Bloomberg: Model Published On: SELL Rs 162 Rs 153 6% 10.7 32% Rs 156-272 BHEL IN 02 July 2013
Valuation Metrics P/E (x) P/BV (x) EV/EBITDA (x) Dividend yield (%)
FY12 5.3 1.5 3.4 4.2%
FY13 5.7 1.2 3.6 3.5%
FY14E 7.1 1.1 4.2 3.5%
FY15E 9.6 1.0 5.0 3.5%
FY16E 9.4 1.0 4.5 3.5%
Key ratios EBITDA margin (%) EBIT margin (%) ROE (%) RoCE (%) Net gearing (x) Net Debt / EBITDA (x) Asset turnover (x)
FY12 19.5% 17.8% 30.9% 33.6% -0.3 -0.7 2.0
FY13 18.0% 16.0% 23.7% 23.3% -0.2 -0.7 1.7
FY14E 15.7% 13.3% 16.3% 15.8% -0.3 -1.4 1.3
FY15E 12.2% 9.3% 11.1% 10.8% -0.4 -3.4 1.0
FY16E 11.5% 8.5% 10.6% 10.4% -0.5 -4.3 1.0
Shares In Issue (mm) Market Cap ($m) Net Debt ($m) Enterprise Value ($m)
2,448 6,241 -1,053 5,189
P&L Summary (Rsm) Revenue % change EBITDA % change % margin Depreciation EBIT % change % margin Interest expense Other Income Exceptional Items Pre Tax Profit Income Tax Expense Net Income Shares in issue (m) EPS (Rs/sh)
FY12 469,963 13.5% 91,729 15.2% 19.5% -8,000 83,729 12.9% 17.8% -513 19,999 0 103,215 -32,816 70,400 2,447.6 28.8
FY13 476,356 1.4% 85,749 22.9% 18.0% -9,534 76,215 19.9% 16.0% -1,228 19,287 0 94,274 -28,177 66,097 2,447.6 27.0
FY14E 426,298 -10.5% 66,965 -27.0% 15.7% -10,077 56,888 -32.1% 13.3% -1,061 19,160 0 74,987 -22,496 52,491 2,447.6 21.4
FY15E 366,243 -14.1% 44,510 -48.1% 12.2% -10,537 33,973 -55.4% 9.3% -1,061 22,541 0 55,453 -16,636 38,817 2,447.6 15.9
FY16E 371,593 1.5% 42,721 -36.2% 11.5% -11,302 31,418 -44.8% 8.5% -1,061 26,433 0 56,789 -17,037 39,752 2,447.6 16.2
Forthcoming Catalysts 1QFY14 results 2QFY14 results
3rd August 2013 October 2013
Espirito Santo Securities Analyst Aditya Bhartia (91) 22 4315 6832 aditya.bhartia@espiritosantoib.co.in
Shareholding Pattern
Others 5% DII 12% FII 15%

Promoter (Govt of India) 68%
Cash Flow Summary (Rsm) Net Income Depreciation Change in working capital Others operating cash Operating cash inflow
(x) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5
FY12 70,400 8,000 -83,135 -2,145 -6,881 -12,462 8,254 -4,207 225 0 -18,206 -513 -18,494 -29,582 -19,567
FY13 66,097 9,534 -52,826 -6,947 15,858 -9,391 8,500 -890 12,293 0 -16,861 -1,228 -5,796 9,172 6,792
FY14E 52,491 10,077 -6,668 -7,126 48,773 -9,000 6,188 -2,812 0 0 -16,861 -1,061 -17,922 28,039 37,773
FY15E 38,817 10,537 38,726 -9,726 78,355 -7,000 8,787 1,787 0 0 -16,861 -1,061 -17,922 62,219 69,355
FY16E 39,752 11,302 4,648 -12,347 43,356 -7,000 11,408 4,408 0 0 -16,861 -1,061 -17,922 29,842 34,356
Order backlog and coverage ratio

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 (Rsbn)
Capital expenditure Change in other assets, investments Cash flows from investing Debt raised Equity raised Dividends Paid (Incl. Tax) Interest Cash flow from financing Change in net cash FCFF pre investments
Order backlog
Order backlog coverage (RHS)
Revenues and EBITDA margins

600 500 400 300 200 100 (Rsbn) 22 (% ) 20 18
16
14 12 10
Balance Sheet Summary (Rsm) Cash & Equivalents Other net current assets Net Block Capital WIP Investments Other assets Total Assets Interest Bearing Debt Shareholders' Equity Total Liabilities + Equity
FY12 66,720 112,348 42,968 13,476 4,617 15,462 255,591 1,859 253,732 255,591
FY13 77,321 165,173 48,301 8,000 4,292 15,507 318,593 14,152 304,441 318,593
FY14E 105,359 171,841 50,224 5,000 6,292 15,507 354,223 14,152 340,071 354,223
FY15E 167,579 133,115 48,686 3,000 8,292 15,507 376,179 14,152 362,027 376,179
FY16E 197,421 128,467 44,384 3,000 10,292 15,507 399,070 14,152 384,918 399,070
Revenues
EBITDA margin (RHS)
Source: Company data, Bloomberg and Espirito Santo Investment Bank Research estimates
Page 13 of 20
L&T
Recommendation: Fair Value: Share Price Upside / (Downside) 3 Month ADV ($m) Free Float 52 Week Low / High Bloomberg: Model Published On: BUY Rs 1065 Rs 850 25% 45.2 88% Rs 836 - 1,152 LT IN 22 July 2013
Valuation Metrics P/E (x) P/E standalone excl sub-value (x) P/BV (x) EV/EBITDA (x) Dividend yield (%)
FY12 15.9 12.5 2.7 13.0 1.9%
FY13 15.0 12.7 2.3 13.1 2.1%
FY14E 15.0 11.7 2.1 13.2 2.2%
FY15E 12.6 10.5 1.9 12.3 2.2%
FY16E 11.0 9.5 1.7 11.3 2.2%
Key ratios EBITDA margin (%) EBIT margin (%) ROE (%) RoE standalone (%) Net gearing (x) Net gearing standalone (x) Asset turnover (x)
FY12 13.6% 11.1% 18.0% 27.1% 1.2 0.0 0.9
FY13 13.2% 11.0% 16.5% 20.9% 1.5 0.1 0.8
FY14E 12.8% 10.3% 14.8% 18.2% 1.7 0.1 0.7
FY15E 12.8% 10.1% 15.9% 17.3% 1.7 0.1 0.7
FY16E 12.9% 10.1% 16.4% 16.7% 1.8 0.1 0.7
921 13,044 8,486 21,531
P&L Summary (Rsm) Forthcoming Catalysts 2QFY14 results 3QFY14 results Order inflows Revenue % change EBITDA % change % margin Depreciation EBIT % change % margin Interest expense Other Income Exceptional Items Pre Tax Profit Income Tax Expense Net Income Recurring Net Income Shares in issue (m) EPS (Rs/sh) EPS standalone (Rs/sh)
FY12 643,131 23.5% 87,700 14.1% 13.6% -16,370 71,330 12.0% 11.1% -11,019 10,960 568 71,839 -22,912 48,926 49,040 916.4 53.4 48.2
FY13 744,980 15.8% 98,590 12.4% 13.2% -16,370 82,220 15.3% 11.0% -20,950 10,960 0 72,230 -23,110 49,120 52,060 920.8 53.3 49.5
FY14E 840,894 12.9% 107,338 8.9% 12.8% -21,100 86,238 4.9% 10.3% -23,464 12,375 0 75,149 -22,544 52,604 52,604 925.6 56.8 52.2
FY15E 962,020 14.4% 123,347 14.9% 12.8% -26,029 97,318 12.8% 10.1% -26,749 16,484 0 87,054 -24,375 62,679 62,679 930.6 67.4 57.2
FY16E 1,120,722 16.5% 144,428 17.1% 12.9% -30,932 113,495 16.6% 10.1% -30,494 14,711 0 97,712 -25,405 72,307 72,307 935.6 77.3 62.8
October 2013 January 2014 Ongoing
Shareholding Pattern (June 2013)
FII 16% Others 47%
DII 37%
Cash Flow Summary (Rsm) Net Income Depreciation Others operating cash Operating cash inflow Capital expenditure Change in other assets, investments Cash flows from investing Debt raised Equity raised Dividends Paid (Incl. Tax) Interest Cash flow from financing Change in net cash FCFF post investments
FY12 48,926 16,370 -85,476 -20,179 -72,853 13,667 -59,186 86,422 11,938 -17,616 -11,019 69,725 -9,640 -95,770
FY13 52,070 16,370 -48,818 19,622 -95,965 13,339 -82,626 84,567 14,394 -18,775 -20,950 59,236 -3,768 -73,324
FY14E 52,603 21,100 -4,324 69,380 -97,765 -4,848 -102,613 101,305 625 -19,955 -23,464 58,511 25,278 -45,070
FY15E 62,678 26,029 -908 87,799 -98,554 12,784 -85,770 104,533 10 -20,063 -26,749 57,731 59,760 -10,755
FY16E 72,306 30,932 -2,888 100,351 -96,741 13,806 -82,935 100,823 10 -20,170 -30,494 50,169 67,585 3,610
Standalone entity revenue split (FY13) MIP 4% Others 2%
E&E 6%
E&C 88%

1,000 900 800 700 600 500 400 300 200 100 0 (Rsbn) (%) 14 13
12
11 10 9
Balance Sheet Summary (Rsm) Cash & Equivalents Other net current assets Net Block (incl. CWIP) Investments Financing, other assets Total Assets Interest Bearing Debt Shareholders' Equity Others Total Liabilities + Equity
FY12 106,032 138,580 343,135 15,649 230,457 833,853 471,501 293,868 68,484 833,853
FY13 110,761 197,738 417,400 12,630 294,327 1,032,855 619,937 338,597 74,321 1,032,855
FY14E 136,039 214,039 494,065 29,314 338,476 1,211,933 765,391 371,870 74,671 1,211,933
FY15E 195,799 229,262 566,590 29,314 389,247 1,410,212 920,696 414,496 75,021 1,410,212
FY16E 263,384 249,187 632,399 29,314 467,097 1,641,381 1,099,368 466,642 75,371 1,641,381
Revenues
EBITDA margin (RHS)
Page 14 of 20
Thermax
Recommendation: Fair Value: Share Price Upside / (Downside) 3 Month ADV ($m) Free Float 52 Week Low / High Bloomberg: Model Published On: SELL Rs 534 Rs 588 -9% 0.6 32% Rs 483 - 684 TMX IN 25 July 2013
Valuation Metrics P/E (x) P/E (ex B&W JV losses) (x) P/BV (x) EV/EBITDA (x) Dividend yield (%)
FY12 17.4 17.4 4.3 10.5 1.2%
FY13 21.9 20.9 3.8 12.6 1.2%
FY14E 20.4 18.0 3.3 11.1 1.2%
FY15E 18.2 16.5 2.9 9.7 1.2%
FY16E 14.4 14.1 2.5 8.0 1.2%
Key ratios EBITDA margin (%) EBIT margin (%) ROE (%) RoCE (%) Net gearing (x) Net Debt / EBITDA (x)
FY12 9.9% 8.8% 27.4% 23.1% -0.3 -0.7
FY13 9.6% 8.2% 18.3% 15.0% 0.1 0.2
FY14E 9.6% 8.3% 17.2% 13.8% 0.0 -0.1
FY15E 10.0% 8.7% 17.1% 14.0% -0.2 -0.6
FY16E 10.3% 9.0% 18.7% 15.6% -0.3 -1.0
119 1,169 17 1,185
P&L Summary (Rsm) Revenue % change EBITDA % change % margin Depreciation EBIT % change % margin Interest expense Other Income Exceptional Items Pre Tax Profit Income Tax Expense Net Income Min Interest Post-tax profit/ (loss) from B&W JV Group PAT Shares in issue (m) EPS (Rs/sh) EPS (excl B&W JV losses) (Rs/sh)
FY12 61,044 14.4% 6,051 5.4% 9.9% -663 5,389 3.6% 8.8% -122 698 0 5,965 -2,043 3,922 114 0 4,035 119 33.9 32.9
FY13 55,173 -9.6% 5,312 -12.2% 9.6% -771 4,541 -15.7% 8.2% -165 593 0 4,969 -1,773 3,195 161 -155 3,201 119 26.9 26.8
FY14E 60,847 10.3% 5,842 10.0% 9.6% -776 5,066 11.5% 8.3% -100 766 0 5,732 -1,834 3,898 0 -464 3,434 119 28.8 32.7
FY15E 64,041 5.3% 6,399 9.5% 10.0% -821 5,578 10.1% 8.7% -100 763 0 6,241 -1,997 4,244 0 -388 3,856 119 32.4 35.6
FY16E 70,919 10.7% 7,289 13.9% 10.3% -878 6,411 14.9% 9.0% -100 981 0 7,293 -2,334 4,959 0 -96 4,863 119 40.8 41.6
Forthcoming Catalysts 2QFY14 results 3QFY14 results
October 2013 January 2014
Shareholding Pattern Others 15% DII 9% FII 14% Promoter 62%
Cash Flow Summary (Rsm) Order backlog over years

70
60 50 40 30
FY12 3,922 663 -2,880 -515 1,189 -3,362 718 -2,645 1,225 0 -969 -122 133 -1,322 -1,071
FY13 3,201 771 -2,631 -426 915 -3,744 -1,445 -5,189 1,509 0 -973 -165 371 -3,903 -1,486
FY14E 3,434 776 -748 -641 2,821 -850 766 -84 0 0 -973 -100 -1,073 1,665 1,871
FY15E 3,856 821 399 -638 4,439 -935 763 -172 0 0 -973 -100 -1,073 3,194 3,404
FY16E 4,863 878 -532 -856 4,352 -1,029 981 -47 0 0 -973 -100 -1,073 3,232 3,223
(Rsbn)
100
(% YoY) 80 60 40 20
Net Income Depreciation Change in working capital Others operating cash Operating cash inflow Capital expenditure Change in other assets, investments Cash flows from investing Debt raised Equity raised Dividends Paid (Incl. Tax) Interest Cash flow from financing Change in net cash FCFF
20
10 0
0
(20) (40)
Energy
Environment

90 80 70 60 50 40 30 20 10 0
(Rsbn)
(%)
13 12 11 10 9 8
Balance Sheet Summary (Rsm) Cash & Equivalents Other net current assets Net Block (inc. capital WIP) Investments Total Assets Interest Bearing Debt Shareholders' Equity Min interest and others Total Liabilities + Equity
FY12 6,983 208 10,906 2,395 20,491 2,704 16,293 1,494 20,491
FY13 3,211 2,840 13,902 4,433 24,385 4,213 18,687 1,486 24,385
FY14E 4,876 3,588 13,975 4,433 26,871 4,213 21,148 1,511 26,871
FY15E 8,070 3,189 14,089 4,433 29,780 4,213 24,032 1,536 29,780
FY16E 11,302 3,721 14,240 4,433 33,695 4,213 27,922 1,561 33,695
Revenues
EBITDA margin (RHS)
Page 15 of 20
Voltas
Recommendation: Fair Value: Share Price Upside / (Downside) 3 Month ADV ($m) Free Float 52 Week Low / High Bloomberg: Model Published On: BUY Rs 97 Rs 79 23% 2.1 70% Rs 73 - 139 VOLT IN 02 July 2013
Valuation Metrics Adjusted P/E (x) Reported P/E (x) P/BV (x) EV/EBITDA (x) Dividend yield (%)
FY12 9.6 16.1 1.8 5.9 2.0
FY13 13.1 12.6 1.6 7.1 2.0
FY14E 11.7 11.7 1.5 5.9 2.1
FY15E 9.3 9.3 1.3 4.5 2.2
FY16E 8.4 8.4 1.2 3.7 2.3
Key ratios EBITDA margin EBIT margin ROE RoCE Net gearing (x) Net Debt / EBITDA (x)
FY12 6.3% 5.6% 19.3% 18.8% 0.0 -0.1
FY13 4.1% 3.6% 12.8% 13.2% -0.1 -0.4
FY14E 5.3% 4.8% 13.1% 13.3% -0.1 -0.5
FY15E 6.3% 5.8% 14.9% 14.6% -0.2 -0.8
FY16E 6.3% 5.8% 14.6% 14.4% -0.2 -1.2
331 436 -15 421
P&L Summary (Rsm) Revenue % change EBITDA % change % margin Depreciation EBIT % change % margin Interest expense Other Income Exceptional Items Pre Tax Profit Income Tax Expense Minority Interest Net Income ESIB adjusted Net Income Reported EPS (Rs/sh) ESIB adjusted EPS (Rs/sh) Shares in issue (m)
FY12 51,750 0.0% 3,258 -27.3% 6.3% -340 2,918 -31.7% 5.6% -314 901 -1,313 2,192 -571 0 1,621 2,733 4.9 8.3 331
FY13 55,141 6.6% 2,283 -29.9% 4.1% -278 2,005 -31.3% 3.6% -398 1,070 121 2,798 -728 8 2,078 1,989 6.3 6.0 331
FY14E 55,259 0.2% 2,948 29.1% 5.3% -298 2,650 32.2% 4.8% -400 938 0 3,188 -956 0 2,232 2,232 6.7 6.7 331
FY15E 58,134 5.2% 3,685 25.0% 6.3% -317 3,368 27.1% 5.8% -350 995 0 4,012 -1,204 0 2,809 2,809 8.5 8.5 331
FY16E 63,863 9.9% 4,044 9.8% 6.3% -339 3,705 10.0% 5.8% -350 1,071 0 4,426 -1,328 0 3,098 3,098 9.4 9.4 331
Forthcoming Catalysts 1QFY14 results Qatar transportation MEP project awards
August 2013 Early 2014
Shareholding Pattern
Others 26%
Promoter 30%
DII 25%
FII 19%
Cash Flow Summary (Rsm) Net Income Depreciation Change in working capital Others operating cash Operating cash inflow Capital expenditure Change in other assets, investments Cash flows from investing Debt raised Equity raised Dividends Paid (Incl. Tax) Interest Cash flow from financing Change in net cash FCFF
FY12 1,620 340 -2,137 -1,425 -1,603 -300 1,261 961 870 0 -848 -314 -292 -934 -578
FY13 2,071 278 -20 -1,137 1,192 -420 221 -199 361 0 -615 -398 -652 341 1,577
FY14E 2,232 298 -946 15 1,598 -423 472 48 0 0 -648 -400 -1,048 598 1,261
FY15E 2,809 317 -476 -52 2,598 -518 494 -24 0 0 -681 -350 -1,031 1,543 2,171
FY16E 3,098 339 -628 -78 2,731 -555 526 -29 0 0 -715 -350 -1,065 1,637 2,274
Revenue split (FY13)
UCP 33%
EMP 58%
Eng Prod 8% EBITDA over years 5 4 3

(Rsbn) (%)
10 9
8
7 6
2
1 0 FY07 FY09 FY11 FY13 FY15E EBITDA Margin (RHS)
5
4 3
Balance Sheet Summary (Rsm) Cash & Equivalents Other net current assets Net Block Capital WIP Goodwill Investments Other assets Total Assets Interest Bearing Debt Shareholders' Equity Minority Interests Total Liabilities + Equity
FY12 2,710 8,174 2,004 46 890 3,116 259 17,200 2,252 14,778 170 17,200
FY13 3,498 8,195 2,064 46 888 4,074 222 18,987 2,612 16,256 118 18,987
FY14E 4,097 9,141 2,104 46 888 4,074 222 20,570 2,612 17,840 118 20,570
FY15E 5,640 9,616 2,213 46 888 4,074 222 22,698 2,612 19,968 118 22,698
FY16E 7,277 10,245 2,331 46 888 4,074 222 25,082 2,612 22,351 118 25,081
Page 16 of 20
Valuation Methodology
Bharat Heavy Electricals We value BHEL on a DCF basis, based on Free Cashflow to Equity (FCFE) approach, as it aptly captures the contraction in earnings over the next few years. We assume a 7.2% risk free rate (based on government 10-year bond yields), 6% equity risk premium, 1.1x beta (historical correlation as per Bloomberg) and 5% terminal growth rate beyond FY20. This yields us a one year forward value of Rs162/sh. This implies PERs of 7.6x for FY14E and 10.2x for FY15E and a FY14E P/B of 1.2x. Larsen & Toubro We value the stock on a SoTP basis to arrive at our 12 month forward FV of Rs1,065/sh. We assign 15x FY15 P/E multiple to the companys E&C business (Rs636/sh) and 12x to other standalone businesses (Rs105/sh). Subsidiaries add another Rs327/sh value, with the bulk contributed by L&T Infotech, L&T Finance and IDPL. Thermax We value the stock at 15x FY15E P/E (excluding the B&W JV losses; we do not attach any value to the B&W JV as we believe the business is likely to incur losses in the near term, and may require some equity support from Thermax and B&W) to arrive at our fair value of Rs534. This is c.10% discount to Thermaxs 5-year average P/E, reflecting the prevailing sluggish macro environment. While we see Thermax as one of the best plays on Indias capex cycle, our SELL recommendation is purely a valuation call as we believe the companys rich valuation does not reflect the difficult macro environment. Voltas We attach a 14x one year forward P/E to the UCP business earnings, and 9-10x P/E multiple to the earnings of EMP and Engineering Products. This yields us a target price of Rs97/sh.
Risks to Fair Value

Bharat Heavy Electricals The main risks to our estimates and fair value for BHEL are: 1. Sharp pick-up in industry segment. BHELs FY13 industry segment order inflows almost halved YoY, to Rs41bn. We have assumed a 20% growth in industry orders in FY14E and a further 40% growth in FY15E. Stronger growth due to success in the railways segment (especially metro/ railway coaches) or water business could boost industry segment orders, and thereby moderate revenue declines over next few years. However, in the last few years, BHEL has not made any significant progress in its growth avenues (yet to enter into 765kV power T&D market, has not won a meaningful share in the water business, management has been speaking about winning railway coach orders for last few years but little success has been achieved). Softening material costs. We have factored in 2ppt increase in material costs as a percentage of revenue over FY13-16. This mainly reflects aggressive pricing of some of the recent tenders. If material costs fall sharply, it could offset some of this impact. We note, however, that BHEL faces a delayed impact of change in material costs (inventory day about 100). Positive news flow in the power sector. Any significant positive announcements for the power sector can re-rate the stock, though the impact on financials would be seen with a lag.
2.
3.
Page 17 of 20
Larsen & Toubro The key risks to our fair value are: 1. Order flow disappointment. We have built in 14% growth in order flow on expectation of a sharp pick-up in international orders. Should order inflow disappoint, then this could lead to de-rating of the stock. Margin decline. L&T has disappointed on its margins in the last two years. We believe if EBITDA margins decline sharply in FY14 as well, it would be taken negatively by investors. Sluggish macro. If investor perception about the macro environment deteriorates further, the stock price can come under pressure.
2.
3.
Thermax The main risks to our fair value 1. International orders. Thermax is expanding its international presence. Should it manage to grow its order backlog meaningfully in FY14 on the back of export orders, this will be seen positively by investors. Chunky domestic orders. Large domestic orders can help Thermax expand its order backlog, leading to earnings upgrades for FY15-16. Similarly, if the B&W JV wins some large orders on reasonable pricing, it will address investor concerns on the JVs profitability. Margin resilience. We have built-in a 40bps EBITDA margin decline for the standalone entity for both FY14 and FY15. Should the company manage to hold on to its margins despite intense competition, it could help the company sustain its premium valuation.
2.
3.
Voltas Main risks to our fair value are: 1. Margin disappointment in the EMP segment. Voltas margins have disappointed in the last four quarters. Should losses in some Middle East projects persist and margins remain low, the stock could de-rate further from current levels. Unfavourable weather for UCP business. Room AC volumes grow sharply in years when summers are hot. While Q1 FY14 should be good as temperatures rose sharply in Northern India, Q4 FY14 temperatures will be equally important. An early monsoon could spoil the party. Sluggish order inflows. We are expecting a pick-up in orders by FY14end. Should MEP orders related to the FIFA 2022 World Cup in Qatar be delayed further, there could be a risk to our and consensus revenue expectations for the next two years.
2.
3.
Please visit our website at www.EspiritoSantoIB.co.uk for up to date recommendation charts.
Page 18 of 20
IMPORTANT DISCLOSURES 300713 This report was prepared by Esprito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Esprito Santo de Investimento, S.A., with headquarters in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A Corretora de Cmbio e Valores Mobilirios, in Brazil, Execution Noble Limited, in the United Kingdom, and Espirito Santo Securities India Private Limited, in India, all authorized to engage in securities activities according to each domestic legislation. All of these entities are included within the perimeter of the Financial Group controlled by Esprito Santo Financial Group S.A. (Banco Esprito Santo Group). Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; the issuers were not previously informed about the content of the recommendation included in this research report and the assumptions were not validated by the issuers; (2) no part of his or her compensation is directly or indirectly related to: (a) the specific recommendations or views expressed by that research analyst in the research report; and/or (b) any services provided or to be provided by Banco Esprito Santo de Investimento, S.A. and/or by any of its affiliates to the issuer of the securities under recommendation. Moreover, each of the analysts hereby certifies that he or she has no economic or financial interest whatsoever in the companies subject to his or her opinion and does not own or trade any securities issued by the latter. Ratings Distribution Espirito Santo Investment Bank Research hereby provides the distribution of the equity research ratings in relation to the total Issuers covered and to the investment banking clients as of end of June 2013. Explanation of Rating System 12-MONTH RATING BUY DEFINITION Ratings Distribution As at end June 2013 Recommendation 12 Month Rating: NEUTRAL Analyst expects upside/downside potential of between +10% and -10% to fair value, which should be realized in the next 12 months Analyst expects at least 10% downside potential to fair value, which should be realized in the next 12 months Buy Neutral SELL Sell Restricted Under Review TRADING RATING TRADING BUY DEFINITION Trading Rating: Trading Buy Trading Sell 1 0 0.2% 0.0% 0 0 0.0% 0.0% 0.0% 0.0% 233 180 100 2 4 44.8% 34.6% 19.2% 0.4% 0.8% 36 9 1 2 1 73.5% 18.4% 2.0% 4.1% 2.0% 6.9% 1.7% 0.2% 0.4% 0.2% Total ESIB Research Count % of Total Total Investment Banking Clients (IBC) Count % of IBC % of Total
Analyst expects at least 10% upside potential to fair value, which should be realized in the next 12 months
Analyst expects a positive short-term movement in the share price (max duration 2 months from the time Trading Buy is announced) and may move out of line with the fair value estimate during that period
TRADING SELL Analyst expects a negative short-term movement in the share price (max duration 2 months from time Trading Sell is announced) and may move out of line with the fair value estimate during that period
Total recommendations
520
100%
49
100%
9.4%
For further information on Rating System please see Definitions and distribution of ratings on: http://www.espiritosantoib-research.com. Share Prices Share prices are as at the close of business on the day preceding publication, unless otherwise specified. Coverage Policy Esprito Santo Investment Bank Research reserves the right to choose the securities it expresses opinions on. The main criteria to choose such securities are: 1) markets in which they trade 2) market capitalisation 3) liquidity, 4) sector suitability. Esprito Santo Investment Bank Research has no specific policy regarding the frequency in which opinions and investment recommendations are released. Representation to Investors Esprito Santo Investment Bank Research has issued this report for information purposes only. This material constitutes "investment research" for the purposes of the Markets in Financial Instruments Directive and as such contains an objective or independent explanation of the matters contained in the material. Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. The material in this research report is general information intended for recipients who understand the risks associated with investment. It does not take account of whether an investment, course of action, or associated risks are suitable for the recipient. 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Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries. All the information contained herein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Esprito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are Esprito Santo Investment Bank Research present opinions only, and are subject to change without prior notice. 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However, the research analysts may not purchase or sell securities or have any interest whatsoever in companies subject to their opinion. Banco Esprito Santo Group has a qualified shareholding (1% or more) in EDP, Portugal Telecom, Providncia and ZON Multimdia. Portugal Telecom has either a direct or indirect qualified shareholding (2% or more) in Banco Esprito Santo, S.A. Pursuant to Polish Ministry of Finance regulations, we inform that Banco Esprito Santo Group companies and/or Banco Esprito Santo de Investimento, S.A. Branch in Poland do not have a qualified shareholding in the Polish Securities Issuers mentioned in this report higher than 5% of its total share capital. The Chief Executive Officer of Banco Esprito Santo de Investimento, S.A., Mr. Jos Maria Ricciardi, is a member of EDPs General and Supervisory Board. Mr. Rafael Valverde, a member of the board of Banco Esprito Santo de Investimento, S.A., is a non-executive board member of EDP Renovveis. Mr. Ricardo Abecassis Esprito Santo Silva, a member of the board of Banco Esprito Santo de Investimento, S.A., is a board member of Brazil Hospitality Group. Banco Esprito Santo de Investimento, S.A and/or its subsidiaries are liquidity providers for Altri. Banco Esprito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated as a syndicate member in share offerings of Aliansce, Brazil Hospitality Group, Equatorial, Iguatemi, IQE plc, Marfrig, Minerva, Santander, Suzano Papel e Celulose, Vertu Motors and ZE PAK in the last 12 months. Banco Esprito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated as a syndicate member in the bond issues of the following companies: EDP, Galp Energia, Jernimo Martins, Mota-Engil, Portugal Telecom, REN and Sonae in the last 12 months. Banco Esprito Santo de Investimento, S.A. and/or its subsidiaries provided investment banking services to the following companies: 4imprint, Aliansce, ACM Shipping, AGA Rangemaster Group, Air Partner, Altri, Assura, Brazil Hospitality Group, Burford Capital, Casino Guichard, Cemig, Copel, EDP, EDP Renovaveis, Ence, Equatorial, Flybe Group Plc, Galp Energia, Godrej Consumer Products, Iguatemi, ImmuPharma, Impax Asset Management Group, Inditex, IQE, Jernimo Martins, Kcom Group, Kredyt Inkaso, Kruk, Laird, Marfrig, Minerva, Mota-Engil, Novae
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Group Plc, Portugal Telecom, REN, Rovi, Santander, Semapa, Shaftesbury Plc, Sonae, Sports Direct, Suzano Papel e Celulose, SVG Capital, Ted Baker, The Local Shopping REIT Plc, Tim, Vertu Motors, Workspace Group Plc, Xchanging, ZE PAK and ZON Multimdia in the last 12 months. Banco Esprito Santo Group has been a partner to Mota-Engil in the infrastructure business in Portugal and other countries. Mota-Engil and Banco Esprito Santo Group, through ES Concesses, S.G.P.S., S.A., have created a joint holding company Ascendi for all stakes in transportation infrastructure concessions, in Portugal and abroad. Banco Esprito Santo de Investimento, S.A. provided, or continues to provide, investment banking services to Ascendi. Banco Esprito Santo de Investimento, S.A. and/or its subsidiaries do and seek to provide investment banking or other services to the companies referred to in this research report. As a result, investors should be aware that a conflict of interest may exist. Market Making UK Execution Noble Limited is a Market Maker in companies covered and may sell to or buy from customers as principal in certain financial instruments listed or admitted to listing on the London Stock Exchange. For information on Companies to which Execution Noble Limited is a Market Maker please see Execution Noble Limited UK Market Making on http://www.espiritosantoib-research.com. Confidentiality This report cannot be reproduced, in whole or in part, in any form or by any means, without Esprito Santo Investment Bank Researchs specific written authorization. This report is confidential and is intended solely for the designated addressee. Therefore any disclosure, replication, distribution or any action taken in reliance on it, is prohibited and unlawful. Receipt and/or review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets without first obtaining express permission from an authorized officer of Banco Esprito Santo de Investimento, S.A. Regulatory Authorities For information on the identity of the Regulatory Authorities that supervise the entities included within Esprito Santo Investment Bank Research please see http://www.espiritosantoibresearch.com. IMPORTANT DISCLOSURES FOR U.S. PERSONS This report was prepared by Esprito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Esprito Santo de Investimento, S.A., with headquarters in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A Corretora de Cmbio e Valores Mobilirios, in Brazil, Execution Noble Limited, in the United Kingdom, and Espirito Santo Securities India Private Limited, in India, all authorized to engage in securities activities according to each domestic legislation. Neither Banco Esprito Santo de Investimento, S.A. nor these affiliates are registered as a broker-dealer in the United States and therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This report is provided for distribution to U.S. institutional investors in reliance upon the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended. This report is confidential and not intended for distribution to, or use by, persons other than the addressee and its employees, agents and advisors. E.S. Financial Services, Inc. is the U.S. distributor of this report. E.S. Financial Services, Inc. accepts responsibility for the contents of this report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Any U.S. person receiving this report and wishing to effect securities transactions in any security discussed in the report should do so only through E.S. Financial Services, Inc. Contact Information Garreth Hodgson Eva Gendell James Kaloudis Lisa Gottardo Mike Williams Pedro Marques Poorva Upadhyaya Rodrigo Carvalho Senior Managing Director / Head of Sales Vice President Executive Director Executive Director Vice President Vice President Assistant Vice President Senior Managing Director (212) 351-6054 (212) 351-6058 (212) 351-6065 (212) 351-6060 (212) 351-6052 (212) 351-6051 (212) 351-6056 (212) 351-6070 ghodgson@espiritosantoib.com egendell@espiritosantoib.com jkaloudis@espiritosantoib.com lgottardo@espiritosantoib.com mwilliams@espiritosantoib.com pmarques@espiritosantoib.com pupadhyaya@espiritosantoib.com rcarvalho@espiritosantoib.com
E.S. Financial Services, Inc. New York Branch 340 Madison Avenue, 12th Floor New York, N.Y. 10173 Each analyst whose name appears in this report certifies the following, with respect to each security or issuer that the analyst covers in this report: (1) that all of the views expressed in this report accurately reflect the personal views of the analyst about those securities and issuers; and (2) that no part of the compensation of the analyst was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in this report. The analysts whose names appear in this report are not registered or qualified as research analysts with the Financial Industry Regulatory Authority ("FINRA") and may not be associated persons of E.S. Financial Services, Inc. and therefore may not be subject to the applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Ownership and Material Conflicts of Interest Banco Esprito Santo de Investimento, S.A. and/or its Affiliates and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Esprito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report. For a complete list of the covered Issuers in which Banco Esprito Santo de Investimento, S.A. or its Affiliates hold stakes in excess of 1% and for information on possible material conflicts of interest arising from investment banking activities please see Important disclosures for US persons on http://www.espiritosantoib-research.com. Receipt of Compensation For information on Receipt of Compensation from subject Issuers please see Important disclosures for US persons on http://www.espiritosantoib-research.com. Representation to Investors Esprito Santo Investment Bank Research has issued this report for information purposes only. All the information contained therein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Esprito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are our present opinions only, and are subject to change without prior notice. Esprito Santo Investment Bank Research is not under any obligation to update or keep current the information and the opinions expressed herein. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Where an investment is denominated in a currency other than the investors currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries. Esprito Santo Investment Bank Research does not accept any form of liability for losses or damages which may arise from the use of this report. Please note that investing in any non-U.S. securities or related financial instruments discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission or subject to regulation in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in the United States.
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ESS Public Sector Hopes

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MARKET UPDATE

India | Capital Goods | 31-July-2013

Public sector FY05

Private corporates FY07 FY09

Source: Espirito Santo Investment Bank Research, RBI

Project award trends not very encouraging either

Impact of elections: slower decision making, lower awards

We do not expect a quick capex cycle recovery

Private sector weak; public sector unlikely to pick-up the slack

Instances of private sector players walking away from planned investments

Krishangarh-UdaipurAhmedabad highway Shivpuri-Dewas highway Cuttak-Angul highway

GVK Ashoka Buildcon BGR

NTPC's Darlipalli TG order JNPT Container Terminal IV Delhi Airport Metro

GFCF as a % of GDP: public sector spending largely stable

Public sector has accounted for 22-26% of Indias GFCF

Public sector FY05

Source: Espirito Santo Investment Bank Research, RBI

Governments accounts for April and May 2013

10,563 665 11,228 5,553 11,100 16,653 5,425

Source: Espirito Santo Investment Bank Research, Controller General of Accounts

Source: Espirito Santo Investment Bank Research, Planning Commission

Time overruns in government projects at highest level in last 15 years

60+ month 22%

1-12 month 25%

25-60 month 29%

13-24 month 24%

Proportion of public sector infra projects facing time overruns

Figure 12 Extent of cost overruns in public sector infra projects

4 6 52 1 17 1 70 100 129 149 19 13 4 1 566

Cost overrun projects (#) 2 2 7 0 6 1 18 18 108 11 9 2 2 1 187

Cost overrun % of total projects 50 33 13 0 35 100 26 18 84 7 47 15 50 100 33

Cost overrun (%) 38 16 24 0 26 63 36 34 228 64 30 15 81 119 71

CCI so far not been able to solve sector-specific issues

The CCI ended up becoming a watered down NIB

Figure 15 Details of projects reviewed and cleared by CCI since inception

Iron ore Coal mining Total

7.8 0.2 30.0

Source: Espirito Santo Investment Bank Research, PIB, CCI

CCI has shown urgency and removed some procedural bottlenecks

fresh investments attracted by CCI approvals limited only to US$10bn

Project award trends are not very encouraging either

Impact of elections: slower decision making, lower awards

Figure 18 New project announcements by Private and Public sector

Figure 19 New project announcements by Public sector

Source: Espirito Santo Investment Bank Research, CMIE

Figure 20 Election calendar (pre Lok Sabha elections)

Source: Espirito Santo Investment Bank Research

Figure 22 BHELs order flow growth over years

Elections held here

Source: Espirito Santo Investment Bank Research, Company Data

Source: Espirito Santo Investment Bank Research, Company Data

Figure 24 Net gearing of L&T and its competitors (FY13)

Source: Espirito Santo Investment Bank Research, Company Data, RBI

Figure 26 Voltas FY14 PE comparison with peers

Source: Espirito Santo Investment Bank Research, Company Data

Source: Espirito Santo Investment Bank Research, Company Data, Factset

Figure 27 BHELs order backlog coverage over years

Figure 28 BHELs margins correlation with revenue growth

4.0 3.5 3.0 2.5

Order backlog coverage (RHS)

Revenue growth (RHS)

EBITDA margin (LHS)

Figure 30 Thermaxs P/E versus Indias GFCF growth