India Infrastructure

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Bharat Parekh India Capex Insights #18

bharat.parekh@clsa.com Backlog at top, valuations at bottom
+91 22 6650 5020
Our thesis of a turn in India’s capex cycle was validated by 3Q backlog growth of
+12% YoY (second highest in 22 quarters) despite execution growth accelerating
to 21% YoY (also second highest since 2012). State Govt capex joining Central
capex and pre-election push were the drivers. YTD domestic inflow grew 21%
YoY led by construction and non-power cap goods (+78%). New orders were
well spread, reflected by L&T’s inflows. Margins expanded c.36bps driving Ebitda
+23%. Just when business visibility is near all-time high (BTB 2.8x), stocks are
trading at -1sd on PE on uncertainty around a potential Govt change. How to
19 February 2019 play revival in the capex cycle - BUY early-cycle plays: L&T, Sadbhav, NCC and
IRB and urban infra play - JKIL, following its 11-23% correction over the past
India three months.
Infrastructure BTB at a high: Companies to easily see through elections and more…
q The key message from our analysis of 30 E&C companies with a backlog of US$119bn
Top Picks was an across-the-board pick-up in India’s Infra capex cycle, leading to near all-time
L&T (+38%)
SADE (+105%) high BTB ratio (see chart below) despite a pick-up in execution and expanding margins
NCC (+70%) (led by non-power segment +430bps) of E&C companies .
q Our deep-dive into the backlog reveals that adjusting for GST, domestic backlog has
grown north of 16% YoY vs reported growth of 13% (Figure 5).
L&T LT IN
Rec BUY q Large expressway orders by states (UP and Maharashtra – read) compensated for weak
Market cap US$24.7bn NHAI orders YTD.
Price Rs1,256 q New orders were well spread, reflected by L&T’s inflows (Figures 9 and 10).
Target Rs1,730 q As highlighted in our Year Ahead (read), 2018 has indeed been a year of capex revival!
Up/downside +38%
In our Year Ahead 2019, we expect a year of execution!!
NCC NJCC IN
Rec BUY Execution: Second highest growth since 2012; all segments shine
Market cap US$692m q After addressing markets’ first concern on capex cycle, by building a lofty backlog, E&C
Price Rs82 companies reported second highest-ever growth since 2012 in execution – up 18%
Target Rs140
Up/downside +70% YoY. The growth was widespread across all segments (Figures 15-18) with construction
despite being large (US$76bn OB) reporting growth of 22% YoY.
Sadbhav SADE IN q B/S were well protected despite robust execution as election-led push was visible. L&T
Rec BUY expanded its CFO (Rs30bn), and NCC (sales +81%) said that debtor days were flat YoY.
Market cap US$398m
Price Rs166 q Margins expanded by c.36bps, with non-power CG c.430bps.
Target Rs340
Up/downside +105% 3Q stars: L&T, NCC, JKIL but valuations…
q L&T (Infra capex revival), NCC (AP state rebuilding) and JKIL (Mumbai Metro rail) were
the star performers with PAT at L&T up 36%, NCC 2x and JKIL up 34%.
q IRB and Sadbhav PAT growth is likely pick-up from 4QFY19 post the financing closure.
q With an 11-23% correction in mid-caps on concerns around Govt re-election, MF
scheme re-org and shift of domestic liquidity, valuations are compelling vs improved
EPS visibility offered by the stocks. We recommend BUYing L&T (16x E&C PE FY20),
JKIL (4x, trading below net block!), NCC (8x), IRB (5x) and SADE (3x ex-SIPL).
India E&C: Book-To-Bill – Near high, is an insurance against election volatility
3.0
3.0 2.9
2.9
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2.6 2.5
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2.4 2.3
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2.2
2.1 2.1

2.0
Mar 14

Sep14

Mar 15

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Mar 16

Sep16

Mar 17

Sep17

Mar 18

Sep18
Dec14

Jun16

Dec16

Dec17

Dec18
Jun14

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Jun18

www.clsa.com Source: CLSA, Companies

Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
For important disclosures please refer to page 19.
 India Capex Insights #18 India Infrastructure

We would like to thank Evalueserve for its help in preparing our research reports. Bhavik Mehta (IT); Kamal Verma (Banking & Financial Services); Kushal
Shah (Midcaps), Jinesh Pagaria (Capital Goods, Utilities, Power); and Suraj Yadav (Cement, Oil & Gas) provide research support services to CLSA.

Figure 1

India Capex plays: Sector order inflow (3QFY19)

Rs bn 3QFY18 3QFY19 YoY (%) 9MFY18 9MFY1 YoY (%)
9
Order inflow growth was CAPITAL GOODS - POWER 289 205 (29%) 603 584 (3%)
21% in 9MFY19 BHEL 120 77 (36%) 157 172 10%
CG Power 8 6 (29%) 49 28 (43%)
Kalpataru 41 15 (63%) 84 102 22%
GE T&D 8 0 (100%) 31 13 (57%)
Inox 1 12 1171% 12 12 (5%)
KEC 56 36 (35%) 113 115 2%
- KEC Domestic 34 22 (36%) 71 59 (17%)
3QFY19 was weak quarter - KEC International 22 14 (34%) 42 56 35%
by design vs 1H as Govt Siemens 33 34 4% 90 100 11%
focuses on execution ahead
Suzlon 23 25 13% 68 42 (38%)
of elections…
CAPITAL GOODS - NON 37 86 137% 157 279 78%
POWER
BEL 11 22 89% 67 165 145%
Thermax 14 15 5% 47 45 (5%)
Spike in order inflow of BEML 5 39 630% 18 47 168%
BEML was on account of Voltas 6 11 93% 25 22 (11%)
Rs30bn order for Mumbai -Voltas Domestic 2 3 51% 18 8 (58%)
metro coaches -Voltas International 3 7 122% 7 14 117%

CONSTRUCTION 809 654 (19%) 1,622 1,877 16%

L&T (Cons) 481 422 (12%) 1,032 1,203 17%
- L&T Domestic 395 346 (12%) 747 949 27%
- L&T International 87 76 (12%) 285 254 (11%)
NBCC 65 74 14% 104 174 68%
Punj 15 0 (100%) 29 0 (100%)
NCC 129 46 (65%) 216 119 (45%)
HCC 20 2 (90%) 46 17 (64%)
Simplex 17 13 (26%) 50 24 (52%)
Sadbhav Eng 25 1 (98%) 43 30 (30%)
EIL (1) 1 (184%) 18 57 214%
VA Tech 1 12 943% 11 39 246%
Dilip 1 17 1643% 2 60 2611%
PNC 36 26 (29%) 37 27 (28%)
JKIL resumed bagging JKIL 0 18 nm 1 48 nm
orders from 1Q19, and KNR 2 2 (11%) 9 6 (27%)
bagged orders worth
Rs48bn (64% of FY18 DEVELOPERS 10 24 133% 24 87 256%
backlog) Ashoka 5 8 71% 15 65 329%
Total IRB 0 10 NA 0 10 NA
MEP 5 5 (1%) 9 12 26%

Total 1,145 969 (15%) 2,406 2,827 17%

Total (Ex-International) 1,033 872 (16%) 2,073 2,502 21%
Source: CLSA, Companies

19 February 2019 bharat.parekh@clsa.com 2

 India Capex Insights #18 India Infrastructure

Figure 2

Order inflow was down 15% India Capex plays: Order inflow growth in 3QFY19
in 3Q19
1,200 Domestic order inflow (Rsbn)
1,033
1,000
872

800

600

400

200
3QFY18 3QFY19

Source: CLSA, Companies

Figure 3

India Capex plays: Order inflow growth in 9MFY19

On a 9M basis order inflow 2,800 Domestic order inflow (Rsbn)
grew by 21% vs 60% in 2,600 2,502
1H19 due to decline in 2,400
order growth in 3QFY19 2,073
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
9MFY18 9MFY19

Source: CLSA, Companies

19 February 2019 bharat.parekh@clsa.com 3

 India Capex Insights #18 India Infrastructure

Figure 4

India Capex plays: Sector order backlog (3QFY19)

Rs bn 3QFY18 2QFY19 3QFY19 YoY % QoQ%
Capital goods sector
CAPITAL GOODS - POWER 1,685 1,911 1,935 15% 1%
Power/ Non-Power backlog
BHEL 1,022 1,155 1,167 14% 1%
grew up to 15%/20% YoY
led by BHEL, Kalpataru, CG Power 38 27 27 (30%) (2%)
BEML and BEL Kalpataru 180 243 241 34% (1%)
GE T&D 72 62 51 (30%) (19%)
Inox 25 35 43 73% 22%
KEC 171 201 206 20% 2%
- KEC Domestic 91 99 99 9% 0%
- KEC International 81 103 107 33% 4%
Siemens 132 124 124 (6%) 0%
Suzlon 45 63 77 71% 23%

CAPITAL GOODS - NON POWER 578 666 692 20% 4%

BEML 69 63 93 36% 47%
BEL 405 490 484 20% (1%)
Thermax 56 64 65 16% 1%
Voltas 49 49 50 3% 2%
-Voltas Domestic 31 28 31 0% 9%
-Voltas International 18 20 19 9% (7%)

Construction sector CONSTRUCTION 5,052 5,352 5,451 8% 2%

recorded modest growth of Dilip 124 239 231 87% (3%)
8% YoY EIL 83 115 108 30% (6%)
HCC 203 191 182 (10%) (5%)
JKIL 82 93 104 26% 12%
KNR 33 18 15 (54%) (16%)
L&T (Cons) 2,707 2,812 2,840 5% 1%
- L&T Domestic 2,030 2,193 2,153 6% (2%)
- L&T International 677 619 687 2% 11%
NBCC 800 800 850 6% 6%
NCC 311 324 337 8% 4%
Punj 157 139 133 (15%) (4%)
PNC 80 61 80 0% 30%
Simplex 177 168 168 (5%) 0%
Sadbhav Eng 96 137 129 33% (6%)
VA Tech 72 86 91 26% 6%

Developers recorded robust DEVELOPERS 164 300 285 74% (5%)

growth of 74% YoY in order Ashoka 59 98 95 60% (2%)
backlog IRB 74 132 122 64% (8%)
MEP 30 70 68 124% (3%)

Total 7,479 8,229 8,363 12% 2%

Total (ex-International) 6,689 7487 7,550 12.9% 1%
Source: CLSA, Companies

19 February 2019 bharat.parekh@clsa.com 4

 India Capex Insights #18 India Infrastructure

Figure 5

India Capex plays: Order backlog growth adjusting for GST impact
Even by adjusting the order Rs bn 3QFY1 3QFY19 YoY % GST % YoY
backlog of just 3 8 impact (adjusting GST
impact)
companies…
…the real pick-up was L&T (Cons) 2,707 2,840 5% 151 11%
c.16% NCC 311 337 8% 29 19%
Sadbhav 96 129 33% 13 54%
GRAND TOTAL (ex- 6,689 7,550 13% 193 16%
International)
Source: CLSA, Companies, *GST amounts are estimated based on company disclosures in previous quarters

Figure 6

India Capex plays: Sector order backlog growth YoY (3QFY19)

Order inflow was weak for 124% Order backlog growth YoY (%)
the cap goods (Power) and 85%
construction players in
65%
3Q19…
45%

25%

5%

…road companies had a -15%

strong push at the end of -35%
FY18 on account of which
the YoY growth appears to -55% BHEL

NBCC

PNC

GE T&D
CG Power
Punj Lloyd
Kalpataru

Voltas
Dilip

Sadbhav
Inox Wind

BEML

EIL

KEC
BEL

L&T
Suzlon

Ashoka

Va Tech

Thermax
MEP

IRB

Siemens

KNR
Jkumar

NCC

HCC
Simplex
be strong for developers Sector Avg.

Source: CLSA, Companies

Figure 7

India Capex plays: Book to bill ratio across companies

Sector book-to-bill ratio is 6 10.4
near its all-time high... Book to bill (Trailing 4Qs)
5

…road builders and cap 3

goods companies are clearly
having higher revenue 2
visibility in the sector
1

0
NBCC

PNC
BHEL

Kalpataru

CG Power
Voltas
GE T&D
KEC
Sadbhav

L&T
Dilip
EIL
BEL

INOX
IRB

Va Tech

Sector
BEML

Suzlon
Ashoka

Thermax
MEP

Siemens
KNR
HCC

NCC
Jkumar

Simplex
Punj

Source: CLSA, Companies

19 February 2019 bharat.parekh@clsa.com 5

 India Capex Insights #18 India Infrastructure

Figure 8

India Capex plays: Order backlog showing improvement

The sector backlog has Rsbn CG - Power CG - Non Power Construction

grown strongly, up 13% Developers YoY growth % (ex-int) YoY growth % (ex-GST)
21%
YoY, led by robust growth 7,500
in the non-power category 18%

and developers, up 20% and

15%
74% respectively….
5,000
12%

9%

2,500
6%
….adjusting for GST, growth
is upwards of 16% 3%

0 0%

-3%

(2,500) -6%
FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

1QFY19

2QFY19

3QFY19
Source: CLSA, Companies

Figure 9

9MFY18 was concentrated L&T: Orders disclosed, 9MFY18

in a few sectors such as
Airport Railways
Water, Oil & Gas and 9MFY18 Orders 2%
Port
0%
3% Metro
Building order disclosed: Rs583bn
6%

Oil & Gas

Material handling 15% Roads, highways &
6% bridges
13%
Building &
factories Power / EPC
15% 8%
T&D
10%
Smart World Telecom
Comm. business 1%
0% Water
Metals Misc Construction
18%
2% 1%
Source: CLSA, Company

19 February 2019 bharat.parekh@clsa.com 6

 India Capex Insights #18 India Infrastructure

Figure 10

L&T consolidated: Orders disclosed, 9MFY19

…however FY19QTD order Metals Roads, highways &
Oil & Gas Fertilizer
worth Rs793bn was more 2% 2% bridges
5%
broad-based… 5%
Power / EPC
Building and
9MFY19 Orders 9% factories
disclosed: Rs793bn 11%
T&D
Smart World
…Water and Heavy Civil Infra 11% Heavy Engg
Comm. business
were the top contributors to 2% 3%
the inflow… Material handling Heavy Civil
1% Infra
Water 14%
23%
… and Heavy Civil bagged its
second-largest order ever Airport
Metro 8%
4%
Source: CLSA, Company

Figure 11

India E&C players stock-price performance over the past six months
India mid-cap derating has
impacted E&C players… IRB Sadbhav Ashoka Dilip PNC

100
…over the past six months,
Dilip is the worst performer
- down 50%... 80

60
…IRB, Sadbhav, and Ashoka
are down 35%, 40%, and
19% respectively 40
Aug 18

Sep 18

Oct 18

Nov 18

Dec 18

Jan 19

Source: CLSA, Bloomberg

Figure 12

India E&C company consensus EPS estimates (FY19) over past six months
L&T’s EPS has seen the 106 IRB Sadbhav PNC L&T Dilip
highest upgrade (6.5%) over
the past six months… 104

102

100
…IRB, Dilip and Sadbhav
have seen a cut of 6%, 5% 98
and 4% respectively...
96

94

…IRB’s estimates have 92

retained back at the original
1-Sep-18
8-Sep-18

1-Dec-18
8-Dec-18
6-Oct-18

2-Feb-19
9-Feb-19
16-Feb-19
10-Nov-18
17-Nov-18
24-Nov-18
15-Sep-18
22-Sep-18
29-Sep-18

13-Oct-18
20-Oct-18
27-Oct-18
3-Nov-18

15-Dec-18
22-Dec-18
29-Dec-18
5-Jan-19
12-Jan-19
19-Jan-19
26-Jan-19

level over the past six

months

Source: CLSA, Bloomberg

19 February 2019 bharat.parekh@clsa.com 7

 India Capex Insights #18 India Infrastructure

Figure 13

India Capex plays: Revenue (3QFY19)

Rs mn Dec 17 Dec-18 YoY %
CAPITAL GOODS - POWER 213,751 225,329 4%
BGR 7,061 8,315 18%
BHEL 64,944 71,157 10%
GE T&D 14,386 11,678 (19%)
Kalpataru 14,174 17,247 22%
KEC 24,048 26,466 10%
Siemens 23,632 27,342 16%
Suzlon 22,039 10,975 (50%)
Inox 909 3,908 330%
CG Power 15,161 17,195 13%
CAPITAL GOODS - NON POWER 52,497 62,797 20%
BEML 7,315 9,239 26%
BEL 24,523 26,564 8%
Sanghvi 389 665 71%
Thermax 11,170 14,366 29%
Titagarh 872 2,163 148%
Voltas 8,229 9,801 19%
CONSTRUCTION 372,456 454,106 22%
HCC 12,309 11,018 (10%)
JKIL 4,572 6,860 50%
KNR 4,332 4,489 4%
L&T 237,146 292,143 23%
NCC 17,777 32,265 81%
NBCC 14,998 24,037 60%
Ramky 2,568 1,938 (25%)
Sadbhav Eng 8,394 9,255 10%
EIL 4,734 5,770 22%
Simplex 13,601 14,034 3%
Dilip 19,421 24,872 28%
PNC 4,725 7,270 54%
VA Tech 8,647 6,619 (23%)
Developers showed all- DEVELOPERS 30,143 38,788 29%
round performance with Ashoka 6,589 10,651 62%
execution up 29% YoY Total IRB 15,988 20,948 31%
-IRB 12,962 17,885 38%
-IRB InvIT 3,026 3,063 1%
MEP 7,566 7,189 (5%)

GRAND TOTAL 631,256 745,218 18%

Source: CLSA, Bloomberg, Companies, *adjustment of roads transferred to InvIT has been made at the Sales &
Ebitda level, and not at the PAT level

19 February 2019 bharat.parekh@clsa.com 8

 India Capex Insights #18 India Infrastructure

Figure 14

India Capex plays: Overall sector sales

Infra sector has recorded a
growth of 18% YoY in Sector Sales YoY growth
execution – it’s second 20%
highest in the past six
years… 15%

10%

…developers and 5%
construction segments saw
superior growth in
execution 0%

-5%
Mar 13

Mar 14

Mar 15

Mar 16

Mar 17

Mar 18
Jun 12
Sep 12
Dec 12

Jun 13
Sep 13
Dec 13

Jun 14
Sep 14
Dec 14

Jun 15
Sep 15
Dec 15

Jun 16
Sep 16
Dec 16

Jun 17
Sep 17
Dec 17

Jun 18
Sep 18
Dec 18
Source: CLSA, Bloomberg, Companies

Figure 15 Figure 16

Sales: Capital goods - power Sales: Capital goods – non-power

20% 40%
Capital Goods - Power YoY growth
Capital Goods - Non Power YoY Growth
15%
30%
10%
5% 20%
0%
10%
-5%
-10% 0%
-15%
-10%
-20%
-25% -20%
Jun 12

Dec 12

Jun 13

Dec 13

Jun 14

Dec 14

Jun 15

Dec 15

Jun 16

Dec 16

Jun 17

Dec 17

Jun 18

Dec 18

Jun 12

Dec 12

Jun 13

Dec 13

Jun 14

Dec 14

Jun 15

Dec 15

Jun 16

Dec 16

Jun 17

Dec 17

Jun 18

Dec 18
Source: CLSA, Bloomberg, Companies Source: CLSA, Bloomberg, Companies

Figure 17 Figure 18

Sales: Construction Sales: Developers

25% 70%
Construction YoY Growth Developers YoY Growth
60%
20%
50%
15% 40%

10% 30%

20%
5%
10%
0%
0%

-5% -10%
Jun 12

Dec 12

Jun 13

Dec 13

Jun 14

Dec 14

Jun 15

Dec 15

Jun 16

Dec 16

Jun 17

Dec 17

Jun 18

Dec 18
Jun 12

Dec 12

Jun 13

Dec 13

Jun 14

Dec 14

Jun 15

Dec 15

Jun 16

Dec 16

Jun 17

Dec 17

Jun 18

Dec 18

Source: CLSA, Bloomberg, Companies Source: CLSA, Bloomberg, Companies

19 February 2019 bharat.parekh@clsa.com 9

 India Capex Insights #18 India Infrastructure

Figure 19

India Capex plays: Ebitda (3QFY19)

Rs mn Dec-17 Dec-18 YoY %
CAPITAL GOODS - POWER 18,263 19,825 9%
BGR 827 920 11%
BHEL Ebitda includes BHEL 2,954 2,187 (26%)
FX translation loss of GE T&D 504 1,126 123%
Rs2bn… Kalpataru 1,630 1,839 13%
KEC 2,442 2,814 15%
Siemens 3,429 3,065 (11%)
Suzlon 2,471 2,719 10%
Inox (203) 513 NA
CG Power 1,271 1,485 17%

…excluding this one-off CAPITAL GOODS - NON POWER 6,696 10,712 60%
loss, its Ebitda would have BEML 416 753 81%
been Rs4.3bn (ie, 44% YoY BEL 4,452 7,681 73%
increase) Sanghvi 57 244 326%
Thermax 955 1,073 12%
Titagarh 72 147 104%
Voltas 745 815 9%

CONSTRUCTION 46,925 56,364 20%

HCC 1,640 1,994 22%
JKIL 776 1,113 43%
KNR 984 901 (8%)
L&T 31,437 39,970 27%
NCC 1,951 3,925 101%
NBCC 750 851 13%
Ramky (682) (426) (38%)
Sadbhav Eng 1,056 1,108 5%
EIL 1,348 949 (30%)
Simplex 2,002 1,789 (11%)
Dilip 3,447 4,407 28%
PNC 663 1,021 54%
VA Tech 777 493 (37%)

DEVELOPERS 12,333 14,020 14%

Ashoka 961 1,487 55%
Total IRB 8,772 10,128 15%
-IRB 6,303 7,604 21%
-IRB InvIT 2,469 2,524 2%
MEP 2,600 2,405 (8%)

GRAND TOTAL 81,908 100,912 23%

Source: CLSA, Bloomberg, Companies, *adjustment of roads transferred to InvIT has been made at the Sales &
Ebitda level, and not at the PAT level

19 February 2019 bharat.parekh@clsa.com 10

 India Capex Insights #18 India Infrastructure

Figure 20

India capex plays: Overall sector Ebitda

Strong growth in execution,
weak base and kicking in of 50%
Sector EBITDA YoY growth
operating leverage have led
40%
to improvement in Ebitda…
30%

20%
…margins are up by 10%
c.230bps…
0%

-10%

-20%
…even on an absolute basis,
-30%
Ebitda is up 43% YoY
Mar 13

Mar 14

Mar 15

Mar 16

Mar 17

Mar 18
Jun 12
Sep 12
Dec 12

Jun 13
Sep 13
Dec 13

Jun 14
Sep 14
Dec 14

Jun 15
Sep 15
Dec 15

Jun 16
Sep 16
Dec 16

Jun 17
Sep 17
Dec 17

Jun 18
Sep 18
Dec 18
Source: CLSA, Bloomberg, Companies

Figure 21 Figure 22

Ebitda: Capital goods - power Ebitda: Capital goods – non-power

80% 195% 100% Capital Goods - Non Power YoY growth

L to P
Capital Goods - Power YoY 75% L to P 125%
60%
growth
50%
40%
25%
20%
0%
0%
-25%
-20% -50%
-40% -75% -140%
-130%

-60% -100%
Jun 12

Jun 13

Jun 14

Jun 15

Jun 16

Jun 17

Jun 18
Dec 12

Dec 13

Dec 14

Dec 15

Dec 16

Dec 17

Dec 18
Jun 12

Jun 13

Jun 14

Jun 15

Jun 16

Jun 17

Jun 18
Dec 12

Dec 13

Dec 14

Dec 15

Dec 16

Dec 17

Dec 18

Source: CLSA, Bloomberg, Companies Source: CLSA, Bloomberg, Companies

Figure 23 Figure 24

Ebitda: Construction Ebitda: Developers

Construction YoY growth Developers YoY growth
75%
100%
60% 350%

45% 80%

30% 60%
15%
40%
0%
20%
-15%
-30% 0%

-45% -20%
Jun 12

Dec 12

Jun 13

Dec 13

Jun 14

Dec 14

Jun 15

Dec 15

Jun 16

Dec 16

Jun 17

Dec 17

Jun 18

Dec 18

Jun 12

Jun 13

Jun 14

Jun 15

Jun 16

Jun 17

Jun 18
Dec 12

Dec 13

Dec 14

Dec 15

Dec 16

Dec 17

Dec 18

Source: CLSA, Bloomberg, Companies Source: CLSA, Bloomberg, Companies

19 February 2019 bharat.parekh@clsa.com 11

 India Capex Insights #18 India Infrastructure

Figure 25

India Capex plays: Sector Ebitda margins

Ebitda margins have risen 15%
sharply by c.36bps YoY…
14%
13%
12%
11%
…margins at the power and 10%
construction segment
improved by c.215bps and 9%
c.200bps respectively 8%
7%
6%
1QFY12
1QFY13
1QFY14
1QFY15
1QFY16
1QFY17
1QFY18
1QFY19
2QFY12
2QFY13
2QFY14
2QFY15
2QFY16
2QFY17
2QFY18
2QFY19
3QFY12
3QFY13
3QFY14
3QFY15
3QFY16
3QFY17
3QFY18
3QFY19
4QFY12
4QFY13
4QFY14
4QFY15
4QFY16
4QFY17
4QFY18
Source: CLSA, Bloomberg, Companies

Figure 26

India Capex plays: Sector Ebitda margins (yearly)

Ebitda margins are on an
Segmental margins FY12 FY13 FY14 FY15 FY16 FY17 FY18
improving trend since
Capital Goods - Power 7.0 7.3 7.2 6.9 6.6 9.4 8.3
FY12...
Capital Goods - Non Power 10.6 8.3 9.5 11.7 12.6 14.4 13.9
Construction 11.1 11.2 11.1 10.4 10.5 11.4 12.8
…however, for FY18, only Developers 44.2 43.9 46.0 47.6 46.3 48.1 43.5
the construction sector Grand Total 10.3 10.6 10.8 10.6 10.7 12.3 12.8
reported margin expansion Source: CLSA, Bloomberg, Companies

19 February 2019 bharat.parekh@clsa.com 12

 India Capex Insights #18 India Infrastructure

Figure 27

India Capex plays: PAT (3QFY19)

Rs mn Dec-17 Dec-18 YoY %
Optically the profits look CAPITAL GOODS - POWER 6,785 8,228 22%
higher at BHEL, up 25% BGR 69 108 57%
YoY… BHEL 1,532 1,920 25%
GE T&D 718 531 (26%)
Kalpataru 752 920 22%
…however this was on KEC 1,118 1,124 1%
account of Rs870m in Siemens 1,905 2,280 20%
interest on the income tax Suzlon (280) (401) (43%)
refund Inox (461) 17 104%
CG Power (282) (335) 19%

CAPITAL GOODS - NON POWER 4,217 6,231 48%

BEML 167 447 168%
BEL had an exceptionally BEL 3,028 5,076 68%
strong 3Q led by excellent Sanghvi (261) (102) (61%)
execution and margin Thermax 586 750 28%
expansion. Titagarh 39 59 50%
Voltas 658 0 (100%)

CONSTRUCTION 22,168 23,134 4%

HCC 313 99 (68%)
JKIL 329 442 34%
KNR 657 521 (21%)
L&T 15,034 20,423 36%
NCC 776 1,602 106%
NBCC 684 836 22%
Ramky 9 (338) (4006%)
Election-led push and GST
Sadbhav Eng 618 563 (9%)
disrupted base have
EIL 1,084 908 (16%)
enabled infra companies to
report superior P&L… Simplex 311 363 17%
Dilip 1,647 2,069 26%
PNC 931 474 (49%)
VA Tech 301 154 (49%)

…profits are up 2x (NCC), DEVELOPERS 2,841 3,463 22%

36% (L&T), and 34% (JKIL) Ashoka 520 622 20%
Total IRB 2,073 2,711 31%
-IRB 2,073 2,189 6%
-IRB InvIT 0 522 NA
MEP 249 131 (47%)

GRAND TOTAL 35,287 44,451 26%

Source: CLSA, Bloomberg, Companies, *adjustment of roads transferred to InvIT has been made at the Sales &
Ebitda level, and not at the PAT level

19 February 2019 bharat.parekh@clsa.com 13

 India Capex Insights #18 India Infrastructure

Figure 28

India Capex plays: Overall sector PAT

Infra sector PAT growth
was driven by solid growth 120%
in bottomline in the Sector PAT YoY growth
construction segment (up 80%
26% YoY)…
40%

0%

…profits grew 2x at NCC

-40%
(better-priced AP state,
P to L
affordable housing orders
-80%
and pre-election surge in P to L
execution), 34% growth at
-120%
JKIL (marked pick up in
Jun 12
Sep 12

Jun 13
Sep 13

Jun 14
Sep 14

Jun 15
Sep 15

Jun 16
Sep 16

Jun 17
Sep 17

Jun 18
Sep 18
Dec 12
Mar 13

Dec 13
Mar 14

Dec 14
Mar 15

Dec 15
Mar 16

Dec 16
Mar 17

Dec 17
Mar 18

Dec 18
execution at MML-3)

Source: CLSA, Bloomberg, Companies

Figure 29 Figure 30

PAT: Capital goods - power PAT: Capital goods – non-power

150%
Capital Goods - Power YoY growth Capital Goods - Non Power YoY growth
L to P 200%
100% L to P 235%
150%
50% 100%

0% 50%

0%
-50%
-197%
-50%
-100%
-100%
-150% -150%
Jun 12

Dec 12

Jun 13

Dec 13

Jun 14

Dec 14

Jun 15

Dec 15

Jun 16

Dec 16

Jun 17

Dec 17

Jun 18

Dec 18

Jun 12

Jun 13

Jun 14

Jun 15

Jun 16

Jun 17

Jun 18
Dec 12

Dec 13

Dec 14

Dec 15

Dec 16

Dec 17

Dec 18
Source: CLSA, Bloomberg, Companies Source: CLSA, Bloomberg, Companies

Figure 31 Figure 32

PAT: Construction PAT: Developers

140%
Construction YoY growth Developers YoY growth
90% 131% 105%
65%
70%
40%
15% 35%

-10% 0%
-35%
-35%
-60%
-321% -284% -70% -294%
-85% -361% -116% -152%

-110% -105%
Jun 12

Dec 12

Jun 13

Dec 13

Jun 14

Dec 14

Jun 15

Dec 15

Jun 16

Dec 16

Jun 17

Dec 17

Jun 18

Dec 18
Jun 12

Dec 12

Jun 13

Dec 13

Jun 14

Dec 14

Jun 15

Dec 15

Jun 16

Dec 16

Jun 17

Dec 17

Jun 18

Dec 18

Source: CLSA, Bloomberg, Companies Source: CLSA, Bloomberg, Companies

19 February 2019 bharat.parekh@clsa.com 14

 India Capex Insights #18 India Infrastructure

Figure 33

Banks: Construction sector credit growth

Construction sector
execution has improved 35%
despite credit crisis at YoY growth (%)
30%
NBFCs during 3Q…
25%

20%
...this is reflected in the
improvement in credit 15%
growth…
10%

5%

0%
…credit growth is in higher
single digits now vs lower -5%
Sep 14

Sep 15

Sep 16

Sep 17

Sep 18
Dec 13

Mar 14

Dec 14

Mar 15

Dec 15

Mar 16

Dec 16

Mar 17

Dec 17

Mar 18

Dec 18
Jun 14

Jun 15

Jun 16

Jun 17

Jun 18
single digits two years
earlier
Source: CLSA, CMIE

Figure 34

E&C Covered: Valuation comps

PE (x) EV/EBITDA (x) P/B (x) Net gearing (%) RoAE (%)
Company FY19 FY20 FY21 FY19 FY20 FY21 FY19 FY20 FY21 FY19 FY20 FY21 FY19 FY20 FY21
L&T 22.1 18.4 15.9 13.4 10.9 9.6 2.9 2.7 2.4 178 144 133 14 15 16
IRB Infra 4.6 4.9 7.7 4.3 3.9 3.8 0.6 0.6 0.6 200 230 231 14 12 7
Sadbhav* 3.2 2.8 2.5 4.4 3.7 2.9 1.4 1.2 1.1 63 62 46 12 12 13
NJCC 8.8 8.0 7.3 4.7 4.3 4.1 1.1 1.0 0.9 34 36 42 13 13 12
JKIL 4.6 4.0 3.4 2.0 1.8 1.3 0.5 0.5 0.4 (2) 0 (9) 12 12 13
Average 8.7 7.6 7.4 5.8 4.9 4.3 1.3 1.2 1.1 95 95 89 13 13 12
Source: CLSA, * ex –Sadbhav Infra

Figure 35

L&T trades at -1sd despite a L&T: E&C PE band

strong new orders and E&C Price P/E Average +1std -1 std
execution momentum 32

27

22

17

12

7
Jul 13

Jul 14

Jul 15

Jul 16

Jul 17

Jul 18
Apr 13

Apr 14

Apr 15

Apr 16

Apr 17

Apr 18
Oct 13
Jan 14

Oct 14
Jan 15

Oct 15
Jan 16

Oct 16
Jan 17

Oct 17
Jan 18

Oct 18
Jan 19

Source: CLSA

19 February 2019 bharat.parekh@clsa.com 15

 India Capex Insights #18 India Infrastructure

Figure 36

IRB stock has corrected on IRB: PE band

fears of likely delay in (X)
financial closure of key 16.0
projects which now has
happened for 3 of the 4 14.0
projects +1sd 13.02x

12.0

10.0 avg 10.09x

8.0
-1sd 7.16x

6.0

4.0
Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 Feb 18

Source: CLSA

Figure 37

Sadbhav is trading at 3x Sadbhav (Parent): PE band

excluding the value of its (X)
infrastructure arm (SIPL)
14.0 +1sd 13.95x

12.0

10.0
avg 9.51x

8.0

6.0
-1sd 5.08x
4.0

2.0

0.0
Feb 09 Feb 10 Feb 11 Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 Feb 18

Source: CLSA

Figure 38

NCC has been de-rated NCC: PE band

despite beating all its (X)
guidances for FY19 40.0

30.0 +1sd 29.92x

20.0
avg 17.99x

10.0
-1sd 6.07x

0.0
Feb 09 Feb 10 Feb 11 Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 Feb 18

Source: CLSA

19 February 2019 bharat.parekh@clsa.com 16

 India Capex Insights #18 India Infrastructure

Figure 39

Regulatory backlash has JKIL: PE band

hurt JKIL’s valuations so (X)
much so that the stock is 20.0
trading below its net block
+1sd 16.46x

15.0

10.0 avg 10.19x

5.0
-1sd 3.91x

0.0
Feb 09 Feb 10 Feb 11 Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 Feb 18

Source: CLSA

Valuation details - Larsen & Toubro Ltd LT IB

In our SOTP-based TP for the company, we use a one-year forward PE multiple
(based on 25% discount to capital goods comps) to derive a core E&C business
value. The hydrocarbon business is excluded from the E&C business now as per
company segmentation and valued separately using a one-year forward PE
multiple. Finance, road SPVs and other subsidiaries are valued at a multiple to the
book value or at a discount to our coverage TP or Bloomberg Consensus TP.
Divested businesses have been valued at the equity consideration expected to be
received.

Investment risks - Larsen & Toubro Ltd LT IB

About 25% of L&T's order backlog is from overseas orders. Strict labour laws and
stringent liquidated damages clauses in the tenders can lead to cost overruns.
Competitive intensity in the domestic EPC space has led to aggressive pricing; if
competition intensifies further, there could be downside to Ebitda margins.
Divestment of assets may be delayed if economic growth does not revive, posing
a risk to valuations.

Valuation details - Nagarjuna Construction Co Ltd NJCC IB

We value NJCC's E&C business at 14x PE multiple on 1-yr fwd earnings for the
domestic business, which is a 25% discount to the industry leader L&T (mid-cap
discount), and approx 15-20% discount to its own trading multiple (mid-cycle
earnings discount). The other investments of the company including Roads, Urban
Infra, Tellapur city and others are valued at 0.5-1x book value of investments.

Investment risks - Nagarjuna Construction Co Ltd NJCC IB

Key risks for the company include heavy investments the company has done in
the infra and the real estate business over the years, as they have depressed the
RoEs. This has increased the company's leverage vis-a-vis its peers. For the E&C
business, the major risks include delay in execution.

19 February 2019 bharat.parekh@clsa.com 17

 India Capex Insights #18 India Infrastructure

Valuation details - Sadbhav Engineering Ltd SADE IN

We value the company at 12x PE on its one year forward earnings. SEL’s stake of
69% in SIPL (post-IPO) is valued at 30% hold-co discount to its Bloomberg
Consensus Target Price.

Investment risks - Sadbhav Engineering Ltd SADE IN

Execution delays, delay in project funding, slower growth in traffic and toll rate
risk on lower inflation are key risks for the company.

19 February 2019 bharat.parekh@clsa.com 18

 Important disclosures India Infrastructure

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Companies mentioned
ABB India (N-R)
Ashoka Buildcon (N-R)
BEML (N-R)
BGR Engy Sys (N-R)
Bharat Electronics (N-R)
Bharat Heavy Elec (BHEL IB - RS62.0 - SELL)
CG Power (N-R)
Dilip Buildcon (N-R)
Engineers India (N-R)
GE T&D (N-R)
Hindustan Construction (N-R)
Inox Wind (N-R)
IRB Infra (IRB IB - RS112.7 - BUY)
J Kumar Infra (JKIL IN - RS118.5 - BUY)
Kalpataru Power (N-R)
KEC Intl (N-R)
KNR Constructions (N-R)
Larsen & Toubro (LT IB - RS1,255.8 - BUY)
MEP (N-R)
Nagarjuna (NJCC IB - RS82.3 - BUY)
NBCC (N-R)
NCC (N-R)
PNC Infra (N-R)
Punj Lloyd (N-R)
Ramky (N-R)
Sadbhav (SADE IN - RS166.2 - BUY)
Sadbhav Infrastructure (N-R)
Sanghvi Movers (N-R)
Siemens India (N-R)
Simplex Infra (N-R)
Suzlon (N-R)
Thermax (N-R)
Titagarh Wagons (N-R)
VA Tech (N-R)
Voltas (VOLT IS - RS524.1 - SELL)

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is, or will be directly or indirectly related to the specific recommendation or views contained in this research
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category: BUY / Outperform - CLST: 0.00%, Underperform / SELL -
19 February 2019 bharat.parekh@clsa.com
India Infrastructure
CLST: 0.00%, Restricted - CLST: 0.00%. Data for 12-month period
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21