INDIA RESEARCH

Engineering
Macro capex new project announcements
plummet to 8-year low

October 2012
BSE Sensex: 19058

Our analysis of CMIEs (Centre for Monitoring Indian Economy) project database suggests that the capex cycle has
further deteriorated. New project announcements have slumped by 75% yoy to its lowest level of Rs574bn since Sept04. The continued fall in new project announcements for the past two years has hit projects under implementation,
wherein growth has fallen to sub 10% levels over the last two quarters. Simultaneously, challenges in project execution
have driven projects under implementation but stalled to touch new highs (+63% yoy in 2QFY13). While the
government has taken some steps towards reforms, we believe the actual impact on ground towards investments
would take some time. The larger issues towards FSAs for power plants, land acquisition, environmental clearances,
etc persist. On the other hand, with inflation remaining sticky, interest rates remain high and the pace of cuts is likely to
be slow. This has manifested in slow order intake and reduced order backlog levels across companies.
We remain cautious on the sector led by slow capex, which is likely to see weak order inflows over the next 2-3 quarters
and thereby low revenue visibility over the next 2-3 years. Simultaneously, the sluggish pace of investments has led to
increasing competitive intensity across segments and pressure on margins. In turn, this reduces visibility on sustainable
earnings growth. We prefer stocks like Havells and Carborundum Universal which offer relatively higher earnings growth
over the next 2-3 years on the back of robust domestic demand, and capacity expansion and higher value add
respectively.
Valuation table
FY14E
Companies

Price

Mcap

EPS

Earnings growth

P/E

EV/EBITDA

P/BV

RoE

RoCE

(Rs)

(Rs m)

(Rs/share)

(%)

(x)

(x)

(x)

(%)

(%)

1,236

98,860

119.6

7.9

10.3

4.6

1.4

14.4

8.4

Engineers India

244

82,094

16.6

(0.2)

14.7

10.0

3.3

24.0

21.5

Havells India

649

80,954

40.8

23.5

15.9

17.4

5.0

35.8

30.8

Thermax

559

66,593

29.7

4.8

18.8

10.8

3.3

18.0

16.7

Voltas

122

40,418

8.9

14.7

13.8

9.3

2.2

16.5

17.2

AIA Engineering

367

34,639

24.0

16.9

15.3

9.1

2.2

15.3

20.3

Carborundum Universal
Source: IDFC Securities Research

157

29,333

12.0

18.1

13.1

8.1

2.3

19.1

18.4

Bharat Electronics

Bhoomika Nair
bhoomika.nair@idfc.com
91-22-6622 2561

For Private Circulation only.

Important disclosures appear at the back of this report
SEBI Registration Nos.: INB23 12914 37, INF23 12914 37, INB01 12914 33, INF01 12914 33.

SECTOR UPDATE

INSTITUTIONAL SECURITIES

Order intake

The yoy increase in order intake appears sharp, largely led by a low base effect. Absolute order intake
remains weak as there is no significant pick up from 4QFY12 levels.
Order Booking

% chg yoy

1,000

100%

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

2Q09

-50%
1Q09

4Q08

-20%

3Q08

200

2Q08

10%

1Q08

400

4Q07

40%

3Q07

600

2Q07

70%

1Q07

800

Source: Companies, IDFC Securities Research

Order backlog

Led by the sluggish inflows, order backlog remains weak with no growth for the 2nd consecutive quarter.

Order Backlog (Rs bn - LHS)

% chg yoy (RHS)

5,000

60%

4,000

45%

3,000

30%

2,000

15%

1,000

0%

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

4Q07

3Q07

2Q07

-15%
1Q07

Source: Companies, IDFC Securities Research

2 | OCTOBER 2012

IDFC SECURITIES

New project announcements overall

New project announcements for the quarter fell sharply to an 8-year low with a 75% yoy decline to
Rs574bn. This implies weak ordering activity for companies over the next few quarters.
New announcements (Rs bn)

yoy growth

8,800

225%

6,600

150%

4,400

75%

2,200

0%

Mar-12

Sep-12

Sep-11

Mar-11

Sep-10

Mar-10

Sep-09

Mar-09

Sep-08

Mar-08

Mar-07

Sep-07

Sep-06

Sep-05

Sep-12

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Sep-06

Sep-05

Sep-04

Sep-03

Sep-02

Sep-01

Sep-00

Sep-99

Mar-06

-75%

Source: CMIE, IDFC Securities Research

New project announcements break-up

New projects by government sector that had seen improvement in the last quarter fell sharply in 2Q13.
Share of manufacturing increased as projects from power fell sharply. The increase in manufacturing was
led by more announcements of projects in the refining segment.
Private (Rs bn)

Construction
& real estate,
11.3%

Government (Rs bn)

6,800

Irrigation, 0.0%

5,100

3,400

Services
(other than
financial),
25.5%

1,700

Manufacturing,
48.1%

Sep-12

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Sep-06

Sep-05

Sep-04

Sep-03

Sep-02

Sep-01

Sep-00

Sep-99

Electricity,
14.1%

Mining, 1.0%

Source: CMIE, IDFC Securities Research

Projects under implementation stalled

Projects under implementation but stalled touched an all time high at Rs7.8tn (+4% qoq), indicating that
execution issues persist.
Implementation - stalled (Rs bn)
8,800
6,600
4,400
2,200

Sep-12

Mar-12

Sep-11

Mar-11

Sep-10

Mar-10

Sep-09

Mar-09

Sep-08

Mar-08

Sep-07

Mar-07

Sep-06

Mar-06

Sep-05

Mar-05

Sep-04

Mar-04

Sep-03

Mar-03

Sep-02

Mar-02

Sep-01

Mar-01

Sep-00

Mar-00

Sep-99

Mar-99

Source: CMIE, IDFC Securities Research

3 | OCTOBER 2012

IDFC SECURITIES

Projects under implementation

After registering 20%+ growth since 2005, growth in projects under implementation has slumped to sub
10% levels over the past two quarters led by fewer new projects over the past two years
Under implementation (Rs bn - LHS)

% yoy growth (RHS)

Sep-12

Mar-12

Sep-11

Mar-11

Sep-10

Mar-10

Sep-09

Mar-09

Sep-08

Mar-08

Sep-07

Mar-07

Sep-06

Sep-05

Sep-04

Sep-01

Sep-00

Sep-99

Mar-06

Mar-05

Mar-04

Sep-03

25,000

Mar-03

Sep-02

50,000

Mar-02

Mar-01

75,000

Mar-00

Mar-99

100,000

Source: CMIE, IDFC Securities Research

Sectoral trends suggest weakness across key investment segments

Manufacturing - Under implementation % yoy growth

Electricity - Under implementation % yoy growth

80%

60%

60%
30%

40%
20%

0%

0%
-20%

Cement - Under implementation % yoy growth

Sep-12

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Sep-06

Sep-05

Sep-04

Metal - Under implementation % yoy growth

Sep-12

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Sep-06

Sep-05

Sep-04

Sep-03

Sep-01

Sep-12

Sep-11

Sep-10

-30%

Sep-09

-50%
Sep-08

0%

Sep-07

0%

Sep-06

30%

Sep-05

50%

Sep-04

60%

Sep-03

100%

Sep-02

90%

Sep-02

Petroleum products - Under implementation % yoy growth

150%

Sep-01

Sep-03

Sep-02

Sep-01

Sep-12

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Sep-06

Sep-05

Sep-04

Sep-03

Sep-02

Sep-01

-30%

Mining - Under implementation % yoy growth

225%

90%

150%

60%
30%

75%

0%

0%
-30%

Jun-12

Jun-11

Jun-10

Jun-09

Jun-08

Jun-07

Jun-06

Jun-05

Jun-04

Jun-03

Jun-02

-60%
Jun-01

Sep-12

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Sep-06

Sep-05

Sep-04

Sep-03

Sep-02

Sep-01

-75%

Source: CMIE, IDFC Securities Research

4 | OCTOBER 2012

IDFC SECURITIES

Macro trends

Macro indicators remain weak; July-12 was the 5th consecutive month of decline for the capital goods
segment. HSBC Mfg. PMI has slumped in the past three months to 52.8 vs 55 in Jun-12

Capital Goods - 3mma (% yoy)

IIP - 3mma (% yoy)

60

24
18

40

12

20
6

Aug-12

Aug-11

Aug-10

Aug-09

Aug-08

Aug-07

Aug-06

Aug-05

Aug-04

Aug-03

Aug-02

Aug-01

Aug-00

Aug-99

Aug-98

Aug-97

Aug-96

Aug-95

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Sep-06

Sep-05

Sep-04

Sep-03

Sep-02

Sep-01

Sep-00

Sep-99

Sep-98

Sep-97

Sep-96

Sep-95

Sep-94

Aug-94

-20

-6

Gross fixed capital formation (% yoy growth)

Infrastructure index - 3mma (% yoy)

25%

12%

20%

9%

15%
10%

6%

5%

3%
0%

0%

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

Dec-08

Jun-08

Dec-07

Jun-07

Dec-06

Jun-06

Dec-05

Jun-05

Aug-12

Feb-12

Aug-11

Feb-11

Aug-10

Feb-10

Aug-09

Feb-09

Aug-08

Feb-08

Aug-07

Feb-07

Aug-06

Feb-06

Aug-05

-5%

Source: MOSPI, IDFC Securities Research

Interest rate trend SBI PL

The RBI has begun easing rates, but banks have not passed the benefit on to corporates. As inflation
remains sticky, we expect the pace of cuts to be slow
% chg yoy

SBI Prime Rate (%)

12%

16.0

9%

14.0
6%

12.0

3%

10.0

0%

Sep-12

Mar-12

Sep-11

Mar-11

Sep-10

Mar-10

Sep-09

Mar-09

Sep-08

Mar-08

Sep-07

Mar-07

Sep-06

Mar-06

Oct-01
Apr-02
Oct-02
Apr-03
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12

Sep-05

-3%

8.0

Source: Bloomberg, IDFC Securities Research

5 | OCTOBER 2012

IDFC SECURITIES

Lead indicators
zLead indicators continue to remain weak. Overall growth in auto volumes turned negative for the 1st time

since 2009. Similarly, led by sluggish economic activity and ban on iron ore mining, steel production and
Indian railway volumes fell sharply over the past two months
CRB Index
Cement despatches (yoy growth)

500

45%
30%

375

15%

250
0%

125

-15%

(%)
Steel production (yoy growth)

Jul-12

Jul-11

Jul-10

Jul-09

Jul-08

Jul-07

Jul-06

Jul-05

Jul-04

Jul-03

Jul-02

Sep-12

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Sep-06

Sep-05

Sep-04

Sep-03

Sep-02

Sep-01

Jul-01

-30%

Actual coal supply vs requirement

100%

20%
15%

90%

10%
5%

80%

Jul-12

May-12

Apr-12
Aug-12

Aug-12

Dec-11

Aug-11

Apr-11

Dec-10

Aug-10

Apr-10

Dec-09

Aug-09

Apr-09

Dec-08

Diesel product - yoy growth

May-12

yoy growth (% - RHS)

Mar-12

Jan-12

Nov-11

Sep-11

Jul-11

May-11

Mar-11

Apr-08

Aug-08

Aug-07

Aug-12

Apr-12

Dec-11

Aug-11

Apr-11

Dec-10

Aug-10

Apr-10

Dec-09

-10%

Apr-09

-20%
Aug-09

0%

Dec-08

0%

Apr-08

10%

Aug-08

20%

Dec-07

20%

Aug-07

40%

Apr-07

30%

Dec-06

60%

Aug-06

40%

Dec-07

Petrol product - yoy growth

Auto volume (yoy growth)

80%

Indian Railway volumes (m tons - LHS)

Jan-11

70%

Aug-12

Jun-12

Apr-12

Feb-12

Dec-11

Oct-11

Aug-11

Jun-11

Apr-11

Feb-11

Dec-10

Oct-10

Aug-10

-5%

Nov-10

0%

All india - major port volume (yoy growth)

15%

100

16%

80

12%

60

8%

40

4%

-5%

20

0%

-10%

-4%

-15%

10%
5%

Feb-12

Nov-11

Aug-11

May-11

Feb-11

Nov-10

Aug-10

May-10

Feb-10

Nov-09

Aug-09

Aug-12

Apr-12

Jun-12

Feb-12

Dec-11

Oct-11

Aug-11

Apr-11

Jun-11

Feb-11

Oct-10

Dec-10

Jun-10

Aug-10

Apr-10

Feb-10

Oct-09

Dec-09

Aug-09

0%

Source: Industry sources, IDFC Securities Research

6 | OCTOBER 2012

IDFC SECURITIES

Analyst

Sector/Industry/Coverage

E-mail

Shirish Rane
Nikhil Vora
Prakash Joshi
Nitin Agarwal
Hitesh Shah, CFA
Bhoomika Nair
Pramod Kumar
Ashish Shah
Chinmaya Garg
Probal Sen
Swati Nangalia
Abhishek Gupta
Saumil Mehta
Harit Kapoor
Vineet Chandak
Nikhil Salvi
Dharmesh R Bhatt, CMT
Dharmendra Sahu

Co-Head of Research; Construction, Power, Cement

Co-Head of Research; Strategy, FMCG, Media, Retail, Education, Mid-caps
Oil & Gas, Metals, Mining
Pharmaceuticals, Real Estate, Agri-inputs
IT Services & Telecom
Logistics, Engineering
Automobiles, Auto ancillaries
Construction, Power
Financials
Oil & Gas
Media, Alcoholic beverages, Education, Exchanges, Mid-caps
Telecom, IT services
Metals, Mining
FMCG, Retail, Paints, Mid-caps
Real Estate, Pharmaceuticals, Agri-inputs
Strategy, Mid-caps
Technical Analyst
Database Analyst

shirish.rane@idfc.com
nikhil.vora@idfc.com
prakash.joshi@idfc.com
nitin.agarwal@idfc.com
hitesh.shah@idfc.com
bhoomika.nair@idfc.com
pramod.kumar@idfc.com
ashish.shah@idfc.com
chinmaya.garg@idfc.com
probal.sen@idfc.com
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nikhil.salvi@idfc.com
dharmesh.bhatt@idfc.com
dharmendra.sahu@idfc.com

Tel.+91-22-6622 2600

Equity Sales/Dealing

Designation

E-mail

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Paresh Shah
Vishal Purohit
Rajesh Makharia
Kalpesh Parekh
Varun Saboo
Dipesh Shah
Mukesh Chaturvedi
Viren Sompura
Rajashekhar Hiremath

Group CEO
MD, Dealing
Head of Sales
Director, Sales
Director, Sales
AVP, Sales
Director, Derivatives
SVP, Sales trading
SVP, Sales trading
VP, Sales trading

tapasije.mishra@idfc.com
paresh.shah@idfc.com
vishal.purohit@idfc.com
rajesh.makharia@idfc.com
kalpesh.parekh@idfc.com
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E-mail

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Director

sanjay.panicker@idfc.com

91-22-662 22575
91-22-662 22567
91-22-662 22564
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:
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More than 5% to Index

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7 | OCTOBER 2012

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| OCTOBER
2012

IDFC SECURITIES