ANCHOR REPORT

India capital goods
EQUITY RESEARCH

Assessing earnings risk

October 12, 2011 Research analysts  India Capital Goods Amar Kedia - NFASL amar.kedia@nomura.com +91 22 4037 4182 Indrajit Yadav - NSFSPL indrajit.yadav@nomura.com +91 22 4037 4992

Looking beyond the clouds: Assessing the sector amid global/domestic uncertainty
The investment cycle is slowing owing to structural and cyclical stress: policy logjams, interest rates, commodity prices. Things could get worse before they improve, and we have cut numbers. Looking beyond the near-term pain, we pick companies that have strong business models and the most attractive risk-reward positioning. CRG, VOLT and TMX are the top BUYs in our coverage. Critically, these companies share a history of experienced management. BHEL (NEUTRAL) remains at risk, despite now fair valuation. We keep our REDUCE call on ABB India. Key analysis in this anchor report includes:

• Study of India’s capex cycle since the 1990s. • DuPont analysis-based forensics for individual companies. • What is consensus pricing in? • What do valuations imply?

See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non-US affiliates are not registered or qualified as research analysts with FINRA in the US.

India capital goods
ELECTRICAL EQUIPMENT

EQUITY RESEARCH

ANCHOR REPORT: Assessing earnings risk  

October 12, 2011

Looking beyond the clouds: Assessing the sector amid global / domestic uncertainty
Investment cycle slowing due to mix of structural and cyclical woes India’s investment cycle has suddenly and substantially slowed on the back of several macro headwinds such as policy logjams, and rising interest rates and commodity prices. While the policy logjams on infrastructure-related capex and even on some large-ticket industrial projects are structural issues that need to be addressed by the Government, interest rates and commodity prices are worries that emerge as part of economic cycles. India’s infrastructure need and opportunity is undeniable, but things could get worse before getting better Our economists expect inflation to come down to 6.8% by March 2012, and hence the RBI taking a pause in the rate hikes cycle. Coupled with the fact that India is chronically underinvested in infrastructure, we maintain our long-term positive outlook on the sector. However, a nervous global market implies a worsening of the situation before it turns for the better. Further, internal issues such as the slow pace of reforms and fuel shortages will also continue to hurt sector growth over the medium term, in our view. Firms that could emerge stronger from impending shocks As we maintain a negative view on the possibility of a near-term fix to the internal structural problems, we would avoid stocks such as BHEL, where we see greater risk of a continued slowdown. While we expect the rest of our stocks to likely escape the current turmoil in the investment cycle from the policy logjams, at least partially, the impact from a worsening global macro environment is difficult to predict. We thus assess potential earnings risk for these stocks, and highlight those with significant risk already priced in and/or those better placed to withstand the cyclical shocks. We provide read-across by looking at similar historical data at Bharat Electronics, BEML, AIA Engineering, Carborundum and Blue Star (all not rated). Our picks: CRG, VOLT and TMX Based on an analysis of the above fundamentals, we believe CRG and VOLT (both still BUY) and TMX (upgraded to BUY) have already priced in significant earnings risk despite their compelling businesses. We see continued near-term downside for ABB (still REDUCE), BHEL (NEUTRAL from Reduce) and KKC (still NEUTRAL) from current levels, though we think KKC would bounce back from any correction from current levels.
Fig. 1: Stocks for action
Company Crompton Greaves Thermax Voltas ABB India Bloomberg Ticker CRG IN TMX IN VOLT IN ABB IN Nomura Rating BUY BUY↑ BUY REDUCE Stock Price 149 418 105 666 Target Price 240 500↓ 150↓ 525↓ Upside/ Downside (%) 61% 20% 43% -21%

Anchor themes The investment cycle in India has been disappointing, on various external and internal issues. While we remain constructive from a long-term perspective, worsening macro conditions could drive further risks before things get better. In this context, we identify companies that are best placed to handle the situation. Nomura vs consensus We have an out-of-consensus Buy call on CRG with a TP that is 25% higher than mean.
Research analysts India Capital Goods Amar Kedia - NFASL amar.kedia@nomura.com +91 22 4037 4182 Indrajit Yadav - NSFSPL indrajit.yadav@nomura.com +91 22 4037 4992

Prices as of 7th October. Source: Nomura Estimates

See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.

Rating: See report end for details of Nomura’s rating system.

Nomura | India capital goods

October 12, 2011

Contents
3
 

Executive Summary Sector valuation summary Scenario analysis: What if the US and Europe slip back into recession? Bharat Heavy Electricals Crompton Greaves Cummins India Voltas Thermax ABB India Bharat Electronics (BHE IN, Not Rated) BEML (BEML IN, Not rated) AIA Engineering (AIAE IN, Not rated) Carborundum Universal (CU IN, Not rated) Blue Star (BLSTR IN, Not rated) Appendix A-1

9
 

11
 

13
 

21
 

29
 

36
 

44
 

52
 

59
 

63
 

67
 

71
 

75
 

81
 

2

Nomura | India capital goods

October 12, 2011

Executive Summary
India is currently witnessing a mix of structural and cyclical pressures in the capex cycle
We note that FY04 to FY08 witnessed an unparalleled capex boom in India fuelled by easing policies, fund availability and a continued demand/supply mismatch, among others. On the back of this, we estimated India’s infrastructure investment opportunity over FY11-15F to be about US$600bn in our Anchor report titled, Different strokes, dated 12 August, 2010. However, sentiments have been dented in general over the past 12 months. While a slowdown in the investment cycle is not an aberration per se for any economy, factors driving the slowdown are important to analyse. For the India infrastructure sector, we see a mix of structural and cyclical factors plaguing near- to medium-term visibility -- first, the aftermath of Lehman bankruptcy that continues to haunt the world macro environment, and then the deteriorating pace of policy initiatives in the infrastructure sector by the existing policy makers. Structural constraints – mostly related to policy issues We highlighted structural concerns facing the sector in our note Structural bottlenecks ahead, dated 22 April, 2011. These primarily relate to the availability of resources such as land, fuel and funding. Additionally, there could be constraints in the form of unfavourable Government policies such as environmental clearances and uncertainty over the tax regime, among others. Falling competitiveness of the industry could be another driver of a capex slowdown for the respective sector. A slowdown induced by such reasons is a greater reason of concern for us than the typical macro cycle-induced slowdown. We also quote excerpts from our recent report on the infrastructure sector titled, Valuation factors in deterioration in fundamentals, dated 29 September, 2011. Hurdles in environmental clearances and land acquisitions have slowed investments in infrastructure, impacting most sectors. For instance, lack of coal availability due to environmental issues and transportation infrastructure bottlenecks, and state electricity board (SEB) losses have taken the sheen out of the power generation segment. Industrial capex has been muted since FY09, and analyst estimates suggest no material pick up in the near term. Cyclical pressures – primarily a function of overcapacity, high commodity prices and rising interest rates Apart from the policy logjam, the macroeconomic environment, too, hasn't been supportive of the capex cycle. India’s current inflation rate at 10% is close to the peak witnessed over the past 15+ years. To counter inflation and inflationary expectations, the Indian central bank (RBI) has responded with repeated monetary tightening over the past several quarters. Specifically, the RBI has taken 12 repo rate hikes, and the current rate, at 8.25%, is 75bps lower than what prevailed just before the post-Lehman crisis period. Similarly, commodity prices are significantly above trend currently (though still below 2008 levels) and pose a significant threat to margins for several capital goods companies. Our view of a typical business cycle is as follows – The cyclical upswing in demand is typically followed by a capacity build-up by suppliers in anticipation of continued demand pull. However, most often such capacity addition comes with a lag and by then demand has typically already slowed down. At times, existing suppliers benefit from low existing capacity in the system and thus make extraordinary profits – such instances excite more vendors and lead to overcapacity. Some of the notable examples of such behaviour are in the Transmission & Distribution equipment segment as well as in the boiler and turbine segment currently. However, we believe that this overcapacity is only a temporary phenomenon, in most cases, as a revival of demand in general leads to an automatic match-up with capacity. The time

3

2: WPI inflation peaking out 13. The impact from such a scenario could be worse than our base case estimates and outlook for the sector.0 Fig. and visibility of improvement could be a key determinant of timing the entry into a particular sector. Fig. 3: Commodity price Index (CRY Index) 500 450 9. However. Nomura Global Economics Apr-13 Source: Bloomberg Fig.0 300 250 2. the team doesn't expect any further tightening by the RBI. May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 4 3 Jan-95 Oct-95 Aug-96 May-97 Mar-98 Dec-98 Oct-99 Jul-00 May-01 Feb-02 Dec-02 Sep-03 Jul-04 May-05 Feb-06 Dec-06 Sep-07 Jul-08 May-09 Feb-10 Dec-10 Sep-11 -1. we reiterate our thesis on India’s large infrastructure investment opportunity. nevertheless. 4: Repo rate (%) 10 9 8 Fig. primarily driven by the base effect. but what if we revert to the pre-capex boom period? Going forward. 2011 frame within which such demand-supply balance is achieved is arguable. though timelines might shift a bit depending on the severity of the slowdown and the continued impasse in domestic policy making.5 200 150 Apr-95 Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Source: CEIC. the extent to which the global scenario could worsen is difficult to predict. 5: Short-term interest rate (%) 15 3M 6M 12 12M 9 7 6 5 4 Apr-01 Source: RBI 6 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Source: Bloomberg India’s infrastructure opportunity is unquestionable.Nomura | India capital goods October 12. A global slowdown will also inevitably lead to a softening of commodity prices from these levels and should be positive for companies in our sector.5 400 350 6. Accordingly. our economics team expects inflation to come down to 6.0 100 . It could also mean continued deferral on capex by companies in general. a cyclical slowdown is a normal course of correction so as to protect the economy from overheating and is often driven by a hawkish Central Bank policy stance – it is in this sense that it is cyclical. At the same time.8% by March 2012. To us.

we assess earnings risk for companies we cover in the capital goods sector to try to determine those best placed to withstand the current slowdown. at best. Focusing on the complete investment cycle from late ‘90s We believe that any analysis of the impact of cyclicality on the Indian capital goods sector is meaningless unless one takes into account the full cycle of data from previous lows. in our view. 2011 5 . metals on RHS) 4.Nomura | India capital goods October 12.800 900 0 1995 1996 1997 BSE500 Oil & gas Auto & Auto Parts Power Infra Telecom Cement Metals 7. if any. Nomura research While we do not attempt to predict what stage of the cycle these companies are currently in and how long the adversities could continue. 2011 and this could materially impact the financial performance of several companies in the sector. Even a comparison with the post-Lehman crisis period is unfair. 6: Investment cycle took off in a big way only around FY04 Corporate Capex Index (indexed to 1995. It is thus necessary. we have also segregated companies that we believe could be suffering from internal structural issues such as a policy logjam.000 4. Fig.600 2.000 3. that we take into account data points from the previous cyclical lows to see what happens if capex – which took off in FY04-05 – all of a sudden stands still for the near term. as highlighted earlier. Accordingly. we do attempt to analyse the impact from such adversities.500 3. since that was a period that only impacted credit availability and was not necessarily a cyclical pause in the investment cycle. We note that the Street (including ourselves) often compares companies’ historical financials and valuation ratios for a period of the past 5-6 years with the current dataset.000 6. in our view. However. We also attempt to see which stocks are best positioned to withstand the pressure from internal and external shocks. In this context.000 2.700 1.000 5. which was in the late 1990s. We would recommend avoiding stocks that are plagued by such structural issues even if their valuations appear attractive. we believe such a comparison would provide a positively biased view.000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Ace Equity.000 1. given that India’s investment story started in FY04-05.

Fig. we analyse how well are the companies placed to sustain risks from an impending slowdown be it internal or external factors induced. Fig. what it could be over and above this. and Asset turnover trends for these companies. We further break-up asset turnover analysis into working capital management and sales trends. ROE is primarily a function of operating margin. Below table summarizes key trend observed by us for each of the companies over the available financial history of 12 years. We start with comparing the historical ROE/ROCE for a particular company and then try and find out reasons why the ROE/ROCE has expanded or collapsed over the time period for that particular company. since for companies in our coverage tax rates have not been a big driver of ROE and further it is not of a predictable nature. We then compared this with the earnings risk that we see for these companies based on the business strength gauged from the above analysis. Of these. Based on the above framework. The below chart summarizes our findings of earnings risk that is already anticipated by consensus vs.Nomura | India capital goods October 12. asset turnover and financial leverage. 2011 Our preferred picks: CRG. since most of the companies in the capital goods space have had very little financial leverage. a) b) c) d) Our key focus thus is on profit margin. 7: Typical DuPont equation Source: Nomura research As depicted in the equation above. 6 . over the analyzed timeframe. we do not focus on tax burden. to find out whether the asset turnover ratios benefit merely from sales growth or is there a genuine effort by the management to keep working capital in check. We also exclude the impact of financial leverage from our consideration. tax burden. 8: Identifying companies that have efficiently managed their balance sheet across the cycle Shaded area highlights companies that have excelled as per the respective criteria ABB ROE ROCE Asset Turnover Asset Turnover Ex-Cash Working Capital Cycle Source: Nomura research AIAE ↓ ↓ ↓ ↓ ↔ BEML ↓ ↓ ↓ ↓ ↑ BHE ↓ ↓ ↓ ↓ ↑ BHEL ↑ ↑ ↓ ↔ ↓ BLSTR ↓ ↓ ↓ ↓ ↑ CRG ↑ ↑ ↑ ↑ ↓ CU ↔ ↔ ↔ ↔ ↓ KKC ↑ ↑ ↑ ↑ ↓ TMX ↑ ↑ ↑ ↑ ↓ VOLT ↑ ↑ ↔ ↔ ↓ ↓ ↓ ↓ ↓ ↑ Our next step entailed a comparison of what the consensus estimates are building in for the stocks we cover now versus what they were building in at the peak of the cycle. TMX and VOLT Our methodology for the purpose of this analysis evolves from the DuPont analysis framework.

7 1. axis divided on the basis of observed median for the analysed companies Source: Bloomberg. are subject to structural slowdown risks as discussed earlier – notably BHEL.4 0. We have also segregated stocks that.3 1.0 BHEL 0. Nomura research 7 . in our view.4 0.6 Shaded area highlights companies that are trading below 12 year mean levels across both the parameters.3 1 yr fwd P/B KKC 1.7 ABB CRG VOLT 1 yr fwd P/E TMX 0. 9: While consensus estimates are down sharply. 2011 Fig.0 1. The figures below summarize our findings based on these parameters. 10: Stocks trading below 12-year mean levels are few 1 year forward multiple over 12 year mean multiple (x) 1. • relatively low earnings risk here onwards. Based on our analysis. axis divided on the basis of observed median for the analysed companies Source: Bloomberg. Nomura estimates Cognizant of the current expectations of earnings risk and business strength (or structural constraints that it is facing as the case may be). we find a few stocks that exhibit traits that we were looking for to qualify them as investible ideas based on: • valuations already factoring in significant near-term earnings risk. and • balance sheet strength and/or superior earnings quality. we see further risk for most companies % 30% 25% Risk of Further Correction KKC ABB 20% 15% 10% 5% 0% 0% 5% 10% 15% Consensus Earnings Cut Back (%) BHEL TMX VOLT CRG 20% 25% 30% 35% Shaded area highlights companies that are preferred based on the above criteria. Fig.Nomura | India capital goods October 12. we try to interpret how much of this risk is already priced into the stocks and thus identify opportunities.

but would keep it in the radar in case of correction. We would highlight KKC as a stock that may be prone to near-term downside due to expensive valuation or earnings risk not yet factored in by the Street. while light shades are preferred upon correction ABB Relative valuation Risk to earnings Balance sheet strength/ Earnings quality Concerns: Structural (S) / Cyclical (C) Our preference Source: Nomura research BHEL C x √ S x CRG √ √ √ C √ KKC TMX √ √ C √ √ C - VOLT √ √ √ C √ Accordingly. we highlight CRG. 11: Identifying companies that are largely pricing in earnings risk Dark shades highlight most preferred companies. we see continued downside risks for BHEL and ABB on account of multiple factors such as structural concerns and/or expensive valuation/earnings risk/relatively inefficient balance sheet management.Nomura | India capital goods October 12. Apart from these. TMX and VOLT as stocks that are currently pricing in significant earnings risk while being strong businesses at the same time. we single out KKC for exhibiting excellent efforts in containing the impact of business cyclicality by way of efficient working capital management and thus sustainably high ROE/ROCE. 8 . On the other hand. and these would be our preferred investment ideas. 2011 Fig.

1 30.2 8.2 5.9) 21.2) (23.5 3.9 3.2) (37.6 21.6 EPS CAGR FY09-11 12% -49% 18% 29% 15% 15% 12% 17% 14% -12% 2% -9% 3% 28% -5% 9% 17% FY11-13F 15% 81% 11% 5% 1% 20% 1% 9% 18% 29% 13% 13% 15% 12% 13% 13% 13% FY11 33.3 2.2) (14.8 22.7) (5.4 16.2 12.1) NEUTRAL REDUCE NEUTRAL BUY BUY BUY BUY Not Rated Not Rated Not Rated Not Rated Not Rated Not Rated Not Rated Source: Bloomberg.7 13. while Siemens India FY11/12/13 is average of Sep-10/11/12/13 and Sep-11/12/13/14 estimates respectively.4) (31.2 16.3) (14.1) (20.1 12.4 29.8 0.2 2.1 6. # Averages for P/E.3 30.4) (55.7 5.0 3.4 23.5 2.4) (25.6) (28.4) (18.2 30.4 9.4 27.9 22.2) (38.0 22.1 12.7 7.4 FY13F 26.9 17.6 12.9 101.8 9.1 12.0) (17.0) (1.1 0.2 25.0) (3.0 24.Nomura | India capital goods October 12.9 2.0) (4. Nomura estimates 9 .4 9.3 2.7 12.4 23.4) (22.9 14.5) (28.6) (56.8 1.8 12.1 2.1 22.6 11.5 21.1) (6.1 15.1) (34.4 3.2 3.6 4.1 32.3) (42.4 28.1) (13.2 FY12F 12. 12: India Capital Goods sector valuation comps P/E (x) Price BHEL ABB India Cummins India Crompton Greaves Thermax Larsen & Toubro@ Voltas Covered companies' average Siemens India* Areva T&D India* AIA Engineering* BEML Ltd* Bharat Electronics* Carborundum Universal* Blue Star* Sector Average SENSEX Pricing as of October 7.7 ROE (%) FY12F 29.2) (5.9 19.0 10.4) (2.2) (5.4 2.7 15.0 FY13F 2.2) (40.6 5.9 21.1 3. 2011 * Bloomberg consensus estimates for non rated companies (see below exhibit for ratings).4 16.4 1.4 4.9 2.1) (5.6 19.2) (8.5 6.1 35.1 17.3) (21. ROE and EPS adjusted for subsidiary valuation and earnings Source: Bloomberg.2 2.5 14.4 2.0 (31.8) (25.1) (17.4 0.7) (16.4 2.1 8.4 19.9 7.3 12.7 24.8 2.8 18.0 25.9 5.9 (55.9 1.3 5.2 25.8) (22. ABB India and Areva T&D India FY11/12/13 correspond with CY10/11/12 estimates.9 13.1 Fig.1 21. 2011 # of Recommendations Buy 21 0 12 19 14 34 19 3 4 4 4 8 4 3 Sell 4 34 7 14 6 3 3 9 6 2 0 0 1 3 Hold 15 2 3 11 15 3 5 6 3 3 0 1 2 6 Stock price performance over 1m (8.7 26.1 12.6 14.7 17.0) (4.2) (59.9 2.2 45.7 29.9) (2.7 17.0) (17. EPS CAGR and ROE do not include ABB India given highly volatile trend.7 12.1 1.4 19.5 3.8) (7.5) (23.6 21.6) 2.5 10.9 6.6 FY12F 3.2) (20.2 19. 13: India Capital Goods sector performance and rating comparison Nomura Rating BHEL ABB India Cummins India Crompton Greaves Thermax Larsen & Toubro Voltas Siemens India Areva T&D India AIA Engineering BEML Ltd Bharat Electronics Carborundum Universal Blue Star Sector Average NIFTY SENSEX Note: pricing as of October 7.8 16.3) (16.1) (8.1 15.1) 12m (37.8 9.9 3.7 23.8 1.4) 3m (18.9 10.0 FY11 14.9 31.4) (16.6) (18.4) (19. Nomura estimates P/BV (x) FY13F 11.9 18.8 11.5) (19. 2011 Sector valuation summary Fig.6) (42.8 11.9 23.1) (48.393 105 837 219 311 468 1.8 (41.0) 26.6 6.6 325 666 406 149 418 1.7 2.2 3.6 1.519 148 222 33.6 12.7 11.6) 6m (26.1 31.6) (16. @ L&T P/E.9) (43.7 18.8 2.5) (6.0) (9.1 2.9 15.8 28.0 18.9) (0.6) (15.6 35.2) (22.1) (31.7 4.1 13.5 3.4) (12.3 FY11 3.

260 6.848 7.591 4.918 7.344 2.113 10.384 Difference -2% -5% 1% 8% -2% 2% -20% Nom ura 70.887 -5% -6% -3% 12% -18% 4% -17% 75.222 FY13F 74.220 43.396 5.230 4.112 6.Nomura | India capital goods October 12.986 3.392 3. 14: Earnings estimates: Nomura vs consensus (Rs mn) FY12F Nom ura Consensus BHEL ABB India Cummins India Crompton Greaves Thermax Larsen & Toubro@ Voltas 65.637 3.230 4.194 3.314 60. 2011 Fig.725 12.884 7.830 4.964 FY14F 73.127 44. Nomura estimates 10 .671 62.041 3.604 7.302 3.070 4.369 10.342 9.912 52.854 8.578 4.345 6.496 4.696 66.486 3% -5% 4% 19% -12% 3% -12% Consensus Difference Nom ura Consensus Difference Source: Bloomberg.184 8.603 5.893 3.788 50.

But. they have run an extreme-case scenario analysis to provide some perspective. These tailwinds include a likely further decline in commodity prices and the ample room Asia has to ease monetary and fiscal policies – more so than any other region. multiplier effects of weakening exports on domestic capex and jobs. but the fragile state of the advanced economies leaves them vulnerable to unforeseen shocks or policy errors. less disturbing this time around are the two factors that there is less leverage in the financial system (less room for capital flight) and less chance of Asian trade finance drying up. However. In this scenario. 2011 Scenario analysis: What if the US and Europe slip back into recession? As the markets have been signaling that risks to our baseline forecasts are on the downside. This extreme scenario assumes: • US GDP averaging about -4% saar in 2H11 and Euro GDP averaging -6. • CRB commodity price index falls 40% between now and year-end. powerful tailwinds would develop. we find Hong Kong. our global economics team have considered a bear case economic scenario. In our bear case scenario. and stays at the lower level through 2012. notably financial decelerator effects. but starts rising back again through 2012 reaching current levels by end-2012. we would expect the Fed to resort to further quantitative easing. we would expect that. superior fundamentals and higher interest rates relative to other regions. as non-linear effects start to kick in. 9 August 2011. over time. The bear case scenario assumes: • The US and Euro area slip back into recession. we have no doubt that initially many economies in the region would be hit hard again in an echo of the global financial crisis. as in 2009. which once again would likely precipitate strong net capital inflows into Asia. allowing Asia to bounce back before other regions. • The CRB commodity price index falls 15% between now and year-end.5% before recovering to around 1% growth in 2012. most obviously triggered by a market meltdown. Singapore. see Global Weekly Economic Monitor. 12 August 2011. What if things get even worse than we can foresee? Although our global economics team does not see such a situation as plausible at the moment. as the world’s central banks have most likely learnt the need to provide ample USD liquidity through FX swap arrangements. If there is a market meltdown and recessions in the US and euro area. For details. and capital flight. 11 . Malaysia and Taiwan to be among the most vulnerable. with US GDP averaging -1% saar in 2H11 and Euro GDP averaging -3% before recovering to around 2% growth in 2012.Nomura | India capital goods October 12. and Global market turbulence: Implications for Asia. attracted by stronger growth.

0 5.2 9.7 2.7 6.4 3.3 6.8 2.4 7.1 Australia China Hong Kong India Indonesia Malaysia New Zealand Philippines Singapore South Korea Taiwan Thailand Vietnam Asia ex Japan. however.0 7. 2011 The table below summarises both the official bear case and the hypothetical extreme case scenarios.5 4.0 6.0 7.Nomura | India capital goods October 12.2 5.6 3. NZ The global bear case does not look bad for much of Asia and in fact is marginally better than the base case for China in 2012 because we would expect a Vshape rebound for the region thanks to the likely decline in commodity prices and the ample room Asia has to ease monetary and fiscal policies.5 3.3 2.5 7.3 2.4 7.5 5.5 4.9 7.9 -0.5 3.0 4.0 4.5 0.5 7.9 Bear case 1.5 5.6 Extreme case 3.5 9. Source: CEIC and Nomura Global Economics.4 Base case 4.8 1.6 6.5 6.7 6.1 3.4 7.0 5. Fig. In the extreme case.7 5.0 1.4 0.5 4.0 -0.1 5.0 4.5 8.4 -1.0 1.5 6.4 3.8 3.0 4.1 6.6 8. We would also expect the Fed to resort to further quantitative easing.3 5.5 4.0 1.7 4. Units: % y-o-y 12 .8 4.3 5.5 2. 15: Real GDP growth forecasts: baseline and downside scenarios 2011F Base case 2.0 4. even these strengths will be tested.9 8.6 3.6 4.5 1.6 2012F Bear case 3.1 5.9 7.2 5.8 4. which once again would likely precipitate strong net capital inflows into Asia.3 1.6 4.5 6. Aus.4 6.9 4.8 4.5 4.2 7.5 5.2 Extreme case 0.

We do not rule out BHEL reverting to preFY05 multiples.1 N/A N/A N/A 608. but reaching fair valuation  October 12.423 26.2 N/A 6. as we expect order deferrals to impact execution.4 2.449 466. macro and policy action We view continued earnings and/or order misses compared to Street estimates and defaults by developers or state utilities as negative triggers. This is largely built into our estimates now. as such.194 65.591 70. Key company data: See page 2 for company data and detailed price/index chart.3 N/A 6.NSFSPL indrajit.194 26.114 53.8 10.7 12.com +91 22 4037 4182 Indrajit Yadav .com +91 22 4037 4992 Revenue (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. important disclosures and the status of non-US analysts.32 20.227 463. we believe that.6 5.9 2.NS BHEL IN EQUITY RESEARCH No relief in sight.80 6. 2011 Rating Up from Reduce Target price Reduced from 346 Closing price October 7. BHEL stock split in 5:1 ratio effective 3 October.7 3.320 28. Tweaking estimates for further execution delays and minor relief in raw-material cost.3 6.7 2. and stock price factors in lack of potential orders Action: Upgrade to NEUTRAL rating While we remain extremely concerned about near-term order inflow for the sector and also foresee continued execution delays for BHEL.217 60.9 2.0 70.147 547. Catalysts: Orders.8 26. .NFASL amar.9 8.3 11.2 N/A N/A 26.88 24. Valuation: Trading at 11x FY13F EPS.3 2.8 65. downside from current levels is limited.580 553. but the possibility of improvement in order activity in 1218m suggests that such a severe correction would be brief.396 75. Nomura vs consensus Our FY12-13F EPS is lower than consensus by 2-5%.73 9. we expect actual power capacity to be constrained by limitations on land & fuel availability and environmental clearances.kedia@nomura. 31 Mar Currency (INR) FY11 Actual Old FY12F New Old FY13F New Old FY14F New Neutral INR 332 INR 325 +2. results. close to pre-FY05 boom Valuation is below BHEL’s mid-cycle trading range.2 3. EPS growth (%) Norm. Our view ties up with historical study: strongly positioned for upturn but sector woes plague visibility in the medium term FY11 margin levels are at the peak of the cycle and suggest downside risks.320 70. 2011 Potential upside Medium-term concerns remain.552 21.Bharat Heavy Electricals ELECTRICAL EQUIPMENT BHEL.3 64.2 7.396 30.423 64. We believe that there is an equal probability of improvement in the sector’s fortunes (most notably related to policy reforms on SEB health and land & fuel availability) post this visible horizon and that.5 29.591 28. Research analysts India Capital Goods Amar Kedia .5 net cash net cash net cash net cash net cash net cash Source: Nomura estimates. but is still higher than pre-utility capex boom levels. We are also concerned about margins due to rising competition. the stock is now extrapolating these concerns beyond the visible horizon.2% Anchor themes Even as demand for power is unlikely to slow.4 14. See Appendix A-1 for analyst certification.2 2. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) 397.yadav@nomura.9 N/A N/A 28.1 70. 2011. especially with the incoming competition and slowing growth. at current levels.999 75.64 21.2 33. while softening commodity prices and policy reforms are upside catalysts.84 8.9 23.

106 -13.7 9.8 2.2 12.7 34.6 3.214 -64.6 2.5 28.7 21.757 62.7 4.8   (%) Absolute (INR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (INR) 1M 3M 12M -8.267 -5.022 106.321 29.5 12.87 9.110 -34.62 8.0 11.44 24.3 11.0 31.2 2.980 70.0 1.2 19.9 5.431 129.600 106.2 18.080 99.1 33.3 18.114 -17.6 18.1 17.654 -8. 43.194 FY13F 547.6 1.6 28.8 -14.80 30.Nomura | Bharat Heavy Electricals October 12.8 10.1 10.512 74.288 90.8 6.5 18.704 75.591 -21.236 -38.0 33.58 17.8 1.909 74.632 -547 8.34 7.567 153.88 21.64 26.2 12.791 -56.1 3. 2011 Key data on Bharat Heavy Electricals Income statement (INRmn)  Year-end 31 Mar Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (INR) Norm EPS (INR) Fully diluted norm EPS (INR) Book value per share (INR) DPS (INR) Source: Nomura estimates Notes FY10 337.1 33.264 97.6 17.84 28.5 21.6 29.552 -7.194 -20.217 -349.358 -547 6.6 30.036 -32.9 34.2 18.418 80.396 0 75.5 33.019 18.9 20.5 17.034 FY11 397.3 6.788 106.7 6.548.715 107.8 10.337 -4.5 11.194 0 65.580 57.0 31.0 42.800 43.64 100.9 36.9 6.331 -67.4 Source: Thomson Reuters.1 38.4 6.4 17.3 17.29 26.3 5.1 17.955 -36.5 21.661 -22.5 17.396 -23.7 4.7 17.5 12.319 98.8 11.1 0.4 17.9 17.757 -335 8.264 -547 8.879 -73.26 28.034 73 43.9 15.2 12.7 20.8 17.6 12.412 65.88 82.5 31.55 3-mth avg daily turnover (USDmn) Major shareholders (%) President of India LIC 67.4 38.304 177.3 8.562 60.7 42.692 99.61 17.6 37.365 70.0 20.552 6.0 1.3 18.8 28. Nomura research  25.9 8.72 8.407 -7.227 -243.715 -547 7.8 34.842 65.840 75.228 -26.4 14.2 2.4 -3.03 5.2 7.894 -208.4 -19.213 44.273 65.64 26.091 198.3 26.9 18.2 2.84 28.4 21.80 141.0 2.358 80.396 Revenue growth rate has already slowed to sub 18% from high twenties as base effect catches up and on execution delays.591 FY14F 608.492 57.67 -3.887 48.5 Relative performance chart (one year) (INR) 550 500 450 400 350 300 M ay 11 Dec 10 J un 11 M ar 11 J ul 11 A ug 11 S ep 11 F e b 11 O c t 11 N ov 1 0 J an 11 A pr 11 Price Rel MSCI India 105 100 95 90 85 80 75 Source: Thomson Reuters.834 -22.94 30.2 13.5 8.552 FY12F 466.84 120.276 -26.9 6.8 16.999 -393.126 -31.7 6.7 15.9 3.632 114.3 29.3 5.4 34.884 -60.80 30.841 42.786 53.8 38.6 22.5 1.58 65.377 52.591 0 70.3 11.128 90.152 114.9 19.2 7. Nomura research   14 .7 -46.3 3.4 24.7 -27.1 12.4 37.7 24.56 21.7 15.9 29.676 53.7 -40.3 14.3 2.7 -16.580 -289.463 -7.3 10.888 215.3 539/309.9 23.6 10.4 35.

223 687.643 FY12F 91.9 1.246 103.3 128.422 0 4.5 117.434 1.596 201.213 -4.7 147.6 247.462 4.799 128.2 1.886 -17.322 42.552 -49.541 0 0 0 15.460 -10.000 293.979 387.53 182.450 0 0 0 469.231 -114.798 248.6 229. -13.355 32.363 92 15.4 132.328 FY14F 116.836 1.2 114.436 -275 0 3.901 0 206.490 0 4.213 0 FY13F 107.485 -1.631 0 0 0 570.8 net cash net cash net cash net cash net cash net cash net cash net cash net cash net cash 198.278 -15.4 1.574 91.636 369.202 116.668 -20.623 -17.460 0 0 0 37.901 -96.100 167.32 172.348 38.297 4.406 -7.202 0 328.7 243.756 5.629 107.182 -14.377 9.469 514.505 115.895 241.244 43.651 0 0 0 687.627 1.414 27.302 -94.995 -21.841 356 FY12F 97.Nomura | Bharat Heavy Electricals October 12.318 130.291 -13.091 25.599 97.537 -5.629 -89.337 -24.629 0 310.634 -16.634 421.841 -18.145 402.000 37.672 96.267 -22.42 164.895 342.236 39.205 429.231 0 365.343 0 0 0 634.012 -31.000 15.274 4.131 8.460 -21.318 1.538 570.8 207.348 798 39.6 119.421 1.822 -29.644 691.076 0 4.392 56.1 145.302 91.191 -17.9 238.193 42.202 -105.64 194.541 -20. 2011 Cashflow (INRmn)  Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt Source: Nomura estimates   FY10 62.654 -44.7 151.434 389.347 Notes Rising working capital pressure to hurt return ratios as cash cycle elongates.619 324.654 573.596 75.895 196.9 1.2 240.634 -16.392 58.519 634.3 229.947 4. 159.787 290.406 -23.242 753.000 32.0 149.623 292.407 -30.278 FY11 96.392 57.009 295.690 289.147 97.598 -20.895 290.029 107.630 35.541 -12.624 FY13F 107.546 109.979 406.750 -3.634 -16.979 392.377 0 Notes Net addition to cash is under pressure as rising working capital is straining operating cash flow.634 -21.850 624.432 0 4.417 1.887 0 FY14F 114.009 113.9 220.7 15 .629 0 0 0 753.970 246.598 Balance sheet (INRmn)  As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Nomura estimates FY10 97.003 407.321 -216 FY11 80.062 150.971 96.495 -14.888 92.406 0 0 0 32.302 0 273.174 469.124 47.272 310.593 0 -6.32 135.651 23.569 -23.887 15.2 150.392 51.901 96.0 213.282 0 4.505 347.895 154.

However. all of these factors are at substantial risk of reversal over the medium term.Nomura | Bharat Heavy Electricals October 12. in our view. as we discuss later. Nomura research FY11 Source: Company. 2011 How well is BHEL positioned for a turn in the cycle? Balance sheet and return efficiency Consistency of return ratios BHEL’s return ratios have risen significantly over the past eight years mainly due to rising EBITDA margins. in our view. 17: … and so has ROCE ROCE 35% 30% 25% 20% 15% 10% 5% 0% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. This is primarily due to unproductive use of cash in the balance sheet. FY11 16 . steady growth and a falling working-capital cycle. We see no clear trends from the receivable cycle. Nomura research Management of working capital and asset turnover Asset turnover ex cash has come back to late 1990s levels despite a falling workingcapital cycle. 16: BHEL: ROE has consistently been rising … ROE 40% 35% 30% 25% 20% 15% 10% 5% 0% Fig. We think that without a supportive working-capital cycle the asset turnover trend for the company would have been worse. including cash. Even the fall in the working-capital cycle appears to be due mainly to rising customer advances and is only partly alleviated by a fall in the inventory cycle. is already worse and is gradually declining. Fig. Asset turnover.

Nomura research Fig. could imply a reversal of the trend that we have been seeing since FY05.6 Asset turnover Fig. At the same time.70 0. Nomura research Trajectory of growth BHEL’s sales growth has ranged from 20-30% since FY05 when the utility capex boom started.00 0.Nomura | Bharat Heavy Electricals October 12. However. FY11 FY11 17 .85 0. 2011 Fig.95 0. 20: Fall in working-capital cycle driven mainly by rising customer advances.7 0.90 0. 19: …though asset turnover ex cash has been better.80 0. Nomura research Source: Company. margins started to improve. possibly due to operating leverage benefits. The dip in FY09 margins was mainly due to provisioning for staff cost hikes.7 0.8 0. our fundamental concerns about slowing growth for BHEL and margin pressure.05 1.9 0.8 0.75 0. both emanating from rising competition and slowing utility capex. even that is now under threat (x) 1.65 Asset turnover (ex cash) FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. also aided by better inventory Days of revenue 250 200 150 100 50 0 -50 Net working capital cycle FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. 18: Asset turnover has declined over the period despite a falling working-capital cycle… (x) 0.

Risk to margins Margin risk is clearly visible as. Nomura research FY11 Source: Company. BHEL margins were <15% compared to current levels of 20%. A slowdown in sales would also lead to reversal of benefits due to operating leverage.Nomura | Bharat Heavy Electricals October 12. Fundamentally. in our view. What are consensus estimates building in? Consensus EPS estimates for BHEL have been flat over the past 12 months and have yet to factor in any risk of execution delays. upside risks are also possible for BHEL from any slowdown in commodity prices. Nomura research Risks from adverse turn in the cycle Sales and margin trends suggest that the business is close to peak-cycle levels – in this case it co-relates with the utility capex cycle. we believe that BHEL’s existing order book should allow it to benefit for another 2 years or so. prior to the utility capex boom. as a significant share of its projects are on a fixed-price basis. Risks to sales We see an imminent risk of a sales slowdown for BHEL on account of slowing orders. 2011 Fig. 22: Rise in EBITDA margins is the key driver of improvement in return ratios % of revenues FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. and execution delays. in our view. 21: Strong sales growth aided in strong return ratios Fig. Nevertheless. rising competition. FY11 18 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% Sales growth (x) 25% 20% 15% 10% 5% 0% EBITDA margin .

Mar-11 19 . However. BHEL’s re-rating since FY05 has been due mainly to the utility capex pick-up story and BHEL’s monopoly status. we do not expect any re-rating at this time.Nomura | Bharat Heavy Electricals October 12. 23: Consensus estimates have yet to factor in execution risks (INR) 170 165 160 155 150 145 140 135 130 125 Consensus EPS FY12 Consensus EPS FY13 Nov-09 May-09 May-10 Nov-10 Oct-09 Apr-09 Aug-09 Sep-09 Apr-10 Aug-10 Sep-10 Dec-09 Oct-10 Dec-10 Jun-09 Jan-10 Jun-10 Feb-10 Source: Bloomberg What is the valuation factoring in? BHEL is currently trading below its 12-year mean on P/E and slightly below its 12-year P/BV mean. • Slower order flow will lead to slower sales growth. but in line with mean multiples pre-utility capex boom (-1 STDEV) BHEL 1 year forward P/E chart Mar-10 Fig.. i. 24: Stock trading below 12-yr P/E mean. This will also be impacted by rising competition and execution delays. Nomura estimates Source: Company. In the current context. Nomura estimates Impression: Strongly positioned on balance sheet. we note that it is still trading above its trading range during the pre-utility capex boom period.e. Fig. Bloomberg. 25: On P/BV. all of these favourable arguments are diminishing for BHEL and hence. which helped it increase margins and ROEs. stock is still close to 12-yr mean and well above pre-utility capex boom multiples BHEL 1 year forward P/B chart (x) 50 45 40 35 30 25 20 15 10 5 0 Mar-00 Mar-01 Mar-02 1 yr fwd P/E chart +1STDEV Mean -1STDEV (x) 12 10 8 6 4 2 0 1 yr fwd P/B chart Mean Jan-11 Jul-09 Jul-10 +1STDEV -1STDEV Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: Company. in our view. especially with the upcoming competition and slowing growth. Bloomberg. though downside risks on margins and working-capital cycle Our evaluation is based on – • FY11 margin levels being at the peak of the cycle and suggest downside risks. 2011 Fig. prior to FY05.

we build in further cuts in medium-term margin estimates. 2011 • While valuation is below the mid-cycle trading range. second-stage growth forecast until FY20). upgrade to NEUTRAL As we build in further execution delays and minor near-term relief from softening commodity prices. 20 . to factor in rising competition. beyond FY13. it is still much higher than preutility capex boom period trading range. as almost half of the order book is on fixed price contract.Nomura | Bharat Heavy Electricals October 12. Valuation methodology We continue to value BHEL using a discounted cashflow (DCF) methodology. However. thus pressurising margins. We would expect BHEL stock to revert to the multiples at which it used to trade pre FY05. our FY12 and FY13 estimates rise 2-3%. • Substantial decline in key commodity prices such as steel and copper. We believe that using 4% terminal growth is justified since rising competition and demand saturation will put a check on high growth rates. assuming a cost of equity of 12% and a terminal growth rate of 4% (explicit forecast period until FY17F. Together with the impact of these changes and rolling over to Sep-12. • Delays or cancellation in capacity by new domestic equipment manufacturers. Risks What could trigger upside in the stock? • A higher-than-expected share of private orders under the 12th and 13th Five-year Plans. What could trigger downside in the stock? • Worsening of fuel availability for new and/or already ordered projects could lead to delays in new and existing orders. and that would imply continued downside from current levels. in our view. • Rising competition could drive pricing even lower than our current estimates. we arrive at our new TP of INR332. Our 4% terminal growth assumption is also in line with the estimated ~4% revenue CAGR over FY15-17F.e. Tweaking estimates and TP.. i.

testify to its low-cost advantage.Crompton Greaves INDUSTRIALS CROM.302 10. We maintain our estimates and TP.9 12. Buy In a sector with growing competitive intensity.302 16.NS CRG IN .5 1. EPS growth (%) Norm.0 3. though worsening global macro causes near-term pains Impression: Significant macro risk already priced in.  In contrast. but we believe these are largely built into consensus estimates.3 7.06 31.302 16.NSFSPL indrajit.5 1.7 32. And although the timing of recovery in the India and international markets is uncertain.0 2. though structural constraints and rising competition suggest the need to be selective.578 12. we think the structural opportunity is attractive.0 1. followed by a march towards building sufficient power for the nation create significant opportunities.kedia@nomura. We also highlight that since this transformation.990 147. implying 61% upside potential from current levels.459 125.com +91 22 4037 4182 Indrajit Yadav . along with double-digit margins over the same period.5 3. .268 9.21 -15. CRG is now trading at some of the lowest multiples since FY05 even on significantly reduced earnings estimates.5 N/A 9.  Sales are cyclical but have also been impacted by a slow pick-up in domestic power orders.6 21.0 N/A N/A 21.6 9.yadav@nomura.5 24. stock factors in significant EPS risk While the stock is already trading below its 10-year mean multiples now.0 N/A N/A 23. 2011 Rating Remains Target price Remains Closing price October 7.7 2.com +91 22 4037 4992  FY11 margin levels are close to the peak of the cycle and suggest downside risks.3 net cash net cash net cash net cash See Appendix A-1 for analyst certification. we note that CRG has undergone significant transformation over the past 5-6 years (following acquisitions as well as rising market share and margins in domestic markets).6 N/A 7.1 2.1% Anchor themes Decades of under-investment. Key company data: See page 2 for company data and detailed price/index chart.268 14.9 10.1 5.051 110.NFASL amar. Buy.830 7.61 22.1 7.6x FY13F EPS.6 7.0 12. CRG’s 34% market share of PGCIL’s transformer orders over FY09-11.523 147. important disclosures and the status of non-US analysts.990 125.8 10.830 12.578 19.2 7.578 19. in our view. Research analysts India Capital Goods Amar Kedia . we believe players with low cost structures will benefit.1 N/A 5.9 5.8 3. EQUITY RESEARCH Fundamentals do not change due to adverse cycle  October 12.7 7. and mostly have changed to reflect post-1QFY12 results. which we believe consensus has yet to factor in.45 12.21 -15.61 22.0 2.7 9. 31 Mar Currency (INR) FY11 Actual Old FY12F New Old FY13F New Old FY14F New Revenue (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Source: Nomura estimates 100.302 10.578 12.5 N/A N/A 24. we believe this reflects a cyclical trough and is not company-specific. Our evaluation: Buy INR 240 INR 149 +61.459 110.523 9.830 12. consensus estimates have adjusted sharply since peak levels. Risk from global slowdown is a key overhang.4 10.5 12. Nomura vs consensus Our FY13F EPS is 17% higher than consensus as we build in a tax shelter from increased R&D spend.830 7.1 23. 2011 Potential upside Opportunity remains lucrative. Even though the business outlook has deteriorated. Valuation: At 9.06 31.

578 -2.3 11.9 9.0 21.623 7.5 9.5 9.0 10.06 73.9 32.7 1.4 6.70 3.9 12.3 9.1 18. 2011 Key data on Crompton Greaves Income statement (INRmn)  Year-end 31 Mar Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (INR) Norm EPS (INR) Fully diluted norm EPS (INR) Book value per share (INR) DPS (INR) Source: Nomura estimates Relative performance chart (one year) FY10 91.6 -15.9 14.1 13.664 -2. Nomura research 12.6 2.48 14.916 33.255 -1.6 31.039 13.4 -44.100 11.409 -59.578 12.45 14.1 9.822 -11.1 2.155 9.702 7.9 19.551 11.302 -2.04 1.7 12.419 14.834 -4 FY13F 125.5 8.0 7.56 12.9 13.6 2.542 -11.810 -2.21 60.0 30.1 25.219 -428 32 1.9 4.9 2.0 11.7 2.4 7.2 30.3 47.8 10.501 10.990 -87.6 30.844 44.964 -2.7 22.302 10.4 23.279 10.8 7.1 2.0 14.561 38.6 17.5 7.1 7.85 12.4 10.7 -29.7 33.4 -32.502 -352 80 1.6 10.142 12.6 11.2 2.5 1.6 10.85 12.247 -947 7.257 12.272 -4 FY12F 110.816 11.1 24.307 -4 FY14F 147.5 Notes Effective tax rate declining over FY12-14F 4.272 -26 FY11 100.118 -2.6 14.0 12.583 -5 (INR) 350 300 250 80 200 150 100 A ug 11 S ep 11 N ov 10 M ay 11 F eb 11 J an 11 D ec 10 M ar 11 J un 11 O c t 11 A pr 11 J ul 11 60 40 Price Rel MSCI India 120 100 Source: ThomsonReuters.247 8.1 1.830 7.9 19.441 8.3 9.3 25.5 29.6 28.7 12.5 21.5 8.100 9.1 17.135 -9.502 13.841 -376 80 1.9 -55.8 19.9 7.6 3.381 12.799 -17.679 -13.001 -13.4 11.268 9.7 34.553 32.8 9. Nomura research   (%) Absolute (INR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (INR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Avantha Holdings Solaris Holding 1M 3M 12M 13.8 2.41 3.2 7.1 20.7 1.06 16.7 3.770 -1.75 18.321 -14.6 54.0 38.4 3.61 19.61 89.42 16.299 9.5 -15.3 -24.1 17.7 19.1 12.9 12.4 Source: Thomson Reuters.7 16.5 6.88 8.Nomura | Crompton Greaves October 12.6 30.7 7.131 11.5 12.536 -1.922 -3.823 13.293 13.45 14.650 8.517 11.85 39.517 31.0 7.0 -51.4 12.83 2.3 28.830 -1.21 12.459 -77.21 12.523 -102.2 15.9 4.5 14.06 16.025.5 15.5 5.0 8.906 -11.1 18.6 8.077 39.677 -376 80 1.936 11.7 1.1 31.0 1.5 4.5 11.1 -40.4 10.05 2.90   22 .6 22.4 47.3 9.0 9.7 5.293 -376 80 1.372 -3.645 7.430 -12.7 18.892 -9.19 19.811 11.1 22.0 8.219 12.9 349/132.45 51.677 11.258 12.045 8.229 8.61 19.8 11.1 7.948 10.268 -1.841 16.1 24.4 -17.551 6.4 8.051 -66.438 -1.

12 3.427 11.000 6.170 5.551 0 0 0 -1.002 9.009 FY14F 12.207 9.728 6.526 7.760 0 71.142 -2.565 6.537 -2. although it is not a major concern as yet 0 60.202 -1.1 149.747 32.6 -4.Nomura | Crompton Greaves October 12.603 30.851 -2.215 -7.593 -2.688 -1.688 2.810 -1.496 6.703 160 38.384 -8.077 25.2 23 .683 12.747 29.984 3.337 51.148 1.423 6.8 86.704 6.423 27.719 1.364 6.6 85.391 -7.892 4.209 4.423 1.984 25.043 60.732 5.501 0 0 0 -2.001 47.314 26.656 6.2 0.634 75.026 83.703 160 49.464 0 83.184 18.216 -6.645 -306 0 518 -1.747 5.412 44.551 439 2.459 -3.474 -2.5 85.001 34.664 -1.6 -1.032 5.216 0 FY14F 16.660 39.271 1.463 10.192 45.298 33.3 60.045 3.13 5.229 43 0 1.118 269 -2.346 -2.703 160 56.211 FY12F 11.660 29.34 32. 2011 Cashflow (INRmn)  Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt Source: Nomura estimates   FY10 12.338 6.5 150.3 net cash net cash net cash net cash 83.9 64.756 157 0 1.2 153.745 38.817 157 0 1.747 19.280 1.186 Notes Working capital cycle is lengthening and needs to be tracked.842 13.893 5.536 13.520 60.433 -3.283 56.526 FY13F 6.437 -1.692 6.954 4.283 96.215 37.3 60.428 3.1 152.588 5.283 23.567 3.314 32.679 1.438 -4.674 41.445 -6.512 Balance sheet (INRmn)  As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Nomura estimates FY10 6.258 5.008 157 0 1.891 4.445 0 Notes Sufficient free cashflow to fund current quantum of capex and acquisitions 1.37 30.283 46.501 5.000 4.754 157 0 1.2 -7.7 1.5 60.743 0 96.911 -3.116 1.864 -2.8 net cash net cash 0.3 61.688 21.018 5.0 -4.554 6.2 1.144 4.716 50.760 FY11 2.3 -12.010 49 35.747 25.000 0 114.984 1.0 1.703 160 43.1 1.851 12.419 7.248 10.306 7.271 -1.100 5.770 -125 -3.448 38.550 834 0 FY13F 13.148 -947 -2.45 36.36 26.30 23.864 FY11 13.4 88.283 37.155 1.194 2.448 57.283 31.173 0 -996 -4.756 15.045 0 0 0 -2.851 31.271 45.989 -1.595 4.360 114.747 71.417 FY12F 3.8 161.

Nomura | Crompton Greaves

October 12, 2011

How well is Crompton Greaves positioned for a turn in the cycle?
We have used consolidated numbers to chart the historical financials for Crompton Greaves (CRG), as subsidiaries form a substantial part of the business and valuation for the company. Since the major impact of the company's international acquisitions started to be felt only from FY06, we have, at times, restricted our reference period to that timeline for relevance purposes.

Balance sheet and return efficiency
Consistency of return ratios Return ratios for CRG have been healthy at above 30% since its acquisition of international businesses, starting from FY06. We do notice some volatility around a change in cycles, which we believe is largely led by sales slowdown and some working capital pressure.
Fig. 26: Return ratios have been stable since FY06 …
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Fig. 27: …with some volatility around business cycles
ROCE

ROE

48% 43% 38% 33% 28% 23% 18% 13% 8%

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Source: Company, Nomura research

Source: Company, Nomura research

Management of working capital and asset turnover We believe the company has maintained tight control over its working capital cycle, which is evident in the charts below. The increase in the WC cycle in FY11 is mainly due to adverse business cycles, in our view. Despite slower sales, asset turnover has remained steady, mainly due to tight control over capital employed in both fixed assets and working capital, on our reading.

FY11
24

Nomura | Crompton Greaves

October 12, 2011

Fig. 28: Asset t/o depicting pressure from slower sales…
(x) 1.6 1.5 1.4 1.3 1.2 1.1 1.0 Asset turnover

Fig. 29: …and recent uptick in WC cycle; cyclical nature
(x) 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 Asset turnover (ex cash)

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Source: Company, Nomura research

Source: Company, Nomura research

Fig. 30: Sharp improvement in WC cycle, barring past 12m, led by a decline in receivables and inventory days
Days of revenue

60 55 50 45 40 35 30 25 20 15 10
FY02 FY03 FY04

Net working capital cycle

FY05

FY06

FY07

FY08

FY09

FY10

Source: Company, Nomura research

Trajectory of growth The company’s sales trend has been disappointing over the past few years, although margins have been rising. We largely attribute this to tight control over costs and the benefit from operating leverage. However, given concerns over sales growth in the near term owing to a slowing global economy, we believe margins could suffer (as evident in the 1QFY12 results) in the near term.

FY11

FY11
25

Nomura | Crompton Greaves

October 12, 2011

Fig. 31: Sales have been under pressure and is a key risk

Fig. 32: Margins close to all-time peak; we see downside risks
% of revenues

120% 100% 80% 60% 40% 20% 0% -20%

Sales growth

15% 14% 13% 12% 11% 10% 9% 8% 7%

EBITDA margin

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Source: Company, Nomura research

Source: Company, Nomura research

Risks from an adverse turn in the cycle
While sales already indicate a bottom-cycle trend, margins are close to peak cycle. Risk to sales Post the Lehman crisis, overall sales had nearly approached zero growth, but refrained from entering negative territory. This, in our view, was led mainly by a slowdown in international markets. We continue to see similar risks to sales owing to ongoing concerns about global economies, especially in the the US and Europe. Risk to margins FY11 margin levels are at close to the top-end of the margin range (9-14%), and we see downside risks from these levels. Average historical margins for the company (since FY06) have been at around 11.5%, though post the Lehman crisis, margins were still rising. Depending on the extent of slowdown in global economies, we could see 300400bp margin risk for the company. Our FY12F estimates factor in 330bps.

What are consensus estimates building in?
Mean consensus EPS estimates have corrected 30-35% for CRG since peaking, with recent estimates falling even lower. We believe current consensus estimates already build in risks to margins for the company, though there is still some risk to sales from a severe global slowdown.

FY11
26

Nomura | Crompton Greaves

October 12, 2011

Fig. 33: Consensus earnings estimates already down 30-35% since peak
(INR) 21 19 17 15 13 11 9 Consensus EPS FY12 Consensus EPS FY13

Oct-10

Oct-09

Apr-09

Apr-10

Apr-11

Aug-10

Aug-09

Source: Bloomberg

What are valuations factoring in?
• CRG has largely traded at 15-25x earnings since FY06 (post acquisitions) except during the post-Lehman bankruptcy period. • Even on a longer timeframe of 10 years, we note that the stock is now trading below the mean trading levels both on a P/E and P/BV basis. • While a severe recession in Europe and the US could lead to further interim de-rating of the stock, we believe it is now pricing in visible medium-term risks to margins and sales growth.
Fig. 34: Stock is trading below 10-year mean trading multiples…
Crompton Greaves 1-year fwd P/E chart

Fig. 35: …and even lower on average levels since FY06
Crompton Greaves 1-year fwd P/BV chart

Aug-11
1 yr fwd P/B chart +1STDEV Mean -1STDEV

Dec-09

Dec-10

Jun-09

Jun-10

Feb-09

(x) 35 30 25 20 15 10 5 0

1 yr fwd P/E chart +1STDEV Mean -1STDEV

Feb-10

(x) 10 9 8 7 6 5 4 3 2 1 0

Feb-11

Mar-00

Mar-01

Jun-11

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Source: Company, Bloomberg, Nomura estimates

Mar-11

Source: Company, Bloomberg, Nomura estimates

Impression: Significant macro risk already priced-in, though extreme case could see further interim risks
CRG stock has corrected by more than 55% over the past 12 months and has underperformed the broader markets by 22%. At current levels, we believe the stock is attractively valued and significant earnings risk is already priced in. However, we do not rule out further correction in the interim were global macro conditions take a sharper dip. On a longer-term horizon, we believe CRG presents an attractive risk-reward opportunity. Our evaluation is based on:

Mar-11
27

2) rising competition in domestic and international T&D. consensus estimates have adjusted sharply since peak levels. 4) a substantial rise in commodity prices could hit margins. given that we believe business conditions are reflective of cyclical pains at this point. Our multiple of 15x is at a slight discount to the mid-cycle multiple of 16x for the stock. the stock is now trading significantly below mean levels and on lowered earnings estimates nonetheless. but since the company has transformed significantly over the past 5-6 years (on the back of international acquisitions as well as rising market share and margins in domestic markets). • The stock is now trading below 10-year mean multiples. 28 .Nomura | Crompton Greaves October 12. and. 2011 • Despite FY11 margin levels being close to the peak of the cycle and have downside risks. • Since these acquisitions. Risk from a severe global slowdown will be a key overhang.06 to arrive at our TP of INR240. • In contrast. which we believe is justified. we believe these are largely built into consensus estimates. Investment risks 1) Further slowdown in power sector investments. and mostly have changed to reflect post-1QFY12 results. SIEM and Areva T&D. which are trading above 16x 1 year forward EPS. Valuation methodology We continue to value the core business at 15x Mar-13F EPS of INR16. 3) worsening of the European crisis. • Sales growth is cyclical but has also been impacted by a slow pick-up in domestic power orders. we would place more emphasis on a mean trading range comparison with the likes of MNC peers such as ABB.

8 61.115 9. consensus estimates have corrected only modestly. 31 Mar Currency (INR) FY11 Actual Old FY12F New Old FY13F New Old FY14F New Revenue (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. maintain Neutral We are cutting our FY12-14F estimates by 10-15% to account for slower sales growth (mainly exports) on account of an anticipated global slowdown.615 23.8 12.105 5.1 45. We also lower our margin estimates modestly on account of falling utilisation levels.7 62.6 to arrive at our TP of INR430.897 6.com +91 22 4037 4182 Indrajit Yadav .5 16. important disclosures and the status of non-US analysts.725 31. Despite the near-term risk on earnings growth. Anchor themes We believe India’s industrial sector offers the unfolding of a substantial opportunity over the coming years.4 19.1 N/A N/A 35.5 N/A N/A 34.958 7.2 6. Cutting estimates on near-term slowdown risks.500 8.NSFSPL indrajit.113 25.3 N/A 11. We see potential opportunities in niche segments.yadav@nomura.86 14.467 7.278 7. compared with the historical mean on both a P/E and P/BV basis.7 5.026 6.NFASL amar.com +91 22 4037 4992  Sales growth is cyclical and tends to be highly volatile around turns.400 7.725 8.88 32. we continue to see Cummins India as a fundamentally strong company which has managed its balance sheet and return ratios well in past cycles.9 net cash net cash net cash net cash net cash net cash net cash See Appendix A-1 for analyst certification. EPS growth (%) Norm. .9%  FY11 margin levels are at the peak of the cycle and could be prone to downside risks. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Source: Nomura estimates 39.3 15.NS KKC IN . 2011 Rating Remains Target price Remains Closing price October 7. but wait for opportunity Impression: Near-term risks from global slowdown.7 31.0 4.47 12. Nomura vs consensus We are in line with consensus on FY13F earnings but our TP is 10% lower on greater caution towards the exports outlook for the company. However. Our valuation methodology remains unchanged (except for rolling over to Sep-13F EPS from Mar-13F earlier) as we value the stock at 15x Sep-13F EPS of INR28.1 50.113 7.910 5.5 4.88 14.898 9.115 32.kedia@nomura.5 N/A 9.5 33.4 N/A N/A 36. but impressive fundamentals imply share price strength upon correction Despite more than a 30% correction since its past 12-month peak. Research analysts India Capital Goods Amar Kedia .  In comparison. we would review our estimates upon a market correction.7 12.2 3.47 22. but this could be partially offset by lower RM costs. in case of a severe global recession.  Current valuations do not appear appealing.Cummins India ELECTRICAL EQUIPMENT CUMM.9 10.789 20. we do not rule out near-term downside risks for Cummins India.1 4. albeit slightly offset by a fall in raw material costs.0 44.958 28.6 35.71 20.1 35. which is in line with the stock’s mid-cycle trading range. Key company data: See page 2 for company data and detailed price/index chart.3 13.66 9.5 54. 2011 Potential upside Near-term concerns on a worsening macro.4 3.4 17.7 3. Our evaluation is based on: Neutral INR 430 INR 406 +5.507 23.3 N/A 13. EQUITY RESEARCH For the long term  October 12.918 6.

120 -2.7 14. Nomura research 25.3 16.439 -2.5 12.2 2.780 16.725 -5.912 5.2 Source: Thomson Reuters.1 17.974 -2.8 33.3 4.725 (INR) 600 550 500 105 450 400 350 A ug 11 S ep 11 N ov 10 M ay 11 F eb 11 J an 11 D ec 10 M ar 11 J un 11 O c t 11 A pr 11 J ul 11 100 95 Price Rel MSCI India 115 110 Source: ThomsonReuters.0 578.59 14.0 10.5 58.910 -3.920 -4.9 15.935 -4.1 27.8 3.109 -1.2 6.034 -3.369 8.453 6.507 412 6.111 -19 513 1.0 22.8 15.5 -22.687 -5.235 5.3 16.309 8.5 58.5 13.47 75.4 12. 2011 Key data on Cummins India Income statement (INRmn)  Year-end 31 Mar Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (INR) Norm EPS (INR) Fully diluted norm EPS (INR) Book value per share (INR) DPS (INR) Source: Nomura estimates Relative performance chart (one year) FY10 28.373 FY11 39.0 25.273 -361 4.Nomura | Cummins India October 12.113 0 7.056 7.647 51.8 13.3 -24.32   30 .918 -4.929 -19 410 1.3 18.4 33.32 20.3 3.4 -16.914 -19 404 1.4 27.725 0 8.32 14.635 -366 6.7 3.9 15.8 27.8 13.2 27.9 31.3 25.2 17.1 17.2 3.026 2.5 13.512 8.204 -4.373 65 4.735 12.111 7.217 9.170 12.0 34.2 16.091 -3.789 121 5.8 17.4 12.9 35.47 31.31 10.2 19.1 10.4 33.4 12.140 2.3 9.8 15.753 -3.912 -21 419 799 6.47 24.2 1.8 4.01 -2.7 33.789 FY12F 44.7 22.47 23.1 3.113 FY14F 61.500 -41.6 18.66 25.66 86.3 2.507 FY13F 50.8 15.1 27.667 7.892 7.775 1.468 6.736 4.7 12.9 24.383 9.3 21.547 -436 7.929 8.4 2.7 4.47 31.113 -4.8 28.0 7.6 6.811 -2.520 -590 7.1 10.8 4.268 6.0 Notes Slowing revenue growth to mirror macro concerns in the domestic and international markets -14.66 25.973 8.741 -2.166 20.7 14.897 -29.8 25.16 12.078 3.467 -33.7 17.1 33.9 11.5 9.5 25.6 -4.1 25.93 31.8 4.4 14.6 19.0 19.5 20.5 15.9 58.4 32.0 16.8 8.2 7.8 27.1 16.698 7.0 15.5 2.0 8.01 15.53 25.7 17.47 99.57/395 3.7 21.546 6.1 14.0 35.96 23.6 12. Nomura research   (%) Absolute (INR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (INR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Cummins Inc LIC 1M 3M 12M -7.105 -26.125 -18.3 49.7 24.8 39.268 -19 262 1.334 -6.5 13.5 16.4 62.4 12.4 13.024 -2.88 20.0 24.1 -12.291.5 3.877 -1.7 -29.491 9.9 26.7 16.977 14.8 16.663 5.78 56.914 10.0 5.2 16.7 30.9 13.1 21.634 -720 9.953 4.01 21.88 65.457 2.6 -0.6 32.5 58.7 12.47 18.78 15.9 5.9 4.

7 37.547 1.020 15.430 -3.442 3.114 3.710 7.273 2.728 274 3.182 5.037 2.1 59.380 5.520 -2.181 187 44.411 FY12F 2.192 2.392 -816 6.263 274 10.508 18.987 6.928 38.109 3.882 0 554 20.836 0 7.109 27.7 1.189 8.508 0 12.6 57.178 2.692 -4.6 1.8 85.222 -1.101 0 7.520 7.9 87.078 1.396 23.037 -607 6.520 1.026 0 -183 FY13F 8.054 -358 5.475 FY13F 1.457 0 96 FY12F 7.775 0 -143 FY11 6.2 2.238 -473 7.918 236 323 559 -473 -3.0 59.209 1. though limited visibility on any inorganic growth intent 170 23.109 0 8.2 59.657 183 7.037 6.451 4.520 -1.2 87.4 31 .50 239.139 7.648 32.610 23.1 37.812 -4.676 0 9.169 1.483 1.192 7.000 6.92 417.056 5.657 20.101 0 554 27.078 0 0 Notes Despite adversities.500 5.361 7.312 -3.832 27.635 -1.083 14.337 61 0 0 3.508 86 5.385 FY14F 2.190 3.328 2.Nomura | Cummins India October 12.361 Balance sheet (INRmn)  As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Nomura estimates FY10 559 7.90 522.898 0 554 15.550 274 11.198 -1.5 2.192 -5.665 Notes Clean and strong balance sheet.056 0 10.391 17.7 54. cash flow generation remains strong -2.063 28.9 40.165 5.5 39.2 60.098 6.229 4.882 187 38.952 7.3 net cash net cash net cash net cash net cash net cash net cash net cash net cash net cash 78.634 -1.373 0 17.349 -3.812 0 0 0 0 2.361 489 559 1.9 64.247 -5.1 78.785 274 4.981 7.181 0 554 23.097 2.420 25.634 7.25 330.247 0 0 0 0 6.139 8.850 -3.140 -1.520 -4.954 33.140 0 0 FY14F 10.594 0 554 17.849 -158 0 0 0 5.898 187 28.500 2.4 82.782 75 -18 0 11 3.995 -193 9.154 -2.1 110.440 3.192 -1.139 10.247 -2.594 187 33.400 0 14.01 374.302 10.717 12.676 2.337 FY11 1. 2011 Cashflow (INRmn)  Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt Source: Nomura estimates   FY10 5.049 -855 -4.836 23.4 64.2 62.574 44.900 274 7.788 19.361 -2.

2011 How well is Cummins India positioned for a turn in the cycle? Balance sheet and return efficiency Consistency of return ratios Despite interim cyclicality.0 0.1 1.0 1.7 1.6 1. 39: Asset turnover ex cash confirms a secular uptrend in the business (x) 2. 36: KKC: ROE has consistently been on a rising trend… ROE Fig.9 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Fig. Cummins India has been able to maintain a healthy and consistently rising ROE/ROCE trend.5 1. Fig.2 1. 37: … and so has its ROCE 55% 50% 45% 40% 35% 30% 25% 20% 15% ROCE 40% 35% 30% 25% 20% 15% 10% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY10 Source: Company.9 1. Fig.8 1. Nomura research Management of working capital and asset turnover A steady trend of declining net working capital cycle and rising asset turnover implies strong management quality for the company over the past 12 years. Nomura research Source: Company.2 1. though rising cash levels and slowing exports hit FY10 and FY11 (x) 1.3 1. in our view.4 1. 38: Asset turnover too has been on a rise.6 1. Nomura research FY11 32 FY11 .4 1.5 1. Nomura research Source: Company.3 1.Nomura | Cummins India October 12.1 FY99 FY00 FY01 FY02 FY03 Asset turnover Asset turnover (ex cash) FY04 FY05 FY06 FY07 FY08 FY09 Source: Company.

on our estimates. Nomura research Trajectory of growth Cummins’ sales have been largely dependent on business cycles and depict great volatility around trend shift. overall sales declined by more than 10% in FY10. Fig. from very high growth rates until then. 2011 Fig. Nomura research Source: Company. 40: Management efforts. FY11 33 . see downside risks % of revenues FY11 50% 40% 30% 20% 10% 0% -10% -20% 20% 19% 18% 17% 16% 15% 14% 13% 12% 11% 10% EBITDA margin FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source: Company. depicted in a tight rein over Net WC cycle (ex cash). and incidentally the bottom during the 2008-09 global financial crisis period was also 14%. although we notice that the lows are now shallower.Nomura | Cummins India October 12. 42: Margins trend suggest cyclical business nature – strong sense of déjà vu in FY10-11. the risk from the FY11 levels is around 300bps. Nomura research Risks from an adverse turn in the cycle Sales and margin trends suggest that the business is close to peak cycle levels. Margins also depict similar business cyclicality. partly explains rising ROCE Days of revenue 160 140 120 100 80 60 40 20 0 Net working capital cycle FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. Therefore. highly volatile around change in momentum Sales growth Fig. In an extreme global economic slowdown. we foresee that a similar (or even greater) decline is indeed possible for Cummins. 41: Sales growth trend in line with business cycles. Risk to margins FY11 margin levels are at the top-end of the margin range (11-19%) and we clearly notice downside risks from these levels. Risk to sales Post the 2008-09 global financial crisis. Average historical margins for the company have been around 14%.

Nomura | Cummins India October 12. while the stock is currently trading at ~16x 1-year forward earnings which is close to the mean. 43: Consensus estimates down 20% from peak. we believe further downside risks are possible. the stock is still +0. 2011 What are consensus estimates building in? Consensus EPS estimates have corrected by ~20% for Cummins India since their peak. given the risk to sales and margins as highlighted above. we see further downside risks (INR) 40 35 30 25 20 15 Consensus EPS FY12 Consensus EPS FY13 Nov-10 Jun-10 Jun-10 Jan-11 Jun-11 Jul-10 Jul-11 May-11 May-11 Mar-11 Mar-11 Feb-11 Aug-10 Aug-10 Sep-10 Dec-10 Dec-10 Apr-11 Oct-10 Oct-10 Jul-11 Aug-11 Source: Bloomberg What is valuation factoring in? • Cummins India largely traded at 10-15x P/E during FY01 to FY07 when growth was much lower than the post-FY07 period and margins were also lower than the current mean. Fig. we rule out similar low multiples as the FY01-07 range for Cummins. However. • Cummins India’s trailing 12-year mean P/E multiple is 15x. because of continuous improvement in its balance sheet through tighter WC cycle management and asset efficiency. Sep-11 34 . On a P/BV basis.5 STDEV of mean levels. • However.

Nomura estimates Mar-11 Source: Company. Bloomberg. Our evaluation is based on: • FY11 margin levels are at the peak of the cycle and could be prone to downside risks.Nomura | Cummins India October 12. Risks to our call Downside risks: appreciation of the rupee. competition from Chinese players. diesel prices pose a risk to demand for backup power. compared with the historical mean on both a P/E and P/BV basis. 45: …while slightly higher than mean P/B multiple KKC 1 year fwd P/B chart (x) 30 25 20 15 10 5 1 yr fwd P/E chart +1STDEV Mean -1STDEV (x) 9 8 7 6 5 4 3 2 1 0 1 yr fwd P/B chart +1STDEV Mean -1STDEV Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: Company. 2011 Fig. export recovery could continue to surprise in the near term. though slightly offset by a fall in RM cost.6 to arrive at our target price of INR430. Bloomberg. • Sales growth is cyclical and tends to be highly volatile around a change in momentum. consensus estimates have corrected only modestly. we continue to see Cummins India as a fundamentally strong company which has managed its balance sheet and return ratios well in past cycles. Despite near-term risks on earnings growth. • In comparison. Cutting estimates on near-term slowdown risks. Mar-11 35 . remain Neutral on strong fundamentals We are cutting our FY12-14F estimates by 10-15% to account for slower sales growth (mainly in exports) on account of an anticipated global slowdown. but impressive fundamentals imply future strength Although Cummins India stock has corrected by over 30% since its past 12-month peak. we would review our estimates upon a market correction. However. we do not rule out any near-term downside risks for Cummins India in case of a severe global recession. though we note that falling commodity prices would compensate for margin loss due to lower utilisation. We are positive on the company in the longer term. We are also lowering our margin estimates modestly on account of falling utilisation levels. which is in line with the stock’s mid-cycle trading range. Nomura estimates Impression: Near-term risks from slowdown. • Current valuations do not appear appealing. Upside risks: raw material cost could pose negative or positive upsides depending on commodity price movements. 44: KKC trading close to 12-year mean P/E multiple… KKC 1 year fwd P/E chart Fig. Our valuation methodology remains unchanged (except for rolling over to Sep-13F EPS from Mar-13F earlier) as we value the stock at 15x Sep-13F EPS of INR28.

171 9.9 7. Research analysts India Capital Goods Amar Kedia .58 -10.8 2.1 N/A N/A 24. we see a 100-150bp downside correction risk from here.3x) Sep-13F EPS of INR10.85. . 2011 Potential upside Retain Buy on attractive longterm opportunity.kedia@nomura.643 3. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Source: Nomura estimates 51.com +91 22 4037 4182 Lalit Kumar .622 13.NS VOLT IN . although the extreme case could drive further downside.3 19.73 19.9 10.5 2.914 3.     FY11 margin levels are close to peak levels.8 4.2 2.0 8.9% Anchor themes Investment cycle in India has been disappointing on various external and internal issues.4 N/A N/A N/A 63.1 12. attractive opportunity.696 8.kumar@nomura.9 18. With consensus estimates also largely capturing earnings risk and valuations factoring in an even greater earnings decline.28 17. worsening macro conditions could drive further risks before things improve.9 1.Voltas VOLT. Voltas is a key beneficiary of infrastructure capex in India & Middle East. Key company data: See page 2 for company data and detailed price/index chart.253 3.2 59. suggesting 43% implied upside. Our revised TP of INR150 is based on 14x (previously: 16.222 3. important disclosures and the status of non-US analysts.540 3.792 4.7 N/A 3.8 5. following a transfer of analyst coverage.yadav@nomura.572 3.com +91 22 4037 4992 New Cutting estimates ~30% and TP to INR150 to factor in adverse macro We cut our FY12-13F earnings on increased concerns over the company’s near-term sales and margin outlook in the electro-mechanical and unitary cooling product segments. however. Buy Voltas has underperformed the SENSEX by 35% over the past 12 months on a slowdown in sales and margin concerns.5 10.737 11. 2011 Rating Remains Target price Reduced from 234 Closing price October 7.NFASL amar. While we remain constructive from a long-term perspective.7 70. We assume coverage of the stock with a Buy rating.2 29.5 net cash net cash net cash net cash net cash net cash See Appendix A-1 for analyst certification.NFASL lalit.14 -15. we believe the stock is attractively valued and would use any correction to accumulate. Nomura vs consensus Our FY12F EPS forecast is 20% lower than consensus on lower margin expectations in EMP segment.8 1.NSFSPL indrajit.964 3.8 N/A N/A 24.9 56. Long term. We see limited further nearterm downside risk from current levels even in a bear-case scenario.com +91 22 4037 4511 Indrajit Yadav .97 23.9 6.964 11.027 3. we believe current levels offer a good entry point from a long-term perspective. Adverse macro conditions are likely to hurt near-term order inflows and sales growth.737 3. any pickup is contingent on global macro trends. concerns priced in Action: Assuming coverage.622 4.96 23.6 51. ENGINEERING & CONSTRUCTION EQUITY RESEARCH Strong leverage to adverse macro priced in now  October 12. EPS growth (%) Norm.9 21.1 1. 31 Mar Currency (INR) FY11 Actual Old FY12F New Old FY13F New Old FY14F Revenue (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm.6 2.222 9. Consensus estimates are largely building in margin risk.3 1.241 2. Buy INR 150 INR 105 +42. although business is highly correlated to global macro conditions. although some risk could emerge from a further sales slowdown.7 N/A 5.

5/102 3. 2011 Key data on Voltas Income statement (INRmn)  Year-end 31 Mar Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (INR) Norm EPS (INR) Fully diluted norm EPS (INR) Book value per share (INR) DPS (INR) Source: Nomura estimates Relative performance chart (one year) FY10 48.6 49.236 -33.1 1.5 28.5 13.7 1.7 13.8 8.69 1.9 13.555 4.523 -492 0 5.9 -0.018 14.97 11.97 11.8 1.222 0 3.80 9.273 2.0 1.9 15.6 16.8 -18.4 7.729 3.7 2.4 10.9 1.51 10.544 3.4 2.9 6.8 2.032 -154 0 1.2 13.5 52.475 0 4.560 250 3.2 33.969 -425 0 3.4 10.2 -18.554 -210 0 4.9 6.1 19.9 2.7 6.7 24.9 58.32 9.769 -214 0 4.73 56.062 0 3.0 11.6 -10.7 9.73 9.241 -655 2.206 15.604 3.8 20.3 3.2 -22.044 -274 0 1.6 4.8 33.23 2.5 40.6 -4.4 10.568 17.3 8.4 14.503 -458 0 4.98 9.6 -56.9 57.896 -10.8 15.14 8.58 41.940 0 5.8 28.5 19.540 -45.0 7.8 -60.862 -1.964 -800 3.9 1.9 10.8 8.2 0.3 31.1 18.9 -42.4 6.14 48.587 3.472 3.970 3.8 12.6 262.7 31.0 20.5 6.696 546 3.6 2.2 6.4 23.41   37 .86 10.1 8.75 32.78 1.6 -34.79 8.845 -11.2 1.7 7.7 12.2 21.914 -37.0 28.75 10.1 29.344 -165 0 664 4.0 19.544 -347 -1 803 4.805 2.0 23.9 9.037 14.4 705.969 -1.964 0 3.2 8.5 8.2 5.570 3.7 1.257 -36 FY14F 63.555 -98 0 612 5.000 -1.9 9.2 0.2 12.091 5.2 28.4 -11.8 5.97 66. Nomura research   (%) Absolute (INR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (INR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Tata Group of Companies LIC.810 -615 3.999 -36 (INR) 300 250 200 150 100 A ug 11 S ep 11 N ov 10 M ay 11 F eb 11 J an 11 D ec 10 M ar 11 J un 11 O c t 11 A pr 11 J ul 11 Price Rel MSCI India 120 100 80 60 40 Source: ThomsonReuters.032 5.1 7.9 35.9 18.800 0 4.5 13.58 9.4 22.572 -768 2.0 10.5 -12.972 -12.6 9.7 10.195 3.164 27.1 -15.9 6.1 7.3 7.8 7. Nomura research 9.171 402 3.182 15.044 4.068 -1.2 9.8 11.9 -10.0 20.726 -31 FY13F 56.17 2.9 29.7 21. India 1M 3M 12M -14.027 -40.73 9.5 0.5 12.3 12.606 -11.Nomura | Voltas October 12.7 8.114 57 FY12F 51.3 8.643 -37.030 -10.49 3.97 11.595 -36 FY11 51.2 88.344 4.091 4.1 0.3 -36.93 1.8 1.3 4.4 6.222 -651 2.3 Notes Adverse macro situation drives near-term revenue slowdown 10.552 0 4.0 0.1 16.4 -15.9 Source: Thomson Reuters.5 -4.1 1.843 -1.

175 32.52 46.825 1.175 27.456 2.030 10.297 309 2.192 14.192 11.7 159.689 -4.225 8.837 FY11 4.440 50.273 -500 2.857 218 0 331 15.821 2.501 421 2.1 105.390 11.142 FY13F 4.5 76.030 0 -166 96 291 4.2 120.869 28.321 19.3 79.177 3.466 101 13.62 26.554 -3.097 -8.4 149.893 306 0 2.5 126.970 2.774 48.204 45.77 32.753 980 0 3.320 50 16.523 -697 -1.295 -615 0 -1.359 10.980 8.467 2.440 44.357 0 -36 0 0 1.444 10.262 764 0 204 33.980 -3.575 916 0 170 48.320 Notes Pressure on working capital is rising though we expect this to be well contained 1.640 24.100 0 -154 -2.456 -10.078 30.267 FY14F 5.192 11.2 38 .444 0 0 18.412 -800 0 -1.440 37.705 16.053 1.177 1.2 1.8 82.350 0 -347 349 3.440 41.604 2.599 FY12F 3.617 41.706 19.0 152.441 2.192 12.9 91.980 2.060 11. 2011 Cashflow (INRmn)  Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt Source: Nomura estimates   FY10 4.969 32 -728 3.065 -317 2.091 3.460 25.177 119 4.230 421 2.846 139 0 331 10.636 16.692 23.8 net cash net cash net cash net cash net cash net cash net cash net cash net cash net cash 74.622 17.748 -775 -236 350 0 208 2.8 1.097 2.631 218 0 331 13.503 -404 -1.050 -651 0 -900 0 -274 -1.142 8.908 218 0 331 18.607 0 21.837 45 11.5 103.279 FY13F 10.383 9.402 1.3 123.74 14.9 110.995 0 -36 0 0 1.312 9.647 22.900 FY14F 11.185 2.543 -655 0 1.450 13.164 218 0 331 21.773 0 -31 0 0 801 3.689 2.872 10.286 0 0 13.175 28.583 916 0 170 54.5 136.873 0 0 16.3 1.818 421 2.521 0 0 10.279 1.1 124.4 126.852 33.938 54.5 131.892 4.337 FY11 4.4 77.524 -638 392 -446 -54 -271 -244 442 0 321 195 -768 0 1.091 3.099 2.309 680 0 3.533 916 0 170 45.689 4.175 29.872 -6.463 0 -99 -2.900 850 14.466 FY12F 8.280 0 3.458 916 0 170 41.769 -526 -1.Nomura | Voltas October 12.0 72.69 10.571 4.239 421 2.857 -500 2.097 11.3 1.495 -500 1.872 2.280 0 3.726 Notes FCF generation remains good despite adverse macro Balance sheet (INRmn)  As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Nomura estimates FY10 4.

2011 How well is Voltas positioned for a turn in the cycle? Balance sheet and return efficiency Consistency of return ratios • Voltas’ return ratios are significantly higher than the previous cycle (late 1990’s) lows despite witnessing a falling trend since the FY07 peak. Nomura research Management of working capital and asset turnover In our opinion. FY11 39 .Nomura | Voltas October 12. We notice there is a tight rein over receivables days although inventory days have expanded. Nomura research Source: Company data. the company’s reduced asset turnover since FY07 is primarily led by a cyclical slowdown in order inflows from the domestic and international markets since the FY07/08 peak. However. 46: Return ratios peaked in FY07 but are still attractive… ROE 60% 50% 40% 30% 20% 10% 0% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Fig. despite cyclical pressures. • Read across for Blue Star (a key competitor for Voltas in this segment): competitive cushion for Voltas might mean Blue Star has further downside risks on margins Fig. We note that this is in spite of an almost similar asset turnover ratio in FY99. attributed to tight working capital management and a sharp improvement in margins. • The sharp improvement in return ratios is prima facie. 47: … and much higher than the bottom ROCE 60% 50% 40% 30% 20% 10% 0% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company data. the working capital (WC) cycle has held up and improved significantly since the previous cycle.

4 1.3 1.7 1. margins have been on a steady uptrend and surprisingly depict very little impact during cyclical lows.2 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 40 Asset turnover Asset turnover (ex cash) Source: Company data.5 1.3 1.7 1. Although its sales trend has yet to recover meaningfully from previous lows and the lull in order inflow cycle currently suggests that a pick-up is still some time away.0 1. Nomura research Source: Company data.1 2.5 1. but has been inching up slightly since FY08 lows Days of revenue Net working capital cycle 40 30 20 10 0 -10 -20 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source: Company data.2 2.6 1.8 1.4 1. Nomura research Trajectory of growth Voltas has consistently maintained a positive double-digit growth trend.9 1.1 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Fig. . 48: Asset t/o trend similar to ROE/ROCE (x) 1. even during cyclical lows. 2011 Fig.6 1. 49: Asset t/o ex cash is slightly better (x) 2.Nomura | Voltas October 12. 50: WC cycle has compressed sharply.2 1. Nomura research Fig.

. We believe this broadly captures the risk to margins although the risks to sales remain. 2011 Fig. What is consensus estimates building in? Consensus FY12-13F EPS estimates are down 20-25% from peak levels already.5% in FY09. Risk to sales A slowdown in the international business. followed by the trough of 6. Nomura research Source: Company data. see downside from current levels % of revenues EBITDA margin 40% 30% 20% 10% 0% -10% -20% -30% -40% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 41 Source: Company data. Risk to margins Current margin levels are clearly close to peak levels although the risk to margins is typically +/. We would assign moderate risk of further downside to sales growth. explain the rise in asset t/o Sales growth Fig. could mean that the sales trend is likely to remain at current levels or even compress further. along with a domestic lull in order inflows. along with compressing WC cycle.100 bps. The previous peak was 8% in FY08. 51: Sales have been on a secular growth path and. Nomura research Risks from an adverse turn in the cycle The company’s sales trend suggests that the business has yet to recover from previous cycle lows and its margins seem to be at risk.100 bps.Nomura | Voltas October 12. 52: Margins have been rising and cyclical sensitivity is typically +/.

although the business is highly correlated to global macro conditions Voltas has underperformed the international and domestic markets by 35% over the past 12 months on slowing sales growth and margin concerns. 55: …and 0. nevertheless. we think the stock is attractive currently and any correction should be seen as an opportunity to accumulate the stock. Under the extreme case. thus largely building in earnings risk (INR) 17 16 15 14 13 12 11 10 Consensus EPS FY12 Consensus EPS FY13 May-10 Nov-10 May-11 Apr-10 Oct-10 Dec-10 Aug-10 Sep-10 Apr-11 Source: Bloomberg What is the valuation factoring in? The stock is trading slightly below its mid-cycle P/E and appears even cheaper on P/BV based on its 12-year historical data. the share price could see further downside in the interim. However.5 STDEV below mid-cycle P/B multiples Voltas 1 year forward P/BV chart (x) Aug-11 1 yr fwd P/B chart +1STDEV Mean -1STDEV Jan-10 Jun-10 Jan-11 Jun-11 Jul-10 Feb-10 Mar-10 Feb-11 40 35 30 25 20 15 10 5 0 1 yr fwd P/E chart +1STDEV Mean -1STDEV Mar-11 14 12 10 8 6 4 2 0 Mar-00 Mar-01 Jul-11 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Source: Company. 2011 Fig. From a long-term perspective. 54: Stock trading below mid-cycle P/E multiples Voltas 1 year forward P/E chart (x) Fig. are down 20-25% from peak levels for FY12-13F. • Slowing order flows will likely lead to slower sales growth in both the domestic and international segments. Bloomberg. Bloomberg. Mar-11 42 . Fig. we believe the sales trend already reflects market pressure and further downside should be limited.Nomura | Voltas October 12. compared with the latest five-year historical range. the stock is significantly below its mid-cycle multiples. We see limited near-term downside risks from current levels in the bear-case scenario. Our evaluation is based on: • FY11F margin levels are close to peak levels and we see risk of 100-150bps downside correction from these levels. Nomura estimates Source: Company. Nomura estimates Impression: Attractive opportunity. However. however. 53: Consensus est.

Both the domestic Electro Mechanical Projects (EMP) (31% of revenue) and Engineering Products and Services (EPS) (9% of revenue) businesses are dependent on domestic capex spending and would likely be affected by any delay in capex. • With earnings risk largely captured in the estimates.85. suggesting 43% implied upside. due to adverse macro conditions. 43 . 2011 • Consensus estimates are largely building in margin risks. we believe current valuation is attractive from a long-term perspective. In our view.Nomura | Voltas October 12. Cutting estimates ~30% and TP to INR150 to factor in adverse macro conditions We cut our FY12-13F earnings by ~30% on increased concerns over its near-term sales and margins outlook in the electro-mechanical and unitary cooling product segments. We assume coverage of the stock with a Buy rating. Risks that may impede the achievement of the target price A delay in the pick-up of the domestic capex cycle would pose a key risk to our numbers and target price.3x) Sep-13F EPS of INR10. the stock could witness some downside upon further sales slowdown but that would be purely cyclical. we caution that further risk could emerge from sales continuing to slow from current levels. Our revised TP of INR150 is based on 14x (previously: 16.

0 N/A N/A 26.NS TMX IN .00 1.yadav@nomura. Nomura vs consensus We are more cautious than consensus on near-term earnings strength given our expectation of an industrial slowdown. we expect both sales growth and margins to take a hit.671 4. We base our evaluation on: Buy INR 500 INR 418 +19. Key company data: See page 2 for company data and detailed price/index chart. but may fare worse in an extreme case Impression: Strong fundamentals.914 3.1 7. ELECTRICAL EQUIPMENT EQUITY RESEARCH Buy into the correction   October 12.671 39.NSFSPL indrajit. oil & gas and cement. especially for process-flow industries such as metals.64 8.5 31.6 3.1 2. we think valuations already factor in the greater risk.1 12.Thermax THMX. .912 3.8 2. we think the stock now factors in the risks to business momentum.8 net cash net cash net cash net cash net cash net cash See Appendix A-1 for analyst certification.3 2.com +91 22 4037 4182 Indrajit Yadav .127 34.932 33.com +91 22 4037 4992  Slower order flow and rising competition in the utility space are likely to lead to slower sales growth over FY12-13F.246 3.932 3.7 6.4 10.4 59.. important disclosures and the status of non-US analysts. While we note that a severe global slowdown would drive further downside. 31 Mar Currency (INR) FY11 Actual Old FY12F New Old FY13F New Old FY14F New Revenue (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm.7 22.6%  FY11 margins have yet to recover from the previous cycle’s low levels. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Source: Nomura estimates 53. upgrade to Buy Given a 53% correction YTD.11 21.780 4.20 19.7 5.2 12.1 6..2 69.kedia@nomura. 200 bps. Thermax remains among the biggest potential beneficiaries of demand for captive power plant and rising industrial capex. so our TP moves lower to INR500 as we now rebase it to 14x (from 16x) on Sep-13F EPS of INR36 (from Mar-13F EPS). Nevertheless.912 32.4 2. we are positive on the fundamentals of the company and view the current downturn as a buying opportunity. Research analysts India Capital Goods Amar Kedia .127 4.7 N/A N/A 26.9 N/A 7.780 40. we upgrade the stock to Buy. at best.6 59.818 4.7 2.6 3.but near-term slowdown drives 10-25% earnings cut Over FY12-13F.3 22. Given a strong long-term opportunity and limited competition. though longerterm order flow should be driven by continued demand from process industries. Anchor themes We believe India’s industrial sector offers significant opportunity over the coming years.4 N/A N/A N/A 70.648 4.4 28.83 -5.. we take this opportunity to upgrade the stock to Buy for the company's solid business fundamentals and strong track record during previous cycles. We see potential opportunities in niche segments.03 47. with potential upside of 20% to our new TP.371 3. in our view. 2011 Potential upside Visible earnings risk priced in..3 13. while risk from current levels should be.6 2.817 32. Strongly poised for cyclical revival.817 3.9 58. . EPS growth (%) Norm. we believe.6 N/A 5.019 4.  While consensus estimates on the stock are down 10-20%.NFASL amar. 2011 Rating Up from Neutral Target price Reduced from 645 Closing price October 7.

64 34.4 48.3 5.4 32.8 13.6 13.3 12.Nomura | Thermax October 12.7 22.0 8.597 5.10 32.7 3.3 35.362 3.703 -20.1 -1.127 0 4.9 10.2 28.9 930/406 2.4 6.146 -5.20 185.141 2.57 39.0 34.2 2.4 12.928 -2.89 10.8 7.9 -17.505 3.186 -3.443 -695 748 3.6 -6.1 10.584 -6.924 3.553 -6.818 -40.75 90.3 -38.0 -17.1 10.740 -541 5. Nomura research 19.246 2.0 29.493 7.9 -9.2 12.9 58.019 -47.772 4.4 Notes Near-term earnings and sales trend reflective of cyclical woes.246 -39.3 6.0 8.671 0 4.9 17.5 4.4 14.7 9.0 -3.4 12.7 3.947 -442 3.4 31.9 22. 2011 Key data on Thermax Income statement (INRmn)  Year-end 31 Mar Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (INR) Norm EPS (INR) Fully diluted norm EPS (INR) Book value per share (INR) DPS (INR) Source: Nomura estimates Relative performance chart (one year) FY10 33.83 32.7 10.0 2.817 0 3.912 0 3. Nomura research   (%) Absolute (INR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (INR) 3-mth avg daily turnover (USDmn) Major shareholders (%) RDA Holding & Trading Aga Arnawaz Rohitz 1M 3M 12M -21.64 34. -2.93 11.83 32.6 34.6 8.1 6.4 48.787 16.7 12.788 -4.3 32.592 -1.7 10.2 12.6 7.4 4.3 9.2 16.1 2.570 4.75 21.352 -683 5.5 1.343 6.493 -50 635 7.9 13.8 10.03 32.5 21.1 14.406 4.7 13.078 -2.0 6.6 11.737 -1.1 6.0 12.4 8.203 2.15 9.416 2.3 16.149 1.588 4 FY11 53.770 47 FY12F 59.409 -6.7 34.83 158.139 22.7 2.0 31.3 -48.6 9.979 6.199 -41 579 5.7 -5.43   45 .912 0 FY14F 70.12 2.2 -5.5 6.11 21.015 3.2 Source: Thomson Reuters.7 7.7 -5.3 47.46 34.331 -8.3 21.4 -9.7 33.48 5.7 6.880 -9.20 39.1 2.5 9.3 10.4 7.127 0 FY13F 59.3 38.0 33.2 34.2 23.4 -26.505 -20 519 4.64 134.4 -9.1 -53.2 2.7 15.1 2.990 -6.1 15.517 5.2 2.7 7.83 32.0 29.965 -8.5 11.5 1.912 -1.671 -1.343 -50 635 5.9 34.35 10.0 -25.355 -863 6.20 39.5 19.253 -2.4 45.371 -36.126 4.004 -1.2 12.3 47.6 6.8 9.0 29.8 17.281 19.1 32.068 5.7 2.300 3.116 -773 5.1 -31.199 5.671 0 (INR) 1000 900 800 700 600 500 400 A ug 11 S ep 11 N ov 10 M ay 11 F eb 11 J an 11 D ec 10 M ar 11 J un 11 O c t 11 A pr 11 J ul 11 60 80 100 Price Rel MSCI India 120 Source: ThomsonReuters.03 32.9 14.014.2 20.7 10.1 1.713 12.5 2.4 19.127 -1.1 1.1 8.5 1.669 6.669 -50 635 6.967 3.817 -1.487 19.310 54.2 18.7 2.03 110.

7 212.740 -2.9 1.326 2.685 520 0 238 18.632 -1.17 113.543 30.880 1.137 FY13F 6.430 3.389 Notes Unlevered balance sheet provides room for growth.025 Notes Cash-flow generation remains reasonable despite cyclical pressures.541 5.563 7.154 49.217 -8.203 0 -1.500 2.632 -838 5.623 FY11 5.132 0 0 0 2.049 80 21.362 0 0 635 -727 1.1 170.211 520 0 238 12.138 520 0 238 15.699 0 9.057 24.885 8.0 -110. Balance sheet (INRmn)  As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Nomura estimates FY10 6.7 -166.355 -1.5 67.118 -1.27 106.124 -1.116 -1.730 18.13 126.702 -6.097 289 49.105 0 11.700 -8.790 80 20.703 5.911 588 28.289 7 147 -305 168 -1.496 8.2 47.699 10.536 2.606 588 26.006 3.880 16.4 1.260 -90 74 46 3.496 0 10.917 24.36 129.624 -1.265 -970 1.017 FY12F 6.8 1.623 289 44.813 22.456 3.Nomura | Thermax October 12.2 34.352 888 -1.323 -1.479 22.400 473 626 794 6.730 80 24.984 2.586 32.149 40.718 3.246 0 1.290 10.198 -875 0 0 0 3.916 10.295 -3.687 -2.500 1.415 8. 2011 Cashflow (INRmn)  Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt Source: Nomura estimates   FY10 3.2 -109.564 -695 0 39 98 -558 3.3 46 .550 289 44.373 1.794 -2.474 289 40.266 -2.127 3.591 3.968 2.7 1.2 -117.217 0 11.619 FY14F 7.672 3.500 4.947 4. 297 33.373 80 22.143 29.3 64.354 4.3 287.696 6.111 441 22.845 44.290 9.698 -1.105 -10.669 9.702 7.08 172.752 FY14F 10.141 483 8.100 2.6 33.208 FY12F 8.0 -82.543 588 27.132 -1.399 0 -2.951 26.406 8.405 3.624 0 0 0 0 1.4 36.278 35.790 13.2 63.934 27.702 0 7.016 8.484 FY11 7.210 26.657 8.9 54.9 212.496 -6.025 FY13F 8.835 588 24.914 94 0 238 10.193 2.9 net cash net cash net cash net cash net cash net cash net cash net cash net cash net cash 74.7 211.309 4.821 3.782 33.699 520 0 238 21.603 720 7.217 8.049 22.8 30.290 9.562 -1.581 1.306 3.002 6.073 44.141 0 0 0 -1.

3 1. Fig. has greatly helped Thermax report a strong improvement in return ratios. Nomura research Source: Company. in our view. Even during the Lehman crisis.4 1. Over the past three years. and peaked in FY08. Nomura research Source: Company.3 2. current levels also attractive % 50% 40% 30% 20% 10% 0% -10% FY99 FY00 FY01 FY02 FY03 70% ROE 60% 50% 40% 30% 20% 10% 0% -10% ROCE FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY10 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source: Company.6 1. In absolute terms.8 1. suggesting optimal cash management (x) 1. even the current cyclical low ROE/ROCE in the 30-40% range is attractive. Nomura research FY11 47 FY11 . we also note a significant decline in its workingcapital cycle since FY01. the impact of cyclicality is clearly visible in the trend. the low point was much higher than the late 1990s level.Nomura | Thermax October 12.7 1.9 1.2 1.1 0.8 0. Fig. 2011 How well is Thermax positioned for a turn in the cycle? Balance sheet and return efficiency Consistency of return ratios We have seen significant improvement in return ratios for Thermax since the lows of the late 1990s. hence. though volatility is far lower than it was in the late 1990s. 59: Asset turnover ex cash is largely in sync.5 1. % Fig.6 Asset turnover 2.7 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 Source: Company. At the same time. its working-capital cycle has been flat despite pressure on receivable days.9 Asset turnover (ex cash) FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 0. Nomura research Managing working capital and asset turnover While rising sales and.. 58: Asset turnover helps to explain the rise in return ratios (x) Fig. 57: .0 0.1 1. 56: Return ratios have risen sharply since late 1990s crisis ... asset turnover..

FY11 48 . 60: Sharp compression in working-capital cycle over the past three years suggests purely sales-led fall in asset t/o Days of revenue 120 100 80 60 40 20 0 -20 -40 -60 Net working capital cycle FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. within + / . in the past growth has suddenly fallen from the high 40s into negative territory during adverse times. though margins have not revived much since their FY10 bottom. We do not rule out a similar slowdown from current levels in case of a severe slowdown in the domestic industrial capex. Risk to sales There may be risk to sales growth for Thermax in the near term. since FY03. as the recent surge in Thermax’s sales following a high share of utility orders looks unsustainable over the long term.Nomura | Thermax October 12.a.200 bps from 12% % of revenues 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% FY11 EBITDA margin Sales growth 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. Fig. Nomura research Trajectory of growth Thermax’s sales have been highly volatile around changes in cycles. but largely above 40% pa % Fig. 61: Volatile sales growth trend. 2011 Fig. 62: Sharp rise in margins since FY02 and has been steady since then. but for the most part have grown 40% p. Slowing industrial capex could add further pressure. Nomura research FY11 Source: Company. Margins have also witnessed a sharp improvement since the FY02 bottom and have been moving within a narrow range of +/200 bps of 12% since FY04. As the sales growth chart suggests. Nomura research Risks from a turn in cycle The sales trend suggests that business is currently close to peak-cycle levels.

2011 Risk to margins Margins are now much better than in previous peaks or lows as a result of sustained improvement in business performance. as mentioned above we note that the stock is already trading below its12-year mean multiples. We are also confident because the lows during the Lehman crisis were much higher than the lows in the late 1990s. down just 10-20% from peak so far INR (INR) 53 48 43 38 33 28 Consensus EPS FY12 Consensus EPS FY13 Source: Bloomberg What is the valuation factoring in? While consensus estimates have yet to correct. In contrast. which is another 200 bps risk from current levels. Fig. valuations have already corrected more than what consensus estimates suggest and in that sense we believe the markets are already building in the anticipated earnings risk. In our view. 63: FY12/13F est. Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 49 . So far we have seen 10-20% correction in consensus EPS estimates since peak levels for both FY12 and FY13. we believe consensus estimates have yet to factor these in. As discussed next though.Nomura | Thermax October 12. A correction in earnings would imply that the stock is still at around its mid-cycle trading range. What are consensus estimates building in? Even as we highlight the risk of a slowdown in sales growth and about a 200 bp risk to margins. but factoring in the above. the next recession might not see margins collapsing below 8% levels. our estimates build in 50 bps of margin risk from current levels. we see [10-15%] further downside in consensus estimates.

Nomura | Thermax October 12. Bloomberg. Cutting estimates on slowdown concerns. Nomura estimates Source: Company. • Consensus estimates are down 10-20%. Bloomberg. 64: Stock trading below 12-yr mean on P/E… Thermax 1-year forward P/E chart (x) Fig. 2011 Fig. cements etc. we remain convinced of TMX’s ability to garner orders from a sustainable flow of industrial capex activity especially in the process flow domain such as oil & gas. Thermax’s virtual exit from the utility space due to rising competition will also lead to a slowdown in sales. however. We base our evaluation on: • FY11 margin levels have yet to recover from the previous cycle’s low levels. on a long-term perspective. metals. • Slower order flow should lead to slower sales growth. in our view. Nomura estimates Strong fundamentals and correction offer an opportunity With Thermax stock having underperformed overall markets 39% over the past 12 months. Risk from current levels should be 200 bps at best. but we believe the valuation has already factored in the greater risk. though as discussed above. Further. in our view. Our assigned multiple of 14x is slightly lower than the 16x we assigned earlier (which is also the past 5-6 years’ mean multiple). which is accompanied by drop in margins too. • Given Thermax’s fair-value range and its robust business fundamentals. our new assumptions drive our earnings cut of 10-25% over FY12-13F. now based on 14x Sep-13F EPS (from Mar13 earlier) of INR36. we have factored in significantly slower growth for Thermax over FY12-13. Thermax has witnessed high volatility during cycle turns and we believe that this time will be no different. we believe there are risks to its projects business. and the possibility that there may be further downside risks in the stock in the short term under a more extreme case scenario. 65: …and on P/B as well Thermax 1-year forward P/B chart (x) (x) 80 70 60 50 40 30 20 10 0 1 yr fwd P/E chart +1STDEV Mean -1STDEV (x) 18 16 14 12 10 8 6 4 2 1 yr fwd P/B chart +1STDEV Mean -1STDEV Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 0 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: Company. we have cut our TP to INR500. Thus. we recommend Buy and would use any further downside as an enhanced buying opportunity. in our view. We expect a revival in FY14. Accordingly. Longer-term. we think the stock offers value and that the correction offers an opportunity to accumulate. especially in the power sector. in our view. this is already built into the stock price now. upgrade to Buy on attractive valuation While Thermax’s short-cycle products business is likely to continue in the near term. instead of just the past 6 years. Mar-11 50 . This is because we now align our valuation with the mean of the past 12 years. Policy logjams impacting decision-making on large industrial and power capex are only likely to worsen the scenario. as this is more relevant.

Nomura | Thermax October 12. A severe global and domestic slowdown could lead to industrial capex deferral and that would be negative for Thermax.6% to our new TP. Risks to our call • Continued fuel shortages could stall demand for power projects. Given Thermax’s fundamentally strong business. • Firming coal prices would reduce demand for captive power plants. Nevertheless. we believe the stock offers a potential upside of 19. • Thermax’s move towards the utility boiler business could hit profitability substantially given high competition in that segment. 51 . is nicely poised to benefit from the cyclical upturn post the current slowdown we upgrade the stock to a Buy rating. the stock could see near term pressure. 2011 Despite our earnings and TP cuts. which. in our view. we caution that in the event of an extreme macro slowdown.

4 101.3 2.5 45.9 N/A N/A N/A 96.NFASL amar.4 5.2 4.9 5.3 83. Reduce  ABB India appears suitably placed to tap into opportunities in India’s T&D equipment sector.0 N/A N/A 19.5 net cash net cash net cash net cash net cash net cash See Appendix A-1 for analyst certification.604 4.9 30.10 159.2% Anchor themes Decades of under-investment in T&D infrastructure and a sudden march towards a power-sufficient nation promise opportunities for equipment manufacturers.307 5.854 27.  Price competition has affected the sector due to the influx of Chinese and Korean players and continued technology upgrading by select domestic vendors.509 4. While earnings continue to disappoint.63 27.112 3.854 5.445 3.9 20.1 94.com +91 22 4037 4992  While we remain positive on the long-term opportunity in the Indian T&D space.kedia@nomura. it could increase outsourcing from the Indian unit.3 15.6 17. important disclosures and the status of non-US analysts.9 0. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Source: Nomura estimates 62.NS ABB IN .com +91 22 4037 4182 Indrajit Yadav . EPS growth (%) Norm. the parent sees ABB India as an outsourcing hub and.7 30.0 72. in our view.6 76.778 27.ABB India ELECTRICAL EQUIPMENT ABB. Furthermore.5 N/A 16.60 -60. 31 Dec Currency (INR) FY10 Actual Old FY11F New Old FY12F New Old FY13F New Revenue (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. ABB has held on to steep valuations on expectations of further buybacks by the parent. we foresee a slowdown in industrial capex as likely to hit the automation business in the near term. Research analysts India Capital Goods Amar Kedia . the company has largely accounted for losses from the rural electrification business and this should ease margin pressure.3 12.73 47. . Reaffirm Reduce on ~21% potential downside.6 0. 2011 Rating Remains Target price Reduced from 585 Closing price October 7.1 24.0 N/A 26.5 15.3 0. and superior execution.4 3. we believe. with access to high-end technology. since they imply lower spending power with the distribution companies for new capex. while SEB orders are still elusive. 2011 Potential downside Premium valuations continue despite worsening performance on buyback expectations Still expensive as near-term inflows remain elusive.870 5.yadav@nomura. given its cost differentials compared with the parent’s high-cost European base. Nomura vs consensus We are in line with consensus on both earnings and valuation. EQUITY RESEARCH Short circuit  October 12.9 0.112 14. in our view.NSFSPL indrajit. Reduce INR 525 INR 666 -21.6 N/A N/A 14. Rising SEB losses are also a concern.302 3. this business contributes ~40% of ABB’s revenue and is highly dependent on the oil & gas and metal capex cycles. On the positive side though. Key company data: See page 2 for company data and detailed price/index chart.  Valuation: We have cut our estimates by 15-20% to factor in poor macro conditions and reduced our TP to INR525.871 632 1.604 21.623 3. we see PGCIL’s ordering activity picking up only in 2H FY12F.69 122.778 5.27 59. Meanwhile.6 75.623 17.399 6. presence across the value chain.

0 1.982 -6.1 27.9 16.60 6.73 21.948 -550 1.334 -8.5 101.5 26.871 -48.8 2.235 -8.2 0.1 15.4 1. 2011 Key data on ABB India Income statement (INRmn)  Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (INR) Norm EPS (INR) Fully diluted norm EPS (INR) Book value per share (INR) DPS (INR) Source: Nomura estimates Relative performance chart (one year) FY09 62.9 14.7 5.5 Source: Thomson Reuters.3 146.9 -34.901 1.531 FY10 62.9 27.975 -2.112 FY12F 83.6 5.60 114.1 9.2 -29.958 5.675 4.728 3.5 1.870 -70.7 45.9 7.63 170.Nomura | ABB India October 12.4 1.8 17.253 6.6 2.9 6.4 107.88   53 .0 955/595 1.2 31.8 8.7 24.391 3.7 0.9 15.784 -517 1.4 3.2 3.531 0 3.112 -437 2.7 2.73 21.6 20.854 0 5.011 5.6 26.0 24.9 47.329 -6.425 -564 3.5 7.0 2.0 28.399 -766 632 -496 136 3.3 65.0 0.34 14.5 -34.9 24.1 16.32 3.789 -256 726 5.63 27.664 16.453 8.371 4.3 30.7 54.7 7.267 -174 855 1.5 26.5 -14.2 30.4 1.854 (INR) 950 900 850 800 750 700 650 600 A ug 11 S ep 11 N ov 10 M ay 11 F eb 11 J an 11 D ec 10 M ar 11 J un 11 O c t 11 A pr 11 J ul 11 Price Rel MSCI India 120 110 100 90 80 70 Source: ThomsonReuters.027 -3.5 15.0 -2.259 -1.4 16.533 3.0 14.973 -250 1.7 32.9 0.5 9.66 114.06 21.4 -60.5 122.0 1.4 -26.4 3.7 35.0 14.2 78.604 0 4.625 -652 5.3 0.0 14.3 19.5 49.98 6.0 -35.0 5.5 40.07 3.267 1.1 12.7 47.8 -66.708 -8.9 28.973 6.0 1.0 1.531 -496 3.2 -27.604 -646 3.789 5.5 224.862 4.9 15.63 27.3 Notes We expect margins to recover but remain lower than normal levels -8.2 6.645 -1.067 18.38 2.0 28.490 26.2 -73.666 -250 1.9 -22.5 5.2 8.4 15.3 4.274 -485 4.8 2.6 20.854 -822 5.1 204.38 2.014 5.5 45.89 -6.3 42.3 27.9 35.666 8.5 -60.69 14.8 2.313 -10.2 5.2 22.9 9.409 -744 7.66 16.0 30.538 14.05 27.509 -61.6 79.7 122.9 76. Nomura research   (%) Absolute (INR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (INR) 3-mth avg daily turnover (USDmn) Major shareholders (%) ABB Asea Brown Boveri LIC 1M 3M 12M -20.1 5.892 4.302 -54.5 11.69 127.4 25.9 26.8 -31.3 33.66 16.196 22.69 14.6 25.112 0 3.0 26.0 148.372 -45.035 1.7 7.0 34.604 FY13F 96.7 2.380 -11.399 FY11F 72.862 -200 984 4.7 -35.7 0.73 146.733 7.34 2.9 4.879.165 -4.869 -3.1 7.982 -5. Nomura research 40.5 34.64 2.5 22.032 69.

307 1 0 -45 -137 1.7 231.7 1.341 0 33.477 0 -46 33.0 224.0 46.431 0 64.49 23.7 -20.368 5.606 8.294 6.879 1.039 84.003 0 72.7 54.0 54 .241 FY10 1.625 424 30.010 168 8.238 FY11F 5.675 7.970 -7.874 FY12F 7.425 -2.815 Notes Clean balance sheet with net cash 0 55.3 1.9 53.179 168 10.615 24.7 net cash net cash net cash net cash net cash net cash net cash net cash net cash net cash 170.380 47.556 24.017 -635 2.320 0 -1 31.275 -2.237 57.258 3.409 385 -1.237 55.810 9.52 18.9 49.583 424 35.242 1.294 9.8 245.166 -860 1.226 55.052 35.493 169 7.241 0 28.795 -12.871 -437 -530 5.169 0 -46 48.706 -749 970 -1.200 -230 0 0 0 137 -93 -437 0 0 FY12F 6.2 -9.262 168 8.800 0 -46 41.241 5.9 1.808 37.7 -17. 2011 Cashflow (INRmn)  Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt Source: Nomura estimates   FY09 5.341 -5.983 -1.7 158.629 5.630 1.501 62.8 225.319 0 57.895 FY10 5.47 7.2 -32.2 222.871 0 29.275 0 0 0 0 3.241 -5.813 424 23.123 424 23.049 64.126 -496 0 0 FY11F 4.341 -646 2.Nomura | ABB India October 12.795 0 39.6 144.0 48.222 FY13F 12.274 -631 -1.450 31.021 73.921 41.6 -22.2 167.871 5.336 5.761 36.871 -5.769 8.1 154.647 -822 0 0 -496 630 5.260 6.825 7.385 -916 2.000 3.784 1.3 1.162 1.049 0 -46 37.275 -646 0 0 FY13F 8.941 2.813 424 26.162 45.007 72.341 7.668 31.970 -822 4.216 -496 0 0 39 -457 1.469 442 0 -39 -656 2.795 Balance sheet (INRmn)  As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Nomura estimates FY09 5.153 49.970 12.577 7.647 0 0 0 5.228 48.48 19.754 0 84.482 5.979 7.668 27.846 33.554 11.052 31.869 1.761 39.556 29.759 3.970 0 36.811 6.52 30.625 19 -1.371 168 10.

Nomura research Source: Company. • Meanwhile. as order flows have yet to pick up for the company. Nomura research Management of working capital and asset turnover • Continues to suffer from the aftermath of the FY09 credit crisis-impinged slowdown. • Sales are thus still to pick up. • In fact. returns since FY06 could arguably be lower than what is visible. 66: Sharp deterioration in return profile… ROE 40% 35% 30% 25% 20% 15% 10% 5% 0% Fig. Fig. 67: …on a move into rural business ROCE 40% 35% 30% 25% 20% 15% 10% 5% 0% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 55 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source: Company. working capital continues to rise and. 2011 How well is ABB India best positioned for a turn in the cycle? Balance sheet and return efficiency Consistency of return ratios • ABB India has witnessed severe erosion in its return profile since FY08. together with slowing sales. thus impacting its growth profile. the company has also lost market share in key segments. given that growth in the rural electrification business then had pumped-up returns during that period. .Nomura | ABB India October 12. as the products business is not ramping-up as yet. • Furthermore. is impacting asset turnover.

Nomura | ABB India October 12. • Continued competition in the T&D segment is likely to exert further pressure on recovery.1 1. 69: …though cash management has been fine (x) 1. Nomura research Source: Company.9 Slow sales growth impacting asset t/o Asset turnover Fig.3 1.0 0.2 1.3 1.2 1.4 1.7 1.8 1.1 1.2 1.0 1.4 1.4 1.6 1.1 1. as depicted in the charts below.5 1. Nomura research Trajectory of growth • We gain very little confidence in ABB’s ability to sharply ramp-up growth and margin profile from the trends.3 1.0 Asset turnover (ex cash) FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. 2011 Fig. 70: Working capital has been rising steadily since FY05 Days of revenue Net working capital cycle 120 100 80 60 40 20 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. Nomura research Fig. 68: (x) 1. FY11 FY11 56 .

we expect that sales should revive. albeit marginally. Nomura research Source: Company. 73: Estimates down 50-60% but we see further risk as 1HCY11 has been worse than expected (INR) 75 65 55 45 35 25 15 Consensus EPS FY12 Consensus EPS FY13 Aug-09 Aug-10 Source: Bloomberg Aug-11 Dec-09 Dec-10 Jun-09 Jun-10 Feb-10 Feb-11 Jun-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 FY11 57 .Nomura | ABB India October 12. the extent will depend on a revival in ABB’s pricing power in key product segments. Risk to sales Given that the order book has expanded marginally over the past few quarters. What is consensus estimates building in? Fig. However. Nomura research Risks from an adverse turn in the cycle Trends suggest that ABB has yet to recover from the aftermath of the previous cycle. While we expect margins to revive from these levels. 71: Revenues are yet to recover from FY09 collapse Sales growth Fig. 2011 Fig. Risk to margins Margins are already at the bottom of the cycle and this is due mainly to the impact of the rural electrification business. headwinds for a sharp revival appear very high. 72: While margins continue to deteriorate EBITDA margin 60% 50% 40% 30% 20% 10% 0% -10% -20% FY00 FY01 FY02 FY03 FY04 16% 14% 12% 10% 8% 6% 4% 2% 0% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source: Company.

75: …despite a disastrous performance on buyback expectations (x) 18 16 14 12 10 8 6 4 2 0 1 yr fwd P/B chart +1STDEV Mean -1STDEV Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: Company. leading to lower sustainable lower ROE from the earlier average levels (adjusted for the difference between expected and actual earnings). Nomura estimates Cutting estimates by 15-20%. which is lower than the historical average but justified. as we cut our estimates by 15-20%. given that the company is losing market share. Bloomberg. 74: The stock continues to trade at premium valuations… (x) 275 225 175 125 75 25 1 yr fwd P/E chart +1STDEV Mean -1STDEV Fig.Nomura | ABB India October 12.3. and 2) a substantial decline in commodity prices. in our view. TP reduced to INR525 We are building in more caution on account of a worsening global macro. Mar-11 58 -25 . We value ABB India at 20x (unchanged) Sep 13F (from Mar-13F earlier) EPS of INR26. Bloomberg. thus benefitting margins. Our target multiple for ABB is still higher than that used for CRG because ABB continues to be more technology-driven and has higher potential of winning more technologyintensive orders vs CRG. Investment risks Upside risks include: 1) Sharper-than-expected recovery in the industrial and power products segment. Our earnings revisions are driven by reducing hopes of strong pick up in execution and margins. Nomura estimates Mar-11 Source: Company. 2011 What is valuation factoring in? Fig.

• All the parameters are close to the bottom. • Working capital cycle has improved after worsening from the lows of FY04. Incidentally. Asset turnover excluding cash is close to FY00 lows. 77: …now lower than previous lows 40% ROCE 35% ROE FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. and the remaining due to foreign technology. 2011 Bharat Electronics (BHE IN. Bharat Electronics operates in the defence sector. 76: Sharp reversal in return ratios… 35% 33% 31% 29% 27% 25% 23% 21% 19% 17% 15% 20% 15% 25% 30% Fig. BHE expects the modernization drive of the country’s security forces to provide a significant business opportunity for the company. Nomura research FY11 Source: Company. Research and Development is the core strength of BHE.Nomura | India capital goods October 12. We notice that receivable and inventory cycle has deteriorated after an improvement in the interim. raising the key question of whether the problem is cyclical or structural. implying poor cash management by the company. Not Rated) Company background Bharat Electronics (BHE) caters primarily to the defence sector through its nine manufacturing units. which is not cyclical. FY11 59 . with the remaining coming from the civilian sector. 21% due to products developed by DRDO and other indigenous agencies. which has collaborated with various leading research institutes. while overall asset turnover is worse. Nomura research Management of working capital and asset turnover • The asset turnover has been falling consistently. Balance sheet and return efficiency Consistency of return ratios • Return ratios have come off their peaks in FY06 and are even lower than previous lows. primarily due to poor sales. Fig. The defence sector contributed 80% of its sales for FY11. The analysis of the company’s turnover for FY11 indicates that 57% was due to BHE-designed products. including DRDO.

Nomura research Source: Company.00 0.40 Asset turnover 1.85 0.60 0. 79: Asset turnover ex cash is also close to late ’90s low (x) 0.45 0.95 0.75 Asset turnover (ex cash) FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 0.80 0.90 0.10 1. Nomura research Trajectory of growth Sales growth is on a constant decline. 2011 Fig. FY11 FY11 60 .Nomura | India capital goods October 12.70 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company.65 0.55 0.50 0. while margins are returning to lows of FY99 after peaking in the FY06-FY09 period.70 0. 80: WC cycle is slightly better after worsening from their FY04/05lows Days of revenue 60 40 20 0 (20) (40) (60) (80) (100) Net working capital cycle FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. 78: Asset turnover has fallen sharply since FY05 (x) Fig.05 1. Nomura research Fig.80 0.75 0.

which is also impacting margins. Nomura research Source: Company. However. 83: Consensus estimate down 15-16% INR Jan-11 May-10 May-11 Feb-10 Mar-11 Feb-11 Feb-11 Aug-10 Sep-10 Jun-11 160 155 150 145 140 135 130 125 120 115 110 Consensus EPS FY12 Consensus EPS FY13 Oct-10 Oct-10 Oct-10 Apr-10 Oct-10 Oct-09 Apr-11 Apr-11 Aug-11 Source: Bloomberg Sep-11 Aug-10 Sep-10 FY11 61 . 2011 Fig.Nomura | India capital goods October 12. Consensus estimates • Consensus EPS estimates are down 15-16% for Bharat Electronics from its peak levels. 81: Falling sales growth is the key culprit Fig. and as such can impact the sales trend and profitability of a company temporarily. Fig. and slow order decisions in the defence segment could be a reason for this. 82: Margins only slightly better since late ’90s and down from FY05-09 peak. Current trends suggest that Bharat Electronics has been suffering from poor sales growth. which is not cyclical. Nomura research Risks from an adverse turn in the cycle Bharat Electronics operates primarily in the defence sector. defence orders are typically lumpy. possibly due to operating leverage % of revenues 30% 25% 20% 15% 10% 5% 0% Sales growth 30% 25% 20% 15% 10% 5% EBITDA margin FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 0% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company.

0 2. Mar-11 62 . • Consensus estimates are down 15-16% from their peak.5 0. the stock is trading at average P/BV and slightly above on P/E on 12-year history. 85: … and close to mean P/BV levels Bharat Electronics 1 year forward P/BV chart (x) 25 20 15 10 5 0 1 yr fwd P/E chart +1STDEV Mean -1STDEV 5.5 4.0 3. Fig. Bloomberg Summary Bharat Electronics stock has outperformed the SENSEX by 4% over the past 12 months. even though Bharat Electronics commands a superior position in the defence sector.Nomura | India capital goods October 12.0 0.0 1 yr fwd P/B chart Mean +1STDEV -1STDEV Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: Company. Bloomberg Mar-11 Source: Company. • Sales growth has been consistently on decline over the past 12 years. necessitating an analysis of structural issues in addition to cyclical problems.5 2. • Margins have come off from their FY06-FY09 peak period and are close to their FY09 lows. • Most of the parameters are at their lows.0 1.0 4.5 3.5 1. 84: Stock still trading above 12 yr mean P/E range… Bharat Electronics 1 year forward P/E chart (x) Fig. though valuation is still well above mean multiples. 2011 Consensus valuation On consensus numbers.

Mining and Infrastructure equipment supply. 86: Sharp change in FY05 followed by consistent declining trend in the return ratios… 30% ROE 25% 20% 15% 10% 5% 0% Fig. Nomura research Management of working capital and asset turnover • Asset turnover has been volatile over the years. Fig. reflecting the sector cyclical trends. which is now fading 30% 25% 20% 15% 10% 5% ROCE FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. the company has expanded its global reach by opening a local company at Indonesia and Brazil recently in addition to its Malaysia and China offices. The company operates under three major business verticals – Mining & Construction. As part of its globalization strategy. Balance sheet and return efficiency Consistency of return ratios • Return ratios are back to single digits after experiencing a spike during FY05-FY09. respectively. Power. 87: … suggests a temporary business change impact in FY05. however. • The working capital cycle peaked in FY04 but has deteriorated sharply since then. The company has drawn up VISION – 2013 with an ambitious growth rate of 12% CAGR for crossing INR 50 bn turnover by FY14 and achieving the INR 100 bn mark by FY17. Rail. Defence and Rail & Metro. The Rail & Metro segment accounted for 37% of revenue in FY11. 2011 BEML (BEML IN. Nomura research Source: Company. Not rated) Company background BEML Limited operates in India’s core sectors such as Defence. • A sharp improvement was seen in FY05 across the board but it has been followed by secular downfall since then.Nomura | India capital goods October 12. while Earth Moving and Defence accounted for 41% and 20%. except in FY11 FY11 63 0% . it is now even worse than the previous lows.

Nomura research Fig.85 0.65 0. Nomura research FY11 Source: Company. 88: Asset turnover broadly mirrors sector cycle… (x) Fig. 90: WC cycle improved sharply until FY04 and has been worsening since then except for a sudden plunge in FY11 Days of revenue 300 250 200 150 100 50 0 -50 Net working capital cycle FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company.6%.00 0.4 1. Nomura research Trajectory of growth • Sales growth has been slowing gradually for the company and is into negative territory now.1 1.0 0.10 1.3 1. making it the lowest growth profile across the companies in this analysis.2 1.Nomura | India capital goods October 12.95 0. Sales CAGR over FY99-11 is a mere 6. 2011 Fig.6 Asset turnover (ex cash) FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. 89: …but bit more volatile and now worse than late ’90s (x) 1.7 0. • The profitability of BEML has worsened with EBITDA declining at a 14% CAGR since FY05 and margins reaching all time lows.70 0.9 0.75 0.05 1.80 0.8 0.60 Asset turnover 1. FY11 FY11 64 .90 0.

Nomura research Source: Company. 92: Margin movement explains ROE/ROCE pattern since FY04. Fig. 91: Sales growth has only occasionally been above 15% Fig. 93: Consensus est. 2011 Fig. EBITDA CAGR since FY05 is -14% % of revenues 25% 20% 15% 10% 5% 0% -5% -10% Sales growth 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% EBITDA margin FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. Nomura research Risks from an adverse turn in the cycle Poor sales and margins trend are approaching levels last seen in previous cycle lows.Nomura | India capital goods October 12. Consensus estimates • Consensus EPS estimates for BEML are down 30-35% from peak levels. cut 30-35% from peak INR 100 90 80 70 60 50 40 Consensus EPS FY12 Consensus EPS FY13 Nov-10 Apr-11 Aug-11 Aug-11 Sep-11 Aug-10 May-11 May-11 Source: Bloomberg May-11 Sep-11 Jun-11 Jan-11 Jun-11 Jul-11 Feb-11 Feb-11 Feb-11 Mar-11 Jul-11 FY11 65 .

with margins approaching previous cycle lows. • EBITDA has been declining at a 14% CAGR since FY05. Bloomberg Summary BEML stock underperformed the SENSEX by 36% over past 12 months. However.Nomura | India capital goods October 12. • Consensus estimates are building in around 30-35% downside from current level. 94: Stock trading close to -1 Std. we note that it is currently trading at -1 standard deviation of 12-year mean trading levels. • Sales growth has been steadily falling since FY05 and turned negative in FY11. • Return and turnover ratios are at the bottom seen during the previous cycle. the working capital cycle has been worsening though we notice one-off improvement in FY11. Fig. • Valuation is close to -1 standard deviation of 12-year mean P/E but in line with mean historical FY99-05 trading multiples. Mar-11 66 . the current valuation is in line with the mean multiple levels the stock used to trade at between FY99-FY05. deviation of mean… BEML 1 year forward P/E chart (x) Fig. but is there value? BEML 1 year forward P/BV chart (x) 35 30 25 20 15 10 5 0 1 yr fwd P/E chart +1STDEV Mean -1STDEV 7 6 5 4 3 2 1 0 1 yr fwd P/B chart +1STDEV Mean -1STDEV Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: Company. 2011 Consensus valuation While the stock has fallen significantly from peak levels. Bloomberg Mar-11 Source: Company. 95: … on both P/E and P/BV.

FY11 67 . development and manufacturing of castings used in various industries including cement. 2011 AIA Engineering (AIAE IN. Fig. Nomura research Management of working capital and asset turnover • Total as well as ex-cash asset turnover are at the bottom and seem to be dictated by business cycles • Working capital cycle also follows similar trend over FY03-FY08 and improved since FY09. Nomura research Source: Company. 97: …though they are in line with business cyclicality 27% ROCE FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 15% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. Not rated) Company background AIA Engineering (AIAE) focuses on the design. mining and power. 96: Return ratios have declined since FY09 levels… 75% ROE 65% 55% 45% 35% 25% 15% 25% 23% 21% 19% 17% Fig. AIAE has provided return on equity above 20% except in the past two years. Receivable days have improved continuously except in last two years while inventory days have been cyclical. AIAE has also collaborated with Southwestern Corp. AIAE is the second-largest Hi-Chrome casting producer in the world. Balance sheet and return efficiency Consistency of return ratios • AIA Engineering (AIAE IN) returns are seen to be in line with business cycles. for process improvements. AIAE provides sales and services in more than 75 countries through its wholly owned subsidiary Vega Industries.Nomura | India capital goods October 12. UK.

Nomura research FY11 Source: Company. Nomura research Fig. 98: Asset turnover has deteriorated consistently… (x) Fig.4 1.9 0.7% CAGR while EBITDA has been at a 26.1 1.5 1. sales growth shows high cyclicality over the years. Nomura research Trajectory of growth • Sales grew at 23.8 0.6 Asset turnover 1.2 1.2 1.2% CAGR over the past 10 years. FY11 FY11 68 . 99: …ex cash too (x) 1. 2011 Fig. 100: WC cycle largely flat except for FY02 and FY09 Days of revenue 260 240 220 200 180 160 140 120 100 80 Net working capital cycle FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company.6 1.Nomura | India capital goods October 12.7 0.1 1.5 1.3 1.8 Asset turnover (ex cash) FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company.0 0.3 1.0 0.4 1.7 1. However.9 0.

with the bulk of the cut in near-term estimates. Nomura research FY11 Source: Company. though margins were still falling. 103: Consensus estimates down 15-35% from peak INR 32 30 28 26 24 22 Consensus EPS FY12 Consensus EPS FY13 Source: Bloomberg Jan-10 Feb-10 Feb-10 May-10 Jun-10 Jun-10 Jul-10 Jul-10 Aug-10 Aug-10 Oct-10 Nov-10 Nov-10 Jan-11 Feb-11 Feb-11 Feb-11 Mar-11 Apr-11 Apr-11 May-11 May-11 May-11 Jun-11 Jun-11 Jul-11 Jul-11 Aug-11 Aug-11 Aug-11 Sep-11 Sep-11 20 FY11 69 .Nomura | India capital goods October 12. Nomura research Risks from an adverse turn in the cycle As of FY11 levels. sales trends are still recuperating from the post-Lehman slowdown. Consensus estimates • Consensus estimates are down 15-35% from their peak. 101: Sales growth volatile amidst cyclicality 60% 50% 40% 30% 20% 10% 0% -10% -20% Sales growth Fig. 2011 Fig. 102: Margins seem cyclical though trending higher % of revenues 29% 27% 25% 23% 21% 19% 17% 15% EBITDA margin FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. Trends suggest that overall the company is yet to recover from previous cycle lows. Fig.

Return and turnover ratios are at the bottom while margins showing downturn since FY08. Fig. 105: …and close to -1 Std.Nomura | India capital goods October 12. 2011 Consensus valuation The stock is now trading lower than the average valuation it got over the last 12 years. Bloomberg Summary AIAE stock performance has been at par with the SENSEX over the past 12 months. 104: Stock trading between mean and -1 Std deviation P/E Fig. while valuations are still almost twice that of the post-Lehman lows. deviation on P/BV AIA Engineering 1 year forward P/E chart (x) AIA Engineering 1 year forward P/B chart (x) 25 23 21 19 17 15 13 11 9 7 5 1 yr fwd P/E chart Mean +1STDEV -1STDEV 5 4 1 yr fwd P/B chart +1STDEV Mean -1STDEV 3 2 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: Company. Bloomberg Mar-11 Source: Company. • Almost all data points show high cyclicality in business. • Consensus estimates are building in around 15-35% downside from their peak. Mar-11 70 1 .

ceramics and electro minerals from its 25 factories spread over seven countries. with sales over USD 3. Receivables have contributed to improvement. while inventory has remained an issue. Nomura research FY11 Source: Company. UK and Murugappa Group. when return ratios hit a high but asset turn was at a low.14bn. Nomura research Management of working capital and asset turnover • Asset turnover ratio shows similar pattern as return ratios with the exception of FY08. Balance sheet and return efficiency Consistency of return ratios • Despite business cyclicality being evident. • The asset turnover dip in FY08-FY09 was due to the cyclical impact on sales and working capital. The Murugappa Group is one of India's leading conglomerates. 107: …though lower than previous cycle ROE 49% 44% 39% 34% 29% 24% 19% 14% ROCE FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. Fig. India. CU was incorporated in 1954 as a joint venture between Carborundum Company. 2011 Carborundum Universal (CU IN. Universal Grinding Wheel Company. CU has shown consistent growth over the past ten years on account of its successful acquisitions as part of the backward integration. FY11 71 . 106: Return ratios in line with peers maintained throughout… 54% 49% 44% 39% 34% 29% 24% 19% 14% Fig. the company has maintained return ratios of 15-20% throughout. as per our reading. Not rated) Company background Carborundum Universal (CU) manufactures and supplies abrasives. • Working capital cycle has improved despite cyclical pressures. in line with peer averages.Nomura | India capital goods October 12. • ROE and ROCE are now back to normal levels after bottoming out in FY10. USA.

05 1. 110: Net WC cycle has shrunk sharply despite cyclicality Days of revenue 130 125 120 115 110 105 100 95 90 85 80 Net working capital cycle FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company.10 1. 2011 Fig.85 0.2% CAGR in EBITDA over the past ten years.95 0.90 0.70 Asset turnover 1. FY11 FY11 72 .Nomura | India capital goods October 12. Nomura research Trajectory of growth • Carborundum Universal has managed sales growth at ~13. Nomura research FY11 Source: Company.95 0. providing ~13.85 0. Nomura research Fig.05 1.00 0.10 1.75 Asset turnover (ex cash) FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. and the trend has been of a consistent double-digit growth rate.8% CAGR over the past 10 years.90 0. 108: Asset turnover show signs of cyclicality (x) Fig.80 0.00 0. • Margins are also seen in the range of 17-19%.75 0.80 0. We note that margins bottomed at 17% post Lehman crisis. 109: no major difference in asset turnover ex cash (x) 1.

Nomura research Source: Company. Fig.100 bps of 18% since FY05 % of revenues 23% 22% 21% 20% 19% 18% 17% 16% 15% 14% EBITDA margin FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. Nomura research Risks from an adverse turn in the cycle Both sales and margins trends suggest a revival of the company’s business cycle from the post-Lehman lows witnessed in FY09. +/. 2011 Fig. 113: Consensus estimates INR 28 26 24 22 20 18 16 14 12 Consensus EPS FY12 Consensus EPS FY13 10 Jan-10 Mar-10 May-10 Jul-10 Source: Bloomberg Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 FY11 73 . 112: Cyclical margins. 111: Sales growth has consistently been in double digits 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Sales growth Fig.Nomura | India capital goods October 12. Consensus estimates • Consensus EPS estimates have consistently been rising over the past 18 months or so.

Bloomberg Summary Carborundum Universal stock outperformed overall markets by 51% over the past 12 months. 115: …and close to the same on P/BV Carborundum Universal 1 year forward P/BV chart (x) 25 20 15 10 5 0 1 yr fwd P/E chart Mean +1STDEV -1STDEV 6 5 4 3 2 1 0 1 yr fwd P/B chart Mean +1STDEV -1STDEV Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: Company. • Sales growth witnessed a dip in FY-08-FY09 due to cyclical pressure. • Carborundum Universal has managed to provide consistent returns in the range of 15-20%. 114: Stock trading at +1 Std deviation of P/E mean… Carborundum Universal 1 year forward P/E chart (x) Fig.Nomura | India capital goods October 12. however. Mar-11 74 . 2011 Consensus valuation The stock is trading well above its mean P/E and P/BV multiple. • The company has maintained a healthy EBITDA margin of +/-100bps of 18% since 2005. Bloomberg Mar-11 Source: Company. • Consensus estimates have increased consistently. Fig. both sales and working capital returned to average in FY11.

Nomura | India capital goods October 12. UK. Nomura research Source: Company. Receivables in particular have been key contributor to the deterioration. The company has recently started pursuing the residential segment with its wide range of room air conditioners. Blue Star primarily focuses on the corporate and commercial markets. even as WC cycle continues to elongate. Blue Star’s ROE/ROCE profile is still better than peer average at 25%+ levels.200 dealers. with an annual turnover of ~INR 29 bn. Fig. FY11 75 . Thales e-Security Ltd. Balance sheet and return efficiency Consistency of return ratios • Despite a sharp fall-off since FY08. Eaton-Williams. 2011 Blue Star (BLSTR IN. Hitachi. Not rated) Company background Blue Star is India's largest central air-conditioning company. • Working capital cycle has been worsening except for brief improvement in FY07-FY08. since then slowing sales growth has led to significant fall off in the asset turnover. Japan.. a network of 29 offices. and Jeol. 116: Above peer average return ratios… 78% ROE 68% 58% 48% 38% 28% 18% Fig. 117: … despite fall from peak in FY08 65% 60% 55% 50% 45% 40% 35% 30% 25% ROCE FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 20% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. UK. However. Japan to offer superior products and solutions to customers. Blue Star has business alliances with world renowned technology leaders such as Rheem Mfg Co. 6 manufacturing facilities and over 1. USA. Nomura research Management of working capital and asset turnover • Asset turnover for the company peaked in FY08 thus explaining ROE peaking the same year.

8 1.5 1.7 1.3 Asset turnover (ex cash) FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company.7 1. Nomura research Trajectory of growth • Sales growth shows a pattern similar to asset turnover and suggests high correlation to cycle.6 1.6 1. in our view.3 Asset turnover 2. 2011 Fig. Nomura research Fig.9 1.1 2. 120: WC cycle has risen sharply and worse than Voltas Days of revenue 90 80 70 60 50 40 30 20 10 0 Net working capital cycle FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company.0 1.1 2.9 1. 119: …and is now lower than previous lows (x) (x) 2. • EBITDA margin had improved continuously until FY10 and is now similar to FY99 levels.4 1.5 1.0 1.8 1. FY11 FY11 76 . Nomura research FY11 Source: Company. 118: Asset turnover peaked in FY09 (same as ROE/ROCE)… Fig. • Trend has been similar to Voltas directionally though volatility is much higher.4 1.Nomura | India capital goods October 12.

Fig.Nomura | India capital goods October 12. 123: Consensus est. better than Voltas % of revenue Sales growth 12% 11% 10% 9% 8% 7% 6% 5% EBITDA margin FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. while we notice a delayed impact on EBITDA margins. Nomura research Risks from an adverse turn in the cycle Sales trends are just now reviving (more of a base effect) from the post-Lehman collapse. Consensus estimates • Consensus EPS estimates for Blue Star are down 35-40% from peak levels compared to a 20-25% cutback in Voltas estimates. Nomura research FY11 Source: Company. 122: Delayed cyclicality in margins. 2011 Fig. down sharply since peak INR 35 Consensus EPS FY12 Consensus EPS FY13 30 25 20 Nov-10 Jan-10 Jun-10 Jan-11 Jun-11 Jul-10 May-10 May-11 Feb-10 Feb-11 Mar-10 Mar-11 Apr-10 Oct-10 Aug-10 Sep-10 Dec-10 Apr-11 Jul-11 15 Source: Bloomberg Aug-11 FY11 77 . 121: Sales pattern highly correlated to business cycle 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% Fig.

3. as discussed above. 2011 Consensus valuation The stock is trading almost at the 12 year average P/E and P/BV multiples. Tight control over the WC cycle has allowed Voltas to keep a check on its asset turnover as well as return ratios. • Blue Star’s 12-year mean P/E multiple at ~12x is in line with Voltas. Mar-11 78 0 . Currently.5x for Voltas. 125: …but valuations still reflective of mid-cycle Blue Star 1 year forward P/BV chart (x) 30 25 20 15 10 5 0 1 yr fwd P/E chart +1STDEV Mean -1STDEV 16 14 12 10 8 6 4 2 1 yr fwd P/B chart +1STDEV Mean -1STDEV Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: Company. • Asset turnover. Bloomberg Source: Company. while on P/BV it is 4x vs. 124: Significant de-rating already… Blue Star 1 year forward P/E chart (x) Fig. • Consensus estimates are sharply down by around 35-40% since peak.Nomura | India capital goods October 12. return ratios and working capital cycle are close to the bottom • Blue Star shows similar trends as that of Voltas but the volatility is high. • We also notice sharp contrast in the way WC cycle has been managed by Blue Star as against a very tight rein displayed by Voltas. Blue Star also enjoys higher margins compared to Voltas. Bloomberg Summary Blue Star stock underperformed overall markets 31% over the past 12 months. Voltas is trading below the 12-year mean multiples. Fig.

2011 79 .Nomura | India capital goods October 12.

Nomura | India capital goods October 12. 2011 80 .

Inc. Amar Kedia and Indrajit Yadav.. Nomura International plc or any other Nomura Group company. Issuer Specific Regulatory Disclosures Mentioned companies Issuer name ABB India Bharat Heavy Electricals Crompton Greaves Cummins India Thermax Voltas Ticker ABB IN BHEL IN CRG IN KKC IN TMX IN VOLT IN Price INR 664 INR 332 INR 152 INR 410 INR 417 INR 101 Price date 10-Oct-2011 10-Oct-2011 10-Oct-2011 10-Oct-2011 10-Oct-2011 10-Oct-2011 Stock rating Reduce Neutral Buy Neutral Buy Buy Sector rating Not rated Not rated Not rated Not rated Not rated Not rated Disclosures Previous Rating Issuer name ABB India Bharat Heavy Electricals Crompton Greaves Cummins India Thermax Voltas Previous Rating Neutral Reduce Not Rated Buy Neutral Not Rated Date of change 30-Sep-2010 11-Oct-2011 09-Feb-2010 12-Aug-2010 11-Oct-2011 20-Sep-2010 Rating and target price changes Ticker Old stock rating New stock rating Old target price New target price ABB India Bharat Heavy Electricals Thermax Voltas ABB IN BHEL IN TMX IN VOLT IN Reduce Reduce Neutral Buy Reduce Neutral Buy Buy INR 585 INR 346 INR 645 INR 234 INR 525 INR 332 INR 500 INR 150 81 . 2011 Appendix A-1 Analyst Certification We.Nomura | India capital goods October 12. is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International. (2) no part of our compensation was. hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report.

a portion of which is generated by Investment Banking activities. are classified as a Buy rating. Capital IQ. If you have difficulty with this site or you do not have a password. *The Nomura Group as defined in the Disclaimer section at the end of this report. 0% of companies with this rating are investment banking clients of the Nomura Group*. Europe: Dow Jones STOXX 600. A 'Bearish' stance. salesperson (1-877-865-5752) or email grpsupport-eu@nomura. indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. please contact your Nomura Securities International. 10% have been assigned a Reduce rating which.current price)/current price. 3% of companies with this rating are investment banking clients of the Nomura Group*. please email grpsupport-eu@nomura. is classified as a Hold rating. In most cases. etc. Reuters and ThomsonOne. A rating of 'Reduce'. for purposes of mandatory disclosures. indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. *The Nomura Group as defined in the Disclaimer section at the end of this report. 50% of companies with this rating are investment banking clients of the Nomura Group*. indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. As at 30 September 2011. Unless otherwise noted. for purposes of mandatory disclosures. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues.com/research/globalresearchportal or requested from Nomura Securities International. A rating of 'Suspended'. for purposes of mandatory disclosures. indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. 20% of companies with this rating are investment banking clients of the Nomura Group*. Inc.Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Online availability of research and additional conflict-of-interest disclosures Nomura Equity Research is available on nomuranow. Inc. the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis. 8% of companies with this rating are investment banking clients of the Nomura Group*. SECTORS A 'Bullish' stance. may not be associated persons of NSI. and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies. Factset. 54% have been assigned a Neutral rating which. A rating of 'Neutral'. is classified as a Hold rating. Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.com/research/globalresearchportal). STOCKS A rating of 'Buy'. indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. 7% have been assigned a Reduce rating which. are classified as a Sell rating.nomuranow.. US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.com/research/globalresearchportal/pages/disclosures/disclosures. target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including. Benchmarks are as follows: United States: S&P 500. on 1-877-865-5752.com. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://go. are classified as a Buy rating. unless otherwise stated in the valuation methodology. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear.nomuranow. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomura’s Equity Research product in the sector for which they have coverage.com for technical assistance. Middle East and Africa. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. for purposes of mandatory disclosures. for purposes of mandatory disclosures.Nomura | India capital goods October 12. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which. 82 . If you have any difficulties with the website. subject to limited management discretion. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://go. the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules.nomuranow. 2011 Important Disclosures Conflict-of-interest disclosures Important disclosures may be accessed through the following website: http://go. are classified as a Sell rating. indicates that the rating. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector.aspx . and trading securities held by a research analyst account. Distribution of ratings (US) The distribution of all ratings published by Nomura US Equity Research is as follows: 39% have been assigned a Buy rating which. 41% of companies with this rating are investment banking clients of the Nomura Group*.com for assistance. Analysts may also indicate absolute upside to target price defined as (fair value . public appearances. As at 30 September 2011. indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. Bloomberg. 41% have been assigned a Neutral rating which. Explanation of Nomura's equity research rating system in Europe. for purposes of mandatory disclosures. A 'Neutral' stance. but not limited to.

A rating of '3' or 'Neutral'. estimates. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. and by other risks related to the company or the market. US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy'. 2011 Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside). Telecoms: FTSE W Europe Business Services.Nomura | India capital goods October 12. subject to limited management discretion. the Target Price will equal the analyst's 12-month intrinsic valuation of the stock. In most cases. A 'Bearish' stance. SECTORS A 'Bullish' stance. A 'Sell' recommendation indicates that downside is more than 20%. In most cases. by sector Hardware/Semiconductors: FTSE W Europe IT Hardware. etc. and may not occur if the company's earnings differ from estimates. However. if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts. In most cases. Accordingly. Communications equipment: FTSE W Europe IT Hardware. A 'Buy' recommendation indicates that potential upside is 15% or more. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage.Current Price)/Current Price. indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. Auto & Components: FTSE W Europe Auto & Parts.Current Price) / Current Price. then the fair value may differ from the intrinsic fair value. indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. Middle East and Africa. A rating of '2' or 'Buy'. if discussed. projections. indicates that the analyst expects the sector to outperform the Benchmark during the next six months. indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. United States: S&P 500. A 'Reduce' recommendation indicates that potential downside is 5% or more. Global Emerging Markets: MSCI Emerging Markets ex-Asia. indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. Nomura might not publish additional research reports concerning this company. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A rating of '5' or 'Sell'. Europe. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. and it undertakes no obligation to update the analysis. Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe. subject to limited management discretion. our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. A 'Strong buy' recommendation indicates that upside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. Business Services: FTSE W Europe. the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. Benchmarks are as follows: Japan: TOPIX. A rating of '4' or 'Reduce'. based on an appropriate valuation methodology such as discounted cash flow. MSCI World Technology Hardware & Equipment. A 'Neutral' recommendation indicates that upside or downside is less than 10%. therefore. 83 . Ecology Focus: Bloomberg World Energy Alternate Sources. A 'Buy' recommendation indicates that upside is between 10% and 20%. The achievement of any target price may be impeded by general market and macroeconomic trends. price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. A 'Neutral' stance. A 'Reduce' recommendation indicates that downside is between 10% and 20%. Recommendations are set with a 6-12 month horizon unless specified otherwise. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside). which is defined as (Target Price . indicates that the analyst expects the sector to underperform the Benchmark during the next six months. indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. Target Price A Target Price. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. reflect in part the analyst's estimates for the company's earnings. indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. conclusions or other information contained herein. within this horizon. which is defined as (Fair Value . multiple analysis.

Taipei Branch (‘NITB’). The securities described herein may not have been registered under the US Securities Act of 1933. Unless prohibited by the provisions of Regulation S of the U. (‘NSM’). Nomura Securities Malaysia Sdn. Mumbai. which is authorized and regulated in Australia by the ASIC. such as e-mail. Annie Besant Road. Furthermore. the Nomura Group may buy and sell certain of the securities of companies mentioned herein. personal account dealing rules. destroyed. If this publication has been distributed by electronic transmission. Opinions expressed are current opinions as of the original publication date appearing on this material only and the information. among others. therefore. Bhd. This publication has also been approved for distribution in Malaysia by NSM. RELIABLE. it is possible that individual employees of Nomura may have different perspectives to this publication. for distribution in Hong Kong by NIHK. other members of the Nomura Group may from time to time perform investment banking or other services (including acting as advisor. include: Nomura Securities Co. Inc. photocopied. which is regulated by the Hong Kong Securities and Futures Commission. or income derived from. then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted. which is authorized and regulated by the UK Financial Services Authority ('FSA') and is a member of the London Stock Exchange. and.T. TO THE MAXIMUM EXTENT PERMISSIBLE ALL WARRANTIES AND OTHER ASSURANCES BY NOMURA GROUP ARE HEREBY EXCLUDED AND NOMURA GROUP SHALL HAVE NO LIABILITY FOR THE USE. if any. NSL accepts legal responsibility for the content of this publication. please request a hard-copy version. (collectively. This publication may be distributed in Germany via Nomura Bank (Deutschland) GmbH. 2011 Disclaimers This publication contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein. If and as applicable. SEBI Registration No: BSE INB011299030. the 'Nomura Group'). (‘NSL’). effectively assume currency risk. or in connection with. referenced above). by any person other than those authorised to do so into the Kingdom of Saudi Arabia or in the United Arab Emirates or to any person located in the Kingdom of Saudi Arabia or to clients other than 'professional clients' in the United Arab Emirates. Dr. that may be associated with any investment decision. AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT. Nomura Group produces a number of different types of research product including. In Singapore. NOMURA GROUP DOES NOT WARRANT OR REPRESENT THAT THE PUBLICATION IS ACCURATE.. NSI's investment banking relationships. Worli. NSC and other non-US members of the Nomura Group (i. P. without limitation. This publication has been approved for distribution in Australia by NAL. Banque Nomura France (‘BNF’). India. or duplicated in any form. Japan. investors in securities such as ADRs. their officers. expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). as such. including persons.com/research/globalresearchportal under the 'Disclosure' tab. India (Registered Address: Ceejay House. Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis. Nomura International (Hong Kong) Ltd. Plot F. Malaysia. which may arise as a result of electronic transmission. Madrid Branch (‘NIplc. Madrid’) and OOO Nomura. Nomura Singapore Ltd. and/or. Nomura Financial Advisory and Securities (India) Private Limited (‘NFASL’). you represent that you are not located in the Kingdom of Saudi Arabia or that you are a 'professional client' in the United Arab Emirates and agree to comply with these restrictions. NSE INB231299034. ('NSC') Tokyo.nomuranow.kofia. INF231299034. as the case may be. directors and employees. involved in the preparation or issuance of this material may. Capital Nomura Securities Public Company Limited (‘CNS’). Securities Act of 1933. may not be offered or sold in the United States or to US persons unless they have been registered under such Act. with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or elsewhere identified in the publication. Australia (ABN 48 003 032 513). Disclosure information is available at the Nomura Disclosure web page: http://go. to the extent permitted by applicable law and/or regulation. which is authorized and regulated in Germany by the Federal Financial Supervisory Authority ('BaFin'). the investment.e. Nomura Indonesia (‘PTNI’). Hong Kong.com/research/globalresearchportal/pages/disclosures/disclosures. Inc. Where the activity of liquidity provider is carried out in accordance with the definition given to it by specific laws and regulations of other EU jurisdictions. whether as a result of differing time horizons. to the extent it relates to non-US issuers and is permitted by applicable law. which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6. or (ii) redistributed without the prior written consent of the Nomura Group member identified in the banner on page 1 of this report. this publication. or derivatives (including options) thereof. investment banking and non-investment banking compensation and securities ownership (identified in this report as 'Disclosures Required in the United States'). or except in compliance with an exemption from the registration requirements of such Act. policies and procedures for managing conflicts of interest arising from the allocation and pricing of securities and impartial investment research and disclosure to clients via client documentation. the report should not be viewed as identifying or suggesting all risks. excluding NSI). (‘NIHK’). Indonesia. This publication has been approved by NIHK. direct or indirect. This publication has been approved for distribution in the United Kingdom and European Union as investment research by NIplc. arrive late or incomplete. NIplc. INE 231299034). Nomura Australia Ltd. maintenance of a Restricted List and a Watch List. as defined by the FSA. (‘NAL’). Ltd. regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412. NIplc or any other member of the Nomura Group. or take into account the particular investment objectives. the securities (including ownership by NSI. Level 11. have long or short positions in. Dubai Branch (‘NIplc. or immediately following. its publication. Ltd. Please see the further disclaimers in the disclosure information on companies covered by Nomura analysts available at http://go. FIT FOR ANY PARTICULAR PURPOSE OR MERCHANTABLE AND DOES NOT ACCEPT LIABILITY FOR ANY ACT (OR DECISION NOT TO ACT) RESULTING FROM USE OF THIS PUBLICATION AND RELATED DATA.kr ). Thailand. Nomura Financial Investment (Korea) Co. Shivsagar Estate. this publication has been distributed by NSL. directors and employees may. Nomura Holdings Inc's affiliate or its subsidiary companies may act as market maker or liquidity provider (in accordance with the interpretation of these definitions under FSA rules in the UK) in the financial instruments of the issuer. you must contact a Nomura entity in your home jurisdiction if you want to use our services in effecting a transaction in the securities mentioned in this material. (‘NFIK’). THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION. ('NSI'). COMPLETE. recommendations contained in one type of research product may differ from recommendations contained in other types of research product. are specified in disclaimers and related disclosures in this report.. Unless governing law permits otherwise. this will be separately disclosed within this report. where it concerns securities. If verification is required. and/or its officers. issued by their foreign affiliates in respect of recipients who are not accredited. or contain viruses. have acted upon or used this material prior to. Nomura Securities International. manager or lender) for. Nomura is under no duty to update this publication. The sender therefore does not accept liability for any errors or omissions in the contents of this publication. NY. Neither this publication nor any copy thereof may be taken or transmitted or distributed. Moscow (‘OOO Nomura’). Mumbai. as agent for its clients. New York. By accepting to receive this publication. companies mentioned herein. or related securities or derivatives.or. Furthermore. For financial instruments admitted to trading on an EU regulated market. United Kingdom. In addition. under the US Securities Exchange Act of 1934. methodologies or otherwise. by any means. are subject to change without notice. and may not. Nomura International plc ('NIplc').Nomura | India capital goods October 12. of companies mentioned herein. directly or indirectly. Nomura International (Hong Kong) Ltd. (II) NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL. confidentiality and independence policies. and buy or sell. a US-registered broker-dealer. Additional information available upon request NIPlc and other Nomura Group entities manage conflicts identified through the following: their Chinese Wall. NIplc. Foreign-currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of. Singapore (Registration number 197201440E. futures and foreign exchange. In addition. quantitative analysis and short term trading ideas. Any failure to comply with these restrictions may constitute a violation of the laws of the Kingdom of Saudi Arabia or the United Arab Emirates. Taiwan. or solicit investment banking or other business from.aspx 84 . fundamental analysis. Investors should consider this report as only a single factor in making their investment decision and. this material is distributed in the United States. It is intended only for investors who are 'eligible counterparties' or 'professional clients' as defined by the FSA. No part of this material may be (i) copied. including the opinions contained herein. lost. MISUSE.. It does not constitute a personal recommendation.400 018. Further information on any of the securities mentioned herein may be obtained upon request. corrupted. Affiliates and subsidiaries of Nomura Holdings. regulated by the Monetary Authority of Singapore). the values of which are influenced by foreign currencies. AND (III) BASED UPON INFORMATION THAT WE CONSIDER RELIABLE. the Nomura Group. OR DISTRIBUTION OF THIS INFORMATION.nomuranow. in such case. or needs of individual investors. be redistributed to retail clients as defined by the FSA. by NSI. financial situations.S. Recipients of this publication should contact NSL in respect of matters arising from. Dubai’). if any. This publication has not been approved for distribution in the Kingdom of Saudi Arabia or to clients other than 'professional clients' in the United Arab Emirates by Nomura Saudi Arabia.

Tel: +886 2 2176 9999 Fax: +886 2 2176 9900 Nomura Financial Investment (Korea) Co. please contact your sales representative. India Tel: +91 22 4037 4037 Fax: +91 22 4037 4111 PT Nomura Indonesia Suite 209A. Mumbai. Tokyo 100-8130. Jung-gu. 8. Jakarta 10270. Singapore 018983. 17th floor. Songzhi Road.5. No. Otemachi 2-chome Chiyoda-ku. Ltd. Japan Tel: +81 3 5255 1658 Fax: +81 3 5255 1747. Menara IMC. Governor Phillip Tower. 8 Jalan Sultan Ismail. Sydney NSW 2000 Tel: +61 2 8062 8000 Fax: +61 2 8062 8362 Equity Research Department Financial & Economic Research Center Nomura Securities Co.O. 3272 0869 Singapore Taipei Seoul Kuala Lumpur India Indonesia Sydney Tokyo Caring for the environment: to receive only the electronic versions of our research. R. Singapore Tel: +65 6433 6288 Fax: +65 6433 6169 Nomura International (Hong Kong) Limited..400 018. Central. 8 Finance Street. Taipei 11047. Shivsagar Estate. Level 11. Seoul 100-768. Dr. Sentral Senayan II Building Jl. 50250 Kuala Lumpur.. Indonesia Tel: +62 21 2991 3300 Fax: +62 21 2991 3333 Nomura Australia Ltd. . Korea Tel: +82 2 3783 2000 Fax: +82 2 3783 2500 Nomura Securities Malaysia Sdn. 17/F Urbannet Building. Ltd. Level 25. Seoul Finance Center.1. Taipei Branch 17th Floor. Suite No 16. Hong Kong Tel: +852 2536 1111 Fax: +852 2536 1820 Nomura Singapore Limited 10 Marina Boulevard Marina Bay Financial Centre Tower 2. Walsin Lihwa Xinyi Building. Worli.Nomura Asian Equity Research Group Hong Kong Nomura International (Hong Kong) Limited 30/F Two International Finance Centre. Gelora Bung Karno. #36-01. Asia Afrika No. Annie Besant Road. Plot F. 84 Taepyeongno 1-ga. 2-2. 1 Farrer Place. Taiwan. 9th Floor. Level 16.C. Bhd. Malaysia Tel: +60 3 2027 6811 Fax: +60 3 2027 6888 Nomura Financial Advisory and Securities (India) Private Limited Ceejay House.

Sign up to vote on this title
UsefulNot useful