Industrials: 3QFY15 preview - withdrawal symptoms::Kotak Sec report

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3QFY15 preview – withdrawal symptoms. 3QFY15 will see wide divergence in
performance of Industrials companies (in terms of revenues and margins) with
company-specific factors at play. The overall sector earnings and order inflow/backlog
position will remain lackluster and management commentary is likely to be cautiously
optimistic. Infrastructure companies will benefit from improving growth (ports,
logistics), stabilization in construction activity and better traffic (roads).

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--> A summary of our expectations for key companies
 L&T (consolidated). For the consolidated (ex-services) business, we expect revenue growth of
5.6% yoy; the infrastructure segment will report steady 20%+ sales growth, which will be
negated by a sales decline of 10-20% in non-infrastructure segments (hydrocarbons, power,
heavy engineering and MMH), given their starting (FY2014-end) order backlog position (see
Exhibit 1). Consolidated (ex-services) EBITDA margins are expected to be 11%. Overall
consolidated revenue growth estimate of 9% is led by steady growth in the services businesses
and higher growth in the developmental business (on commission of the power project). L&T's
announced 3QFY15 order inflow was weaker, at around `86 bn (see Exhibit 2) versus
announced order inflow in 3QFY14 of about `131 bn.
 BHEL. We expect improved execution in the power segment versus extremely weak 1HFY15
(sales down 32% yoy), which will be partially negated by sales contraction in the industrial
segment, leading to modest yoy growth in overall revenues. Our 8.9% EBITDA margin (down
70 bps yoy) estimate factors in partial normalization in provision cost (1HFY15 had negligible
provisioning versus `22 bn in FY2014 or 5.7% of sales) and contained employee costs. BHEL
has so far (see Exhibit 3) announced order inflow of `164 bn (reported should be higher given
unannounced/spares inflows) versus FY2014 reported order inflow of `280 bn and our FY2015
estimate of `370 bn.
 Cummins India. Continued strong growth in exports and price hike-led sales growth in the
powergen segment (and a weak base in 3QFY14) will lead to our estimated 20% yoy revenue
growth. We expected EBITDA margin of 17.5% (down 180 bps yoy) though sequentially higher.
 Crompton Greaves. Domestic businesses are expected to report sedate sales growth yoy, while
overseas businesses will face currency headwinds (Euro/INR down 6% yoy). We expected a
marginal yoy improvement in overall margins, led by a recovery in overseas business due to a
potentially higher share of better-margin businesses (smart meters, systems) and the power
transformer business benefitting from a better margin profile of order wins in the recent past.
 Voltas: We expect 9.4% growth in sales, driven largely by strong growth in the cooling
products business (+20% yoy), while the projects business will remain sedate. We expect
EBITDA margins to decline by 72 bps yoy to 5%, led by normalization in margins of the UCP
and EPS segments (was very high in 3QFY14 and 4QFY14, led by several one-offs) and
continued lackluster performance in the EMP segment.
 Thermax: We expect strong 18% growth in sales, driven by implementation of the Reliance
order, won last year (not in the base). We expect EBITDA margin to marginally increase by 23
bps yoy to 9.2%, led by gradual normalization in margin of the environment segment (was
impacted last year by cost overruns and project delays at certain sites for the water business,
with some spillover into FY2015).

 Container Corporation. Strong underlying sector growth (see Exhibit 8) and higher
realizations from December will support overall revenue growth (we estimate 14% yoy
growth). Margin benefits of operating leverage and higher double stacking will be offset
by lower gross margins in December (realization hike is less than that in railways haulage).
 Gujarat Pipavav and Adani Ports and SEZ. For GPPV, we expect some growth
moderation in volumes (high base on business benefits from JNPT strike last year) and
realizations (full impact of the August 2013 hike was fully in the base). We estimate
strong EBITDA margins, benefitting from storage income (on slow evacuation of rail
cargo). Adani Ports and SEZ is expected to benefit from strong underlying sector growth
(see Exhibit 7). We build in steady 68-69% EBITDA margins, supported by benefits of
operating leverage.
 Sadbhav Engineering and IRB. We expect road construction companies to benefit from
stabilizing execution trends (see Exhibit 12) and improving traffic growth. Sadbhav’s
execution will also benefit from (1) its BOT projects entering a high-growth phase in
construction and (2) recent mining wins. For IRB, additional growth levers would be (1)
contribution from execution of recently won projects and (2) provisional completion
certificate achieved for the Amritsar Pathankot project (from November 28, 2014).
 KEC and Kalpataru. We expect modest growth for both companies based on improved
domestic execution (see Exhibits 10 and 11). This is expected to compensate for lower
starting order backlog for both companies for 3QFY15. We also expect improved margins
for both companies.

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