Sector Update

Capital Goods
Subdued Q4 as expected

Project-based companies reported flattish revenue (down 0.7% y-o-y) for Q4FY2020, although
Q4FY2020 Results Review
was on expected lines. Bharat Electronics (BEL), L&T, KEC and Kalpataru Power (KPTL) reported
Sector: Capital Goods better-than-expected performance while Thermax and Triveni Turbine fared poorly on execution
Sector View: Positive front. OPM improved marginally by 42 bps y-o-y due to stable commodity prices leading to
2.3% y-o-y rise in operating profit. Further, net profit marginally improved by 0.9% y-o-y for
largely aided by a lower tax outgo. Order booking remained weak (ex-L&T) due to deferment
Our coverage universe of orders affected by COVID-19 led disruption during last ten days of March 2020. We expect
ordering activities to remain subdued during FY2021 as government-led infrastructure spending
Companies CMP Reco. PT (Rs)
(Rs) might take some time to pick up; while concerns around global challenges persist, international
tendering is expected to remain mixed. Companies’ focus during FY2021 would be to maintain
Bharat 102 Buy 110
liquidity and contain working capital requirements. The activities at most project sites are at
Electronics
50- 70%, while the migrant workforce are expected to return to work slowly during Q2FY2021.
Finolex 295 Hold 325 Hence, we expect normalcy in project execution to return during Q3FY2021. The electrical and
cables
consumer durables companies (V-Guard, Polycab, KEI, Finolex Cables and Dixon Technologies)
KEC 289 Buy 350 reported revenue decline of 12% y-o-y during Q4FY2020 owing to loss of sales during the
Kalpataru 255 Buy 300 last ten days of March 2020, which is considered to be peak period. Dixon Technologies and
Power KEI reported flat revenue growth y-o-y while V-Guard, Polycab and Finolex cables revenues
L&T 951 Buy 1,250 declined in the range of 14% to 28% mirroring a slow pace of construction activities and
slowdown in consumption demand. OPM for consumer durable/electrical companies improved
Ratnamani 1,049 Buy 1,250
Metals y-o-y largely led sharp margin expansion for Polycab (up 424 bps) and Dixon Technologies (up
215 bps) while rest (Finolex Cables, V-Guard and KEI) witnessed a sharp decline in margins.
Thermax 781 Hold 815
Net profit growth of 25% y-o-y for the consumer durable/electrical companies was led by lower
Triveni 86 Hold UR tax outgo. Dixon and Polycab registered strong net earnings growth of 52.5% y-o-y and 65.8%
Turbines y-o-y respectively. V-Guard reported a steep fall (down 45.1% y-o-y) affected by lower sales
V-Guard 170 Buy 215 and dip in OPM. Management across consumer durable/ electrical companies highlighted
JMC Projects 52 Positive 62 that the companies observed a strong growth in months of January & February but a washout
in March, due to COVID-19. Companies are expecting significant correction in yearly sales,
KEI Industries 354 Positive 382
looking at current situation, which shall change based on how the COVID-19 scenario pans out.
Polycab India 844 Positive UR
Outlook:
Dixon 5,971 Positive UR
Technologies Uncertain environment likely to affect FY2021 than FY2022 earnings: The COVID-19 outbreak
and the shutdown led to stoppage of work at most factories, forcing brakes on demand and
execution. With the lockdown easing, most project sites across companies are at 50-70%
occupancy level with the migrant workforce slowly returning to work. However, execution is
yet to start at full pace which is expected to get reflected in H1FY2021 performance. Overall,
management commentary indicates some revival in ordering activity as orders due in March
2020 will be awarded in the subsequent months. However, for FY21, ordering activity should
remain subdued as government-led infrastructure spending might take some time to pick up while
concerns around global challenges persist. International tendering is expected to remain mixed.
Price chart In the current environment, most companies would focus on maintain liquidity, lowering capital
110
expenditure and containing working capital requirements. However, project-based companies
100
has maintained a healthy order backlog of 2.2x its FY20 revenue, despite weak order intake
90
over the trailing four quarters, which was compensated by lowering execution. Companies are
80 expected to witness some elongation in their working capital cycles as payments get delayed
70 and due to the extended support measures to vendors. We believe although the situation may
60 take time to recover, it will also bring about pent-up demand during FY2022-FY2023.
50 Valuations:
Oct-19

Apr-20
Jan-20
Jul-19

Jul-20

Prefer companies with inherent abilities to strive during turbulent times: We have seen a
Sensex BSE Capital Goods
steep correction in stock prices over the trailing two months, which was harsh for capital goods
companies having exposure to EPC projects and large export-oriented order books. Further,
lower utilisation rates will affect industrial players in H1FY2021, but we expect companies
with diversified businesses, higher service revenue and product basket catering to operating
expenditure spends to see a pickup quickly as normalcy returns. For project based companies
we prefer L&T, BEL, KPTL and KEC having a strong diversified order book, execution capabilities
and healthy balance sheet. In consumer durable/electrical, we prefer companies such as Dixon
Technologies, V-Guard, Polycab and KEI Industries with a strong cash flow position and better
working capital management with ability to bounce back in FY2022E.
Key Risks:
1) Weak domestic macroeconomic environment leading to weak project tendering and 2) higher
commodity prices affecting OPM.
Leaders: Bharat Electronics, Polycab, Dixon Technologies
Laggards: Triveni Turbine, V-Guard, Ratnamani Metals,
Preferred Picks: L&T, Bharat Electronics, KEC, Kalpataru Power, Polycab, Dixon Technologies and
KEI Industries.

July 06, 2020 36

 Sector Update
Q4FY2020 result snapshot:
Company Sales OPM (%) PAT QoQ
growth
Q4FY20 Q4FY19 Y-o-Y QoQ Q4FY20 Q4FY19 bps bps Q4FY20 Q4FY19 Y-o-Y
growth growth (YoY) (QoQ) growth
Bharat Electronics 5,817 3,899 49.2% 155.3% 25.7 24.6 112 1,003 1,047 601 -57.6% -57.6%
Finolex Cables* 651 823 -20.9% -7.2% 13.4 15.3 (197) 22 117 85 6.2% -34.5%
KEC 3,671 3,841 -4.4% 19.5% 10.1 10.4 (29) (27) 193 199 29.0% 4.2%
Kalpataru Power* 2,303 2,491 -7.6% 16.4% 11.0 10.7 29 48 107 137 48.9% 7.9%
L&T 44,245 43,303 2.2% 22.1% 11.6 12.2 (62) 21 3,197 3,418 15.2% -6.9%
Thermax 1,323 2,074 -36.2% -6.2% 4.8 8.2 (343) (322) 39 129 13.2% 229.0%
Triveni Turbines 154 240 -35.8% -24.2% 11.6 16.7 (507) (867) 14 28 18.6% -46.1%
Ratnamani Metals 629 716 -12.1% -16.8% 15.3 17.9 (265) 92 67 92 60.9% 32.1%
V-Guard* 537 740 -27.5% -14.4% 8.4 10.6 (215) (107) 33 59 27.2% -25.2%
Soft Coverage
JMC Projects 939 937 0.2% 1.1% 10.2 11.1 94 24 45 49 -7.4% 16.5%
KEI Industries* 1,259 1,259 0.0% -4.2% 10.8 10.6 (134) (101) 61 60 1.5% -15.8%
Polycab India 2,130 2,464 -13.6% -15.1% 15.7 13.5 424 60 214 140 52.5% -2.2%
Dixon Technologies 857 859 -0.2% -13.7% 4.9 5.2 215 133 28 17 65.8% 4.9%
AIA Engg 857 888 -3.5% 23.5% 22.7 24.9 (6) (335) 142 156 -9.2% -9.4%
Total 65,371 64,533 1.3% 21.7% 12.7 12.6 9 114 5,303 5,170 2.6% 43.1%
Total (excl L&T and 15,309 17,331 -11.7% 0.8% 11.1 11.1 6 (39) 1,059 1,151 -8.0% -6.4%
BEL)

Source: Company, Sharekhan Research, *Standalone financials

Valuations
Company CMP (Rs) Price Reco. EPS P/E
Target
(Rs) FY2020 FY2021E FY22E FY2020 FY2021E FY22E

Bharat Electronics 102 110 Buy 7.5 6.9 7.5 13.6 14.7 13.7
Finolex cables* 295 325 Hold 26.3 19.4 21.7 11.2 15.2 13.6
KEC 289 350 Buy 22.0 20.8 23.6 13.1 13.9 12.2
KPTL* 255 300 Buy 30.0 28.5 35.5 8.5 9.0 7.2
L&T 951 1,250 Buy 68.0 59.6 72.3 14.0 16.0 13.2
Ratnamani Metals 1,049 1,250 Buy 65.8 59.2 70.3 15.9 17.7 14.9
Thermax 781 815 Hold 18.9 22.2 31.4 41.4 35.2 24.9
Triveni Turbines 86 UR Hold 3.8 3.2 3.9 22.8 26.9 22.3
V-Guard* 170 215 Buy 4.3 4.6 5.7 39.3 36.8 29.8
Soft Coverage
JMC Projects* 52 62 Positive 9.4 7.2 10.1 5.5 7.3 5.1
KEI Industries* 354 382 Positive 28.5 28.4 36.8 12.4 12.5 9.6
Polycab India 844 UR Positive 54.2 43.5 53.8 15.6 19.4 15.7
Dixon Technologies 5,971 UR Positive 103.0 121.6 166.0 57.9 49.1 36.0
AIA Engg 1,608 NR NR 60.4 55.0 67.4 26.6 29.2 23.9

Source: Company, Sharekhan Research, *Standalone, NR- Not Rated, UR- Under Review

July 06, 2020 37

 Sector Update
Upward/Downward revision in earnings estimates in Q4FY20
Companies Change in Reason Current Previous Target
estimates Reco Reco Price
(Rs.)
The sector and the stock have seen significant
correction and at CMP, the valuation is attractive at
8.3x one-year forward P/E. We believe, this provides
an attractive investment proposition. We have fine-
tuned our earnings estimates for FY2021-FY2022
KEC International Maintained Buy Buy 350
and have revised our valuation multiples given
a healthy order backlog along with order inflow
visibility in international T&D & non-T&D business as
well as KEC’s execution capabilities to bag orders in
tough scenarios. We maintain a Buy rating.
We believe that the company’s performance is
likely to be impacted by delayed demand offtake
as - i) construction activity is likely to be adversely
impacted (60% mix) along with challenges in
automobiles industry impacting electric wires and
cables , ii) postponement of deferment of projects
by the government as the focus and funds will
be deployed in tackling the COVID-19 crisis, and
iii) challenges expected in the optic fibre cables
Finolex Cables* Fine- tuned Hold Hold
with lower investments from telecom, impacting 325
the communication cable segment. Despite
uncertainties, the balance sheet remains healthy
with a strong cash position. Hence, we have fine-
tuned our estimates for FY2021-FY2022. Moreover,
a key hangover with respect to issue surrounding re-
appointment of the chairman is sub-judice and thus,
remains unresolved. Hence, we maintain our Hold
rating on the stock.
KPTL has risen over 32% since our last report dated
May 21, 2020 which has been led by better than
expected Q4FY2020 performance, new order wins
and improving sector outlook led by favorable
government measures. We expect FY2021 to be
better for KPTL in terms of order intake, improving
prospects for asset divestments which will further
Kalpataru Power* Maintained Buy Buy 300
deleverage the balance sheet. Overall, the strong
order inflows and improvement in sector outlook
has lead to re-rating of the company’s valuation
multiple. We increase our valuation multiple for
Kalpataru along with higher contribution fromJMC
.We maintain our Buy rating on the stock with a
revised SOTP-based price target (PT) of Rs. 300
L&T’s strong order backlog along with its presence
across verticals and geographies in its core E&C
business provides healthy revenue visibility. Further
L&T’s recent order wins amid current uncertainties
are likely to improve upon execution during FY2022-
FY2023. Hence, we believe although FY2021 may
be relatively weak on account of macroeconomic
uncertainties, we expect L&T to bounce back during
FY2022 owing to multiple levers such as strong
L&T Fine-Tuned Buy Buy
business model, diversified order book, and healthy 1,250
balance sheet. The company continues to focus
on its strategic plan of improving its return ratios.
Consequently, the steep correction in L&T’s stock
price provides a favourable risk reward ratio to
investors (P/E ratio of 16x/13x its FY2021E/FY2022E
earnings). We have fine-tuned our estimates for
FY2021-FY2022 and we continue to maintain our
Buy rating

July 06, 2020 38

 Sector Update
Upward/Downward revision in earnings estimates in Q4FY20
Companies Change in Reason Current Previous Target
estimates Reco Reco Price
(Rs.)
Lower carry-forward order book along with lower
capacity utilisation in most core user industries
is likely to impact order inflows for FY2021.
Additionally, weak order intake outlook during
FY2021 may lead to further depletion of order book
by the end of FY2021. Hence, order inflows during
the current fiscal year would be the key monitorable
for the company. Further, H1FY2020 is expected to
Thermax Fine-tuned be remain weak owing to COVID-19 pandemic and Hold Hold
815
damage caused at its Dahej facility. The company
is expected to return to normalcy by Q3FY2021.
On a positive note, the company has been able to
improve its cash flow position during FY2020. We
have tweaked our estimates for FY2021-FY2022
factoring lower order booking and challenges
pertaining to the uncertainties related to execution
and production. We retain our Hold rating.
The management guided that the company could
see a decline in revenue by 10 to 15% in worst case
scenario and profit by 20% for FY2021. However,
the management expects better order inflow during
FY2021 due to the postponement of order finalisation
in Q4FY20 but expects deliveries of orders more
bunched up towards FY2022. The management
Triveni Turbine Fine-tuned Hold Hold UR
highlighted that enquiry pipeline remains healthy,
although fructifying of the same remains a key
monitorable considering the given uncertainties
in the current environment. We have revised our
revenues for FY2021-FY2022 factoring near-term
uncertainties in terms of execution and order inflow.
We maintain our Hold rating on the stock .
V-Guard, like its industry peers, has been affected
hard by weak sales in March 2020, which is the
peak sales period. Consequently, revenue for
FY2021 and near-term working capital requirements
have been affected negatively. However, V-Guard
largely caters to Tier 2/3/rural/suburban areas,
which is expected to rebound quickly as seen in
May where revenue was ~70% of May 2019, largely
coming from these Tier-2/3/rural/suburban areas.
We have lowered our revenue estimates, factoring in
V-Guard Industries* Fine-tuned a gradual improvement in the demand environment Buy Buy
215
for FY2021-FY2022, and have revised OPM for
FY2022. Currently, the stock is trading at a P/E ratio
of 31.6x its FY2022E earnings, which is almost 25%
discount to historical (trailing five year) average one-
year forward P/E multiple. We believe the company’s
strong balance sheet, reputed brand, and robust
business fundamentals will help emerge stronger
from the near-term weak environment. Hence, we
continue to maintain Buy on the stock with a revised
PT of Rs. 21
As order intake expected to remain soft in FY2021E
Bharat Electronics Downward and likely to pickup in FY2022E, also expects Buy Buy
110
margins to remain under pressure.

July 06, 2020 39

 Sector Update
Upward/Downward revision in earnings estimates in Q4FY20
Companies Change in Reason Current Previous Target
estimates Reco Reco Price
(Rs.)
Under Soft Coverage
JMC Projects has risen by over 50% since our last
report dated May 21, 2020 which has been led by
better than expected Q4FY2020 performance,
new order wins and improving sector outlook led
by favourable government measures. We expect
JMC Projects* Downward FY2021 to be better for JMC in terms of order Positive Positive 62
intake, improving prospects for asset divestments
and easing funding requirement of its BOT assets.
Consequently, we have increased our EPC valuation
multiple for JMC retaining our Positive view on the
stock
KEI, like its industry peers, has been affected by weak
sales in March 2020, which is the peak sales period.
Consequently, revenues for FY2021 and near-term
working capital requirements have been affected
negatively. However, we expect KEI to rebound in
FY2022 with growth revival and normalised working
capital cycle. Debt reduction, cost rationalisation
and minimal capex are likely to support net earnings
during FY2020. We have lowered our revenue
KEI Industries* Fine-tuned estimate downwards factoring loss of revenues led Postive Positive
382
by COVID-19, while improving upon OPM for FY2021
and FY2022. The steep correction in KEI’s stock
price and attractive valuation provides a favourable
risk-reward ratio to investors. KEI’s diversified user
industries, increased sales of high-margin EHV
cables, higher export sales and low base of the wires
business helped combat a weak macroeconomic
environment. Hence, we maintain our Positive view
on the stock
Polycab is the leading wires and cable brand. The
company has a strong balance sheet, net cash
position, and debt equity ratio at 0.04x versus
0.10x in FY2019, which provides comfort. Due to
COVID-19 impact, the company’s topline was
drastically impacted during this quarter. However,
demand is likely to normalise over 1-2 quarters. The
steep correction in Polycab’s stock price provides
Polycab India* Fine-tuned favourable risk reward ratio to investors (P/E of Positive Positive UR
15x/12x its FY2021E/FY2022E earnings). We believe
the company will bounce back once the situation
normalises owing to its leadership position and a
strong product portfolio both in wires and cables
and FMEG businesses along with strong distribution
and in-house manufacturing capabilities. Hence,
we maintain our Positive view on the stock with an
upside potential of 28-30%.
FY2021E revenue growth guidance revised
Ratnamani Metals & downward, lower crude oil prices and COVID-19 to
Downward Buy Buy
Tubes impact order inflows, and delay commissioning of 1,250
additional capacity.
Forays into new business vertical, expand capacities
Dixon Technologies Upward in few segments, adds new clients and improves Positive Positive UR
utilisation levels.

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

July 06, 2020 40

 Stock Update
Kalpataru Power Transmission
Improving business prospects

Kalpataru Power’s (KPTL’s) stock price has risen by over 32% since our last report dated May
Sector: Capital Goods 21, 2020, which has been led by better-than-expected Q4FY2020 performance, new order
Company Update wins and improving sector outlook led by favourable government measures. KPTL has been
able to win Rs. 1,847 crore orders during Q1FY2021 while its Q4FY2020 end order backlog
stood at Rs. 13,288 crore (1.7x its FY2020 standalone revenues) besides L1 status of Rs.
Change 2,000 crore, which along with expected weak execution during Q1FY2021 (50% of normal
quarterly run-rate due to COVID-19) is likely to result in further strengthening of its exit order
Reco: Buy  backlog at the end of Q1FY2021. The company has a strong order pipeline going ahead with
CMP: Rs. 255 Green corridor ordering by REC/PFC worth Rs 15,000-20,000 crore expected in June 2020
and Metro project bids worth Rs. 10,000 crore. KPTL has earlier guided for Rs 10,000-11,000
Price Target: Rs. 300 á crore of new order booking for FY21E of which it has already bagged Rs1847 crore besides L1
status (all in T&D – 70/30%). The company is in line with its asset sale commitment and has
á Upgrade  No change â Downgrade recently signed share purchase agreement for entire stake sell in Jhajjar KT Transco Private
Limited and Alipurduar Transmission Limited for an enterprise value of Rs. 310 crore and
Rs 1,286 crore, respectively. Monetisation of both assets remain positive for the company
Company details as it will help reduce debt and is in line with the company’s target to be net debt-free on
the standalone business front by March 2021. Further, the agreement for sale of the third
Market cap: Rs. 3,946 cr project Kohima Mariani Transmission stands intact and the company has appointed advisors
for sale of Shubham Logistics too, which would help further deleveraging the balance sheet.
52-week high/low: Rs. 553/170 Overall, strong order inflows and improvement in sector outlook has led to re-rating of the
company’s valuation multiple. We increase our valuation multiple for KPTL along with higher
NSE volume: contribution from JMC. We maintain our Buy rating on the stock with a revised SOTP-based
1.2 lakh
(No of shares) price target (PT) of Rs. 300.
Strong order inflows, stake sale of its BOOT assets & improving sector outlook re-rates
BSE code: 522287 KPTL valuation: KPTL has been able to win Rs. 1,847 crore orders during Q1FY2021 while it
had a strong order backlog of Rs. 13,288 crore (1.7x its FY2020 standalone revenues) and L1
NSE code: KALPATPOWR status in Rs. 2000 crore at the end of Q4FY2020, which along with expected weak execution
during Q1FY2021 (50% of normal quarterly run-rate due to COVID-19) is likely to result in further
Sharekhan code: KALPATPOWR strengthening of its exit order backlog at the end of Q1FY2021. The company has a strong order
pipeline going ahead with green corridor ordering by REC/PFC worth Rs 15,000-20,000 crore
Free float: expected in June 2020 and Metro Rail bids worth Rs 10,000 crore. KPTL’s guidance for order
7.1 cr inflows for FY2021 stands at Rs 10,000-11,000 crore. The company is also faring well with its
(No of shares)
asset sale commitment and has recently signed share purchase agreement for entire stake
sell in Jhajjar KT Transco Private Limited and Alipurduar Transmission Limited for an enterprise
value of Rs. 310 crore and Rs. 1,286 crore, respectively. Further, the agreement for sale of the
Shareholding (%) third project Kohima Mariani Transmission stands intact and the company has appointed advisor
for the sale of Shubham Logistics too which would deleverage the balance sheet. The above
Promoters 54.4 developments have helped KPTL along with its sector peers to improve upon their business
valuation.
FII 7.3
Our Call
DII 28.4 Valuation - Maintain Buy with revised PT of Rs. 300: KPTL has risen over 32% since our last
report dated May 21, 2020, which has been led by better than expected Q4FY2020 performance,
Others 10.0 new order wins and improving sector outlook led by favourable government measures. We
expect FY2021 to be better for KPTL in terms of order intake, improving prospects for asset
divestments which will further deleverage the balance sheet. Overall, strong order inflows
and improvement in sector outlook has led to re-rating of the company’s valuation multiple.
Price chart We increase our valuation multiple for Kalpataru along with higher contribution from JMC .We
maintain our Buy rating on the stock with a revised SOTP-based price target (PT) of Rs. 300.
700
500 Key Risks
Slowdown in tendering, especially in the T&D, railways, and oil & gas verticals.
300
100 Valuation (Standalone) Rs cr
Jul-19

Jul-20
Mar-20
Nov-19

Particulars FY19 FY20 FY21E FY22E

Revenue 7,115 7,904 8,302 9,369
OPM (%) 10.9% 10.9% 10.7% 10.8%
Adjusted PAT 401 463 420 523
Price performance % YoY growth 24.6% 15.4% -9.3% 24.5%
(%) 1m 3m 6m 12m Adjusted EPS (Rs.) 26.2 30.0 28.5 35.5
P/E (x) 9.8 8.5 9.0 7.2
Absolute 17 43 -39 -48 P/B (x) 1.3 1.1 1.0 0.9
EV/EBITDA (x) 4.8 4.6 4.2 3.4
Relative to
10 22 -28 -42 RoNW (%) 13.6 13.8 11.2 12.5
Sensex
RoCE (%) 20.9 19.1 16.2 17.7
Sharekhan Research, Bloomberg Source: Company, Sharekhan Estimates

July 06, 2020 41

 Stock Update
KEC International
Expect steady recovery

KEC International (KEC) has risen over 47% since our last report dated May 29, 2020,
Sector: Capital Goods which has been led by better than expected Q4FY2020 performance, new order wins and
Company Update improving sector outlook led by favourable government measures. KEC has received orders
worth Rs. 739 crore for YTDFY21 and has an L1 position in orders worth Rs. 4,000 crore. The
company has bid for Rs. 14,000 crore worth of projects (Power Grid tenders& Southern SEBs).
Change The outlook for KEC’s business segments, viz. T&D international and non-T&D. comprising
railways, civil and other businesses remains favorable. In the railways segment, order
Reco: Buy  momentum has remained slow but is expected to pick up as railways projects has kick started
early deferred tenders to come up for bidding with fresh tenders worth Rs 9000 -10000 crore
CMP: Rs. 289 expected by July 2020. Further, opportunities in the international T&D (Mena region and
Africa) with a good chunk of tenders being floated provides further avenues for order inflow.
Price Target: Rs. 350 á KEC had a healthy order backlog of Rs. 20,503 crore (1.7x its FY2020 standalone revenues)
which along with strong L1 order position and expected weak execution during Q1FY2021
á Upgrade  No change â Downgrade
(50% of normal quarterly run-rate due to COVID-19) is likely to result in further strengthening
of its exit order backlog at the end of Q1FY2021. KEC is also one of the front runners in power
Company details equipment manufacturing in India and expected to benefit from ban of imports of certain
power equipment’s from China. In the Smart Grids domain, the Government is focused on
Market cap: Rs. 7,426 cr improving grid infrastructure through analytics enabled on ICT infrastructure. The Company
plans to leverage its existing competencies in utilities to expand in to grid automation and
52-week high/low: Rs. 358/155 identifies it as a key area of growth. Overall, the strong order inflows and improvement in
sector outlook has lead to re-rating of the company’s valuation multiple. We expect FY2021
to be better for KEC in terms of order intake with opportunities’ across its diversified business
NSE volume: verticals. Consequently, we have increased our valuation multiple for KEC and maintain Buy
3.3 lakh
(No of shares) rating on the stock with a revised PT of Rs. 350

BSE code: 532714 Strong L1 position & improving sector outlook re-rates KEC valuation: KEC has received
orders worth Rs. 739 crore for YTDFY21 and has L1 position in orders worth Rs. 4000 crore. The
company has bid for Rs. 14,000 crore worth projects (Power Grid tenders & Southern SEBs) over
NSE code: KEC trailing two weeks. The outlook for KEC’s business segments, viz. T&D international and non
T&D comprising railways, civil and other businesses remains favorable. In the railways segment,
Sharekhan code: KEC order momentum has remained slow but is expected to pick up as railways projects has kick
started early deferred tenders to come up for bidding with fresh tenders worth Rs. 9,000-10,000
Free float: crore expected by July 2020. Further, opportunities in the international T&D (Mena region and
12.4 cr Africa) with a good chunk of tenders being floated provides further avenues for order inflow.
(No of shares)
KEC had a healthy order backlog of Rs. 20,503 crore (1.7x its FY2020 standalone revenues)
which along with strong L1 order position and expected weak execution during Q1FY2021 (50%
of normal quarterly run-rate due to COVID-19) is likely to result in further strengthening of
Shareholding (%) its exit order backlog at the end of Q1FY2021. KEC is also one of the front runners in power
equipment manufacturing in India and expected to benefit from ban of imports of certain power
Promoters 51.7 equipment’s from China. In the Smart Grids domain, the government is focused on improving
grid infrastructure through analytics enabled on ICT infrastructure. The company plans to
FII 8.7 leverage its existing competencies in utilities to expand in to grid automation and identifies it as
a key area of growth.
DII 27.5 Our Call
Valuation - Maintain Buy with a revised PT of Rs. 350: KEC has risen over 47% since our last
Others 12.2 report dated May 29, 2020 which has been led by better than expected Q4FY2020 performance
strong L1 position and improving sector outlook led by favorable government measures. We
expect FY2021 to be better for KEC in terms of order intake with opportunities’ across its
Price chart diversified business verticals. Consequently, we have increased our valuation multiple for KEC
and maintain Buy rating on the stock with a revised PT of Rs. 350.
400
350 Key Risks
300
Slowdown in domestic macroeconomic environment and higher loss-funding in the roads
250
200 segment can affect business outlook and earnings growth.
150
100 Valuation (Standalone) Rs cr
Particulars FY19 FY20 FY21E FY22E
Nov-19
Jul-19

Jul-20
Mar-20

Revenue 11,001 11,965 12,668 13,915

OPM (%) 9.4 8.8 5.9 9.8
Adjusted PAT 486 566 534 607
Price performance % YoY growth 5.7 16.3 (5.6) 13.7
(%) 1m 3m 6m 12m Adjusted EPS (Rs.) 18.9 22.0 20.8 23.6
P/E (x) 15.3 13.1 13.9 12.2
Absolute 17 82 -6 -10 P/B (x) 3.0 2.7 2.2 2.0
EV/EBITDA (x) 7.7 7.6 7.7 6.8
Relative to
11 61 5 -5 RoNW (%) 21.9 21.6 17.5 17.0
Sensex
RoCE (%) 26.4 24.0 20.6 20.7
Sharekhan Research, Bloomberg Source: Company, Sharekhan Estimates

July 06, 2020 42

 Viewpoint
JMC Projects (India) Limited
Strong order inflows, improving outlook to drive valuation

JMC Projects’ (JMC’s) stock price has risen by over 50% since our last report dated
Sector: Capital Goods May 21, 2020, led by better than expected Q4FY2020 performance, new order wins
Company Update and improving sector outlook led by favourable government measures. JMC has
been able to win orders worth Rs. 2,069 crore during Q1FY2021, which amounts to
more than 60% of order inflows during FY2020 and 1.8x of order inflows achieved
Change during Q1FY2020. JMC had a strong order backlog of Rs. 9,546 crore (2.6x its
FY2020 standalone revenues) which along with strong order inflows in Q1FY2021
View: Positive  and expected weak execution during Q1FY2021 (50% of normal quarterly run-rate
due to COVID-19) is likely to further strengthen its exit order backlog at the end
CMP: Rs. 53 of Q1FY2021. On the other hand, the government announced relief measures for
road developers at the start of June 2020 to ease liquidity situation for developers.
Upside potential: 18-20% á The government will be compensating the companies for loss in toll collection
fee through extension of time period till it reaches 90% of average daily fee.
á Upgrade  No change â Downgrade
JMC, having four build-operate transfer (BOT) toll projects for which it has been
incurring loss funding is expected to get relief through extension of the concession
Company details time period. Loss funding requirement for BOT assets will also reduce to Rs. 50
crore during FY2021 versus Rs. 76 crore in FY2020. The company has been looking
Market cap: Rs. 878 cr to divest assets but have been unsuccessful due to huge oversupply of assets
for sale. However, the government’s relief measures such as release of retention
52-week high/low: Rs. 140/30 money in proportion to work completion, nil deduction of retention money from 3-6
months for bills raised by contractors, extended time period for under construction
NSE volume: projects by three to six months, increase in concession period for BOT projects,
1.3 lakh direct payment to sub-contractors through escrow account and waiver of penalty
(No of shares)
in submission of bank guarantee for new contracts have improved outlook for road
development sector which is likely to aid in divestment of BOT assets for JMC.
BSE code: 522263 Overall, strong order inflows and improvement in sector outlook has lead to re-
rating of the company’s valuation multiple. We increase our EPC valuation multiple
NSE code: JMC for JMC and stay Positive on the stock and expect an 18-20% upside.

Sharekhan code: JMC Strong order inflows & improving sector outlook re-rates JMC’s valuation: JMC
recorded strong order inflows during Q1FY2021 which stood at Rs. 2069 crore. To
put it in perspective, the order inflows during the quarter were over 60% of the orders
Free float: bagged during FY2020, and 1.8x the orders received in Q1FY2020 and against nil
5.5 cr
(No of shares) orders received during Q4FY2020. Subsequently, we expect strong exit order backlog
at the end of Q1FY2021 considering weak Q1FY2021 execution (~50% of the normal
quarterly run-rate). Besides strong order inflows, the government’s relief measures
Shareholding (%) announced at the start of the June are expected to ease liquidity constraints in the
roads sector and help improve prospects for asset divestments in the industry. The
Promoters 67.4 above developments have helped JMC along with its sector peers to improve their
business valuations.
FII 0.5 Our Call
Valuation - Retain Positive view; Expect 18-20% upside: JMC Projects has risen by
DII 18.5
over 50% since our last report dated May 21, 2020 which has been led by better
than expected Q4FY2020 performance, new order wins and improving sector outlook
Others 13.7 led by favourable government measures. We expect FY2021 to be better for JMC in
terms of order intake, improving prospects for asset divestments and easing funding
requirement of its BOT assets. Consequently, we have increased our EPC valuation
Price chart multiple for JMC retaining our Positive view on the stock and expect an 18-20% upside
150
from here.

Key Risks
100
Slowdown in domestic macroeconomic environment and higher loss-funding in the
50 roads segment can affect business outlook and earnings growth.
Valuation (Standalone) Rs cr
0
Particulars FY19 FY20 FY21E FY22E
Jul-19

Jul-20
Mar-20
Nov-19

Revenue 3253 3713 3855 4372

OPM (%) 10.4 11.1 10.5 11.1
Price performance Adjusted PAT 142 158 120 170
% YoY growth 33.9 11.5 -24.1 41.1
(%) 1m 3m 6m 12m Adjusted EPS (Rs.) 8.5 9.4 7.2 10.1
P/E (x) 6.2 5.6 7.3 5.2
Absolute 16 54 -47 -60
P/B (x) 1.0 0.9 0.8 0.7
Relative to EV/EBITDA (x) 4.7 3.8 3.9 3.0
9 33 -36 -54 RoNW (%) 16.6 16.7 11.7 14.6
Sensex
RoCE (%) 17.6 19.0 16.5 18.8
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates

July 06, 2020 43

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