Order inflow for engineering companies
under coverage up 40% yoy and 7% qoq
􀀗 Order cancellation risk overplayed and
positive impact of commodity prices on
EBIDTA margins to be visible with a lag
􀀗 Continue to favour strong revenue
visibility and balance sheet. Still OW(V)
on BHEL, L&T and Thermax, UW(V) on
ABB India, and N(V) on Thermax
In this report, we update our sector view and reproduce our
analysis of results for the latest quarter. We maintained
estimates, target prices and ratings across the sector.
Business momentum: orders up 40% yoy but only 7% qoq.
The India engineering sector was quite successful in 2QFY09
with order inflow up 40% yoy. We note the slowdown to 7%
qoq, but order inflow still exceeds quarterly revenue, meaning
increased revenue visibility. Company managements are still
giving upbeat guidance. However, we would be slightly
cautious on orders from the industrial sector. We continue to
favour long-cycle capex like power/process.
Order cancellation risk overplayed. Most orders are backed
by customer advances with financial closure already achieved.
However, companies are tracking customer profiles and are
slightly cautious before booking. We regard the risk of order
cancellation from government projects (power, infrastructure)
or large private sector firms as insignificant.
Lower commodity price benefits to be visible with a lag.
Falling commodity prices will have more visible impact on
margins of companies with a longer execution cycle (BHEL,
L&T) but only post 4QFY09. However, at the same time,
companies with a shorter execution cycle have recorded a
decline in raw material to sales ratio.

目录

Sector update 3
ABB India 6
BHEL 11
Larsen & Toubro 16
Punj Lloyd 22
Thermax India 27
Appendix 32
Disclosure appendix 34
Disclaimer 39

Sector update
􀀗 Business momentum continues with strong orders (up 40%); lag
effect of lower commodity prices visible (margins down 137bps)
􀀗 We prefer companies with strong balance sheet, high revenue
visibility and exposure to long-cycle capex
􀀗 BHEL and L&T are our top picks in the sector

Business momentum
Orders up 40% yoy, 7% qoq –
however, absolute order inflow
number still higher than sales
In terms of new order inflow, the India
engineering sector has been quite successful this
year. The pace of order inflows continued to
outstrip the absolute amount of quarterly revenue
in 2QFY09, and the increase in orders improves
revenue visibility. Order backlog for the
companies under our coverage increased by 43%
yoy at the end of 2QFY09, driven by 40% yoy
growth in order inflow. However, order growth
was muted on a qoq basis at 7% in 2QFY09.
Management outlook: At recent results
briefings, company managements maintained
upbeat guidance in terms of future visibility.
Some management teams have made it clear that
they are cautious about booking orders from

private sector entities, given the financial
uncertainty. State/central government orders are
viewed as lower risk than private sector orders.
Exchange rate movements and concern about the
cost of purchasing foreign equipment have helped
companies like BHEL to attract private sector
orders. However, BHEL has stated that it only
books orders where it can see financial backing.
Our view: We continue to be positive on
companies with exposure to long-cycle capex
(like power and process) or government or large
private sector projects. Companies in this category
include BHEL and L&T, which are our top picks
in the sector. We do not expect any near-term
slowdown in order inflow to affect revenue
growth given book-to-bill ratios of c3x.