Capital goods
“In government we trust”
With an uncertain economic environment threatening to derail industrial capex, the
government has emerged as the sole agency capable of reviving the economy. We
expect improved execution in various planned infrastructure programmes and the
RBI’s monetary easing measures to lead to sustained order inflow for our
construction and power equipment universe. This, coupled with strong current
order books, imparts high revenue visibility to the companies. Moreover, with a
sharp correction in commodity prices peaking out of interest rates, easing raw
material and interest cost pressures would drive earnings growth over the next 12
months. Within our construction and power equipment universe, we prefer
companies having high leverage to government spending with BHEL, Crompton,
IVRCL, NCC and HCC (80%> government orders) as our top picks.
Government spending to the rescue: To mitigate uncertainty on private sector capex,
we expect the government to step up spending on various infrastructure development
programmes as a means to revive the economy. We expect sectors such as roads, power,
railways, irrigation, ports and urban infrastructure to be accorded the top most priority.
Further, we expect RBI’s monetary easing and policy measures to improve availability
of funding, albeit with a 3-6 month lag.
Cost pressures to recede: With raw material prices falling by 15-50% and interest rates
having peaked out, we expect cost pressures to recede for our construction and power
equipment universe. While margin gains for construction stocks are likely to be
restricted due to the price variation clause in contracts, BHEL – with ~50% orders on
fixed price basis – is likely to be a key beneficiary.
Prefer companies with leverage to government spending: High order book/ revenues
(6-8 quarter highs) and a likely acceleration in new order flows lend high revenue
visibility to our capital goods universe. We prefer companies with strong leverage to
government-led infrastructure investments as they run the minimum risk of delays/
deferments in orders. With 80-100% of their order book constituted by orders from
government/ quasi-government entities, BHEL, Crompton, IVRCL, NCC and HCC
are our top picks in the space.

CONTENTS
Investment Argument..........................................................................................4
Policy measures to ease liquidity woes ................................................................9
Liquidity crunch curtailing investments ................................................................9
RBI/ GoI measures to deice liquidity, step-up budgetary spending......................10
Government spending to the rescue ..................................................................13
Roads..................................................................................................................14
Power..................................................................................................................18
Ports ...................................................................................................................21
Railways..............................................................................................................23
Airports...............................................................................................................24
Irrigation.............................................................................................................26
Urban infrastructure ...........................................................................................28
Industrial capex: Pockets of concern .................................................................29
Oil & Gas sector: Downstream ...........................................................................29
Metals .................................................................................................................32
Fertilizers: A ray of hope for industrial capex.......................................................34
Outlook ............................................................................................................36
Order flows to remain strong on higher government spending ............................36
Cost pressure to recede due to sharp drop in raw material costs ...........................38
Interest cost pressure to ease over 1-2 quarters.....................................................40
Execution capacity not to be restrained by balance sheet gearing .........................40
Valuations & View..............................................................................................41
Companies ........................................................................................................44
Gammon India.................................................................................................... 45
HCC................................................................................................................... 49
IVRCL................................................................................................................ 53
L&T ................................................................................................................... 57
Madhucon........................................................................................................... 61
NCC................................................................................................................... 65
Simplex ............................................................................................................... 69
ABB .................................................................................................................... 73
BHEL ................................................................................................................. 77
Crompton ........................................................................................................... 81
Emco................................................................................................................... 85
KEC Intl ............................................................................................................. 89