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NiveshDaily
January 23, 2017
INDICES
Indices Previous (day) Close % chg From Research Desk
Sensex 27034.5 ‐1.0 %
Nifty 8349.4 ‐1.0%
(As on 20th January, 2017)
News Update
Kalpataru Power Transmission Ltd.:
Result Update
Force Motors Ltd.
Sector Update ‐ Defense and Aerospace
Result Today
Daljeet S. Kohli
Head of Research
Tel: +91 22 66188826
daljeet.kohli@indianivesh.in
IndiaNivesh Securities Limited | Research Analyst SEBI Registration No. INH000000511
IndiaNivesh Research 601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007. Tel: (022) 66188800
IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva INDNIV.
Daljeet S. Kohli News Update
Head of Research
Tel: +91 22 66188826
daljeet.kohli@indianivesh.in Kalpataru Power Transmission Ltd.:
Kalpataru Power Transmission Ltd (KPTL) received orders of Rs 8.25bn
Monami Manna
Kalpataru Power Transmission Ltd (KPTL) has secured new orders of Rs 8.25bn,
Research Analyst
Tel: +91 22 66188848 the company has said in a filing to the stock exchanges on 20th January, 2017.
monami.manna@indianivesh.in
Out of the above Rs 8.25bn orders, the company secured orders to the tune of
Rs 4.4bn for various transmission line and substation projects in Africa and CIS
region.
Other than the above the company has received two pipeline project orders to
the tune of Rs 2.77bn from Indian Oil Corporation and GAIL.
KPTL has also secured Railway Project orders of Rs 1.11bn from CORE.
Our take
KPTL’s standalone order book at the end of Q2FY17 stood at Rs 94bn, including
orders of Rs 20bn received during Q2FY17. Additionally, KPTL is favourably
placed (L1) in orders of over Rs 30bn. With the above orders of Rs 8.25bn,
KPTL’s order book now stands at Rs 102.3bn, which is 2.3x its FY16 sales,
thereby providing good revenue visibility for the next 24 months.
KPTL management expect ~Rs 70‐75bn order intake for FY17, the company
already received ~ Rs 40bn orders in H1FY17. For the second half KPTL is
confident of garnering at least Rs 35bn orders. Out of this the company
already received Rs 8.25bn orders, so in the next 3 months KPTL has to receive
around Rs 27bn orders. With a healthy order backlog and focus on execution
KPTL management is confident of achieving 20% revenue growth for FY17.
At CMP of Rs 265, KPTL is trading at 8x and 6.8x for FY17E and FY18E
EV/EBITDA. We have a BUY rating on the stock with a SOTP based target price
of Rs 332.
Force Motors Ltd
Much below our estimates, maintain BUY with a TP of Rs 4322
Force Motors reported Q3FY17 numbers much below our expectations. Revenue
Current Previous stood at Rs. 6.3 bn, below our expectation of Rs. 6.7 bn (net of excise duty). Auto
CMP : Rs 4,296 components business fell 33%/42% YoY/QoQ at Rs. 2.5 bn vs INSPL estimate of
Rating : BUY Rating : BUY Rs. 2.9 bn. EBITDA margins contracted by 186 bps YoY to 4.6% (vs our expectation
of 6%), owing to higher employee costs (up 24%/7% YoY/QoQ).
Target : Rs 4,322 Target : Rs 4,322
(NR‐Not Rated)
Q‐o‐Q % Y‐o‐Y % INSPL
Q3FY17 Q2FY17 Q3FY16
STOCK INFO Rs.mn Q3FY17e Variance(%)
INDEX Revenue 6291 8492 7335 ‐26 ‐14 6681 ‐6
EBIDTA 289 750 474 ‐62 ‐39 401 ‐28
BSE 500033
PAT 232 503 274 ‐54 ‐15 375 ‐38
NSE Source: Company Filings; IndiaNivesh Research
Bloomberg FML IN
Reuters FORC.BO Automobile Segment:
Sector Auto
Force Motors total sales volume decreased by 18% YoY to 6867 units. LCV & SCV
Face Value (Rs) 10
Equity Capital (Rs mn) 130
sales volume increased by 18% YoY to 3614 units. Although volumes were not good
Mkt Cap (Rs mn) 55,989 for the quarter, the company has historically been performing exceedingly well in
52w H/L (Rs) 4,839 / 2,180 this segment due to strong demand for Traveller class of vehicles from four segments
Avg Daily Vol (BSE+NSE) 1,31,314 namely Ambulances, Bus aggregators, School bus segment and Diversified segment
(Firefighting and Rescue vehicles, Defense vehicles). UV, SUV & Tractor sales volume
SHAREHOLDING PATTERN % down 19% YoY to 3253 units.
(as on Dec,2016)
Promoters 61.1 Management was targeting to sell 40,000 vehicles in FY17 as against 33,345 it sold in
Public 38.9 FY16. It has so far sold 23417 vehicles in 9MFY17 as against 23277 vehicles in
9MFY16, partly impacted by currency demonetization. Traditionally Force Motors
STOCK PERFORMANCE(%) 3m 6m 12m
generates 30% volume sales for the full year of auto segment in Q4 alone.
FORCE MOTORS 1.3 43.1 72.1
SENSEX (3.9) (3.2) 12.4
Source: Bloomberg, IndiaNivesh Research Auto Component Segment:
FY17 so far has witnessed two big events negatively impacting the luxury vehicle
FORCE MOTORS v/s SENSEX
sales (a) temporary diesel vehicle ban in NCR region (b) demand slowdown due to
currency demonetization. Mercedes volumes (which make ~40% of luxury vehicle
sales in India) dropped 3.3% YoY in 9MFY17. We expect the situation to improve in
upcoming fiscal as normalcy returns on the currency availability front.
Other Income is up 63%/25% YoY/QoQ at Rs. 238 mn in Q3FY17.
Tax as a percentage of PBT was at 5.6% in Q3FY17 as against 28% in Q3FY16 and in
Source: Bloomberg, IndiaNivesh Research
full year FY16.
Daljeet S. Kohli Valuation:
Head of Research
With two major negative events in FY17, the expected growth has seen a perceptible
Tel: +91 22 66188826
daljeet.kohli@indianivesh.in hit. We continue to hold our thesis of rising share of discretionary spending will
eventually boost luxury car demand in India as seen in China and other developed
Sriram R
countries. At CMP of Rs. 4296, Force Motors is trading at 21.9x FY18e earnings; we
Research Associate
maintain BUY with a target price of Rs. 4322 (based on 22x FY18e earnings) and any
Tel: +91 22 61151621 correction should be seen as a good opportunity to buy the stock.
r.sriram@indianivesh.in
Rajiv Bharati
Research Analyst
Financial Performance
YE March EBITDA
Net Sales EBITDA Adj.PAT Adj.EPS (Rs) RoE(%) Adj.P/E(x) EV / EBITDA (x)
Tel: +91 22 66188818 (Rs Mn) Margin
FY14 20,216 967 773 58.7 4.8 6.5 73.2 56.5
rajiv.bharati@indianivesh.in FY15 23,636 1,469 1,013 76.8 6.2 8.0 55.9 36.5
FY16 30,598 2,741 1,794 136.2 9.0 12.8 31.5 19.5
FY17E 31,680 2,996 1,968 149.4 9.5 12.5 28.8 18.1
FY18E 42,413 3,885 2,589 196.5 9.2 14.6 21.9 13.9
Source: Company, IndiaNivesh Research
IndiaNivesh Securities Limited|Research Analyst SEBI Registration No:INH0000000511
IndiaNivesh Securities Ltd 601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007. Tel: (022) 66188800
IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva INDNIV.
Q3FY17 Result Update | Force Motors Ltd
Chapt er Title
Net Sales and Net Sales Growth
45,000 40.00%
33.9%
40,000 35.00%
29.4%
35,000 30.00%
25.00%
30,000
16.9% 20.00%
25,000
15.00%
20,000
3.5% 10.00%
15,000 2.5% 5.00%
10,000 0.00%
‐5.4%
5,000 ‐5.00%
19,727 20,220 23,637 30,598 31,680 42,413
‐ ‐10.00%
FY13 FY14 FY15 FY16 FY17E FY18E
Net sales Growth %
Source: Company, IndiaNivesh Research
Segment(Rs. mn) FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Autom otive Sales 17,143 17,297 16,502 17,973 21,956 20,356 24,650
Contribution in total revenue(%) 72 76 72 68 63 57 52
Com ponent Sales 5,645 4,904 6,159 7,925 12,595 14,668 22,393
Contribution in total revenue(%) 24 22 27 30 36 41 47
Parts Sales 35 4 94 204 17 270 289
Service Charges 602 254 1 13 44 18 21
Other Operating incom e 267 304 255 272 240 283 303
Revenues
Sales and services - Gross 23,692 22,764 23,015 26,389 34,852 35,595 47,655
(-) Excise duty 2,842 3,036 2,795 2,752 4,254 3,915 5,242
Excise duty % 12% 13% 12% 10% 12% 11% 11%
Net Revenues 20,850 19,727 20,220 23,637 30,598 31,680 42,413
Grow th % -5% 2% 17% 29% 4% 34%
Source: Company, IndiaNivesh Research
EBITDA margin to stabilise in FY17E and FY18E
Strong expansion in EBITDA margin of 273bps to 9% in FY16 from 6.2% FY15 was due
to benefit of operating leverage which mainly came from revival in CV industry and
also from lower employee and other expenses as % of sales in Auto component
segment with increasing volumes of Mercedes and BMW sales. We expect the
company to maintain EBITDA at around 9.5% in FY17E and 9.2% in FY18E on the back
of improving sales from Traveller segment and steady improvement in volumes of
Mercedes and BMW sales.
EBITDA and EBITDA Margin
3,500 8.00%
6.2% 7.00%
3,000
6.00%
2,500 4.8%
5.00%
2,000
4.00%
1,500 2.7%
3.00%
1,000 2.00%
500 1.00%
539 970 1,470 2,741 2,996 3,885
‐ 0.00%
FY13 FY14 FY15 FY16 FY17E FY18E
EBITDA EBITDA Margin %
Source: Company, IndiaNivesh Research
Valuation and Outlook
Considering the growth in the Luxury car segment, we see strong revenue growth
from Auto component business that will help in overall margin expansion. Strong
demand for Force Traveller from multiple industries will ensure strong growth of the
Automobile segment. The company is a net debt free company, sitting on cash and
cash equivalents of around Rs. 3.2 bn (Rs. 242/share) as on 31st March 2016. At CMP
of Rs. 4296, Force Motors is trading at 21.9x FY18e earnings; we maintain BUY with a
target price of Rs. 4322 (based on 22x FY18e earnings) and any correction should be
seen as an opportunity to buy the stock.
Income Statement (Standalone)
Y E March (Rs m) FY14 FY15 FY16 FY17E FY18E
Net sales 20,216 23,636 30,598 31,680 42,413
Growth (%) 2 17 29 4 34
Operating expenses (19,249) (22,167) (27,857) (28,683) (38,529)
Operating profit 967 1,469 2,741 2,996 3,885
Other operating income 0 0 0 0 0
EBITDA 967 1,469 2,741 2,996 3,885
Growth (%) 79.5 51.9 86.6 9.3 29.6
Depreciation (848) (813) (919) (999) (1,048)
Other income 599 658 714 737 759
EBIT 718 1,314 2,536 2,734 3,596
Finance cost (92) (66) (43) 0 0
Exceptional item 0 0 0 0 0
Profit before tax 626 1,248 2,493 2,734 3,596
Tax (current + deferred) 147 (236) (699) (765) (1,007)
Profit / (Loss) for the period 773 1,013 1,794 1,968 2,589
Associates, Min Int 0 0 0 0 0
Reported net profit 773 1,013 1,794 1,968 2,589
Extraordinary item 0 0 0 0 0
Adjusted net profit 773 1,013 1,794 1,968 2,589
Growth (%) 446 31 77 10 32
Source: Company, IndiaNivesh Research
Balance Sheet (Standalone)
Y E March (Rs m ) FY14 FY15 FY16 FY17E FY18E
Share capital 132 132 132 132 132
Reserves & surplus 12,128 13,037 14,673 16,491 18,715
Net Worth 12,260 13,169 14,804 16,623 18,847
Minority Interest 0 0 0 0 0
Total Liabilities 5,459 6,548 8,134 7,632 9,659
Non‐current liabilities 516 605 967 530 530
Long‐term borrowings 204 107 26 0 0
Deferred tax liabilities 66 266 677 266 266
Other Long term liabilities 40 40 40 40 40
Long term provisions 207 192 224 224 224
Current Liabilities 4,942 5,943 7,167 7,102 9,129
Short term borrowings 0 0 0 0 0
Trade payables 3,000 3,928 4,172 4,714 5,923
Other current Liabilities 1,689 1,617 2,709 2,008 2,697
Short term provisions 254 398 285 380 509
Total Liabilities and Equity 17,719 19,717 22,939 24,256 28,506
Non Current Assets 9,266 9,785 10,772 13,167 14,588
Net Block 9,922 10,518 11,295 14,550 16,448
Goodwill 0 0 0 0 0
Non‐current Investments 12 12 12 12 12
Long‐term loans and advances 763 1,000 780 950 1,272
Deferred tax Assets 0 0 0 0 0
Other non current Assets 0 0 0 0 0
Current Assets 8,453 9,932 12,167 11,088 13,919
Inventories 3,773 3,925 5,475 5,238 6,582
Sundry Debtors 1,351 1,087 1,504 1,634 2,092
Cash & Bank Balances 2,161 3,030 3,176 2,284 2,658
Other current Assets 19 43 152 32 42
Loans & Advances 1,150 1,847 1,860 1,901 2,545
Current Investments 0 0 0 0 0
Total (Assets) 17,719 19,716 22,939 24,256 28,506
Source: Company, IndiaNivesh Research
IndiaNivesh Securities Ltd 23 Jan 2017 5 of 6
Q3FY17 Result Update | Force Motors Ltd
Cash Flow Statement (Standalone)
Y E March (Rs m) FY14 FY15 FY16 FY17E FY18E
Profit before tax 626 1,248 2,493 2,734 3,596
Depreciation 848 813 919 999 1,048
Change in working capital (66) 140 (613) (49) (751)
Total tax paid (6) (36) (288) (1,176) (1,007)
Others (508) (592) (671) (737) (759)
Cash flow from operations (a) 895 1,573 1,840 1,771 2,127
Capital expenditure (1,233) (1,095) (2,126) (3,224) (2,146)
Change in investments (1) 0 0 0 0
Others 599 658 714 737 759
Cash flow from investing (b) (634) (437) (1,411) (2,488) (1,387)
Free cash flow (a+capex) (338) 478 (286) (1,453) (20)
Equity raised/(repaid) 0 0 0 0 0
Debt raised/(repaid) (216) (97) (81) (26) 0
Dividend (incl. tax) 0 0 0 0 0
Others (135) (170) (202) (150) (365)
Cash flow from financing (c) (351) (266) (283) (176) (365)
Net change in cash (a+b+c) (90) 869 146 (893) 375
Reconciliation of Other balances 0 0 0 0 0
Cash as per Balance Sheet 2,161 3,030 3,176 2,284 2,658
Source: Company, IndiaNivesh Research
Key Ratios (Standalone )
Y E March FY14 FY15 FY16 FY17E FY18E
Adjusted EPS (Rs) 58.7 76.8 136.2 149.4 196.5
Growth 445.6 30.9 77.2 9.7 31.5
Dividend/share (Rs) 0.0 0.0 0.0 0.0 0.0
Dividend payout ratio 0.0 0.0 0.0 0.0 0.0
EBITDA margin 4.8 6.2 9.0 9.5 9.2
EBIT margin 3.6 5.6 8.3 8.6 8.5
Net Margin 3.8 4.3 5.9 6.2 6.1
Tax rate (%) (23.5) 18.9 28.0 28.0 28.0
Debt/Equity(x) 0.0 0.0 0.0 0.0 0.0
Inventory Days 68 61 65 60 57
Sundry Debtor Days 24 17 18 19 18
Trade Payable Days 54 61 50 54 51
Du Pont Analysis ‐ ROE
Net margin 3.8 4.3 5.9 6.2 6.1
Asset turnover (x) 1.2 1.3 1.4 1.3 1.6
Leverage factor (x) 1.5 1.5 1.5 1.5 1.5
ROE(%) 6.5 8.0 12.8 12.5 14.6
RoCE (%) 5.7 9.9 17.2 16.6 19.7
Valuation (x)
PER 73.2 55.9 31.5 28.8 21.9
PCE 34.9 31.0 20.9 19.1 15.6
Price/Book 4.6 4.3 3.8 3.4 3.0
EV/EBITDA 56.5 36.5 19.5 18.1 13.9
Source: Company, IndiaNivesh Research
Political Developments:
India, UAE hold the first strategic Defense & Security dialogue
In order to elevate their bilateral relationship to ‘Comprehensive strategic partnership’, both
India and UAE had their first strategic dialogue on Jan 20. Both the sides were represented by
Inter‐departmental and ministerial delegates, with discussions covering areas like, Energy
Security, Renewable Energy, Defense, Electronics & Information Technology and Space.
Key outcome of these meeting’s include, (1) India would provide offshore patrol vessels and
design’s for frigates/corvettes by India based private shipyards (till now UAE was buying
them from USA, Europe), (2) India would supply Interceptor boats developed by L&T and
other private players, (3) L&T could bag the project for 100 SPAD guns in partnership with a
Korean company (we expect the total project cost to be somewhere ~Rs 9‐10 bn).
Mauritius receives 2 Helicopters and commissions Patrol Vessels
India delivered Mauritius 2 Chetak Helicopters and a patrol vessel. Mauritius commissioned
50m long CGS Victory, built by Goa Shipyard Ltd (GSL), and funded by GoI Line of Credit. This
announcement comes after Mar‐2016, when Mauritius commissioned 10 14.5m Fast
Interceptor Boats (FIBs), which were built by GSL.
Industry & Other Developments:
MoD proposes manufacture of Fighters, Warships, BMS under ‘Make in India’
MoD has proposed “Strategic Partners” policy to allow manufacturing of top‐of‐the Line
Fighters, Warships, Battle systems under ‘Make in India’ program, thereby facilitating long‐
term tie‐ups and complete technology of transfer. This proposal is awaiting final approval.
This proposed policy is a step ahead of the current framework of “screwdriver technology”,
where foreign players outsource manufacture of few components (as per the offset clause) to
Indian partners, without transferring the entire technology. As part of this proposal, Indian
ministry would identify Indian players from the private sector and foreign defense players to
make equipments in India. Also, this proposal intends to sing a long‐term agreement with the
JV, assuring dedicated order’s and the first right of refusal on any upgrades.
India to buy cannon & ammo for Su‐30MKI, Mi‐35
MoD officials would soon visit Russia to fast‐track delivery of rockets and ammunition used
for Mi‐35 helicopter and Su‐30 fighter jets used by IAF. IAF intends to buy 50,000 rounds of
30mm GsH ammunition (for Su‐30 fighter jets) and over 60,000 rounds of 12.7 mm ammo (for
Mi‐35 gunships). IAF wants to increase its war stock, which is currently at half the required 40
days of military materials used for intense combat.
India to produce its Active Protection Systems for its T‐90 tanks
As part of ‘Make in India’ campaign, MoD is working on plans to produce within India Active
Protection Systems (APS) for T‐90 tanks. In Nov‐2016 India decided to procure 464 T‐90 tanks
from Russia at a cost of ~$2.1bn (without APS). By 2020, India plans to induct over 1,600 T‐90
tanks. Currently, none of the Indian tanks is equipped with an APS. APS prevents guided anti‐
tank missiles/ projectiles from acquiring and/ or destroying a given target.
We expect Tata Power SED to be the biggest beneficiary of the emerging opportunity, as it is
only player in India to have made APS for SAAB. We do not expect any awarding on this front
to be seen before 2HFY2018.
India procures $3bn worth of Emergency Weapons and Ammunition
Deliveries have already started from Russia and Israel as India focuses on procurement of
Anti‐tank Missiles, Bombs, Tank engines, protective armour for troop‐carrying Vehicles and
Tanks, Anti‐personnel grenade Launchers, and various types of ammunition, worth $3bn.
India has ordered few thousand Anti‐tank guided Missiles, T‐90 tank engines and other key
tank components, multi‐barrel rocket launchers, various types of ammunition from Russia.
Also orders for sophisticated Unmanned Aerial Vehicles, several thousand missiles have been
(contd...) January 23, 2017 | 2
Sector | Defense & Aerospace (contd...)
placed with Israel. These purchases are done by "Empowered Committee" under "Off‐the‐
shelf purchases" route for IN and IA.
RFI hands over Indigenous Ghaatak rifle to Kerala Police
On Jan‐16, Rifle Factory Ishapore (RFI) handed over the first Ghaatak rifle to Director General,
Kerala Police. This Assault rifle is developed by RFI indigenously for use by Defense, Central
Paramilitary, State Police Forces. State Police Forces from Assam, Punjab, Manipur, Tamil
Nadu, Telangana, Bihar, Maharashtra and Nagaland are expected to receive consignments of
Ghaatak rifles in subsequent batches shortly. Also, other Central Armed Police Forces (CAPFs)
have given indents for supply of these rifles.
BAE to start making guns for Indian Army
Having signed $542mn (~Rs 37bn) agreement with USA for procurement of 145 M777 ultra‐
light Howitzers on Dec‐1, 2016, making of the guns at BAE’s site at Barrow, Cumbra have
started. US Defense is buying the weaponry through its Foreign Military sales program for
India. Delivery of the first 2 guns is expected to reach India by Jun‐2017, with the rest to come
at 2/ month. As part of agreement, 25 guns in fly‐away condition would be sold to India, with
remaining to be assembled by its JV partner, Mahindra in India. As part of the offset clause
under the contractual agreement, BAE will invest $200mn in India.
Brahmos Aerospace bags Rs 3bn orders
BrahMos Aerospace Thiruvananthapuram Ltd. (BATL), owned by Indo‐Russian, BrahMos
Aerospace received Rs 3bn worth of orders from ISRO, DRDO and other European Agencies.
Gas Turbine Research Establishment (GTRE), DRDO's Bangalore based arm, has given Rs
100mn order for the production of Aerospace Engines.
DRDO develops Mountain Foot Bridge
Research and Development Establishment (Engineers), Pune of DRDO has developed
Mountain Foot Bridge (MFB), which would be used by IA for faster movement in high altitude
regions. This bridge is made of high‐strength Aluminum alloys and costs below Rs 10mn. Trials
conducted by the labs, indicate the positive outcome and have given desired results. Mass
production of this bridge would take some time, post the successful completion of the
transfer of technology.
Corporate News:
MKU Industries to deliver Helmets for Indian Army
After 2 decades of wait IA contracted Kanpur based MKU Industries to manufacture 0.158mn
Helmets (to be integrated with communication devices) in a deal worth Rs 1.7‐1.8bn. MKU
Industries is looked upon as world leader in manufacture of Body Armour’s (bulletproof
jackets, helmets). Delivery of new helmets would start in next 3 years.
This is second major announcement since Mar‐2016 when IA signed an ‘emergency contract’
with Tata Advanced Materials Limited towards purchase of 50,000 new bulletproof jackets.
Govt. invites bids from Advisers for 26% stake sale in BEML
GoI has invited bids from Advisers for stake sale in BEML, where it holds 54.03% stake in the
company. Selected adviser would be required to manage bidding process, assist government
in fixing the fair reserve price. GoI proposes to hire the Transaction Adviser from a reputed
Consulting firm, Investment Bankers, Financial Institutions, Banks. Transaction adviser is
expected to have at least 5 years of experience and should have completed at least 1
transaction of Strategic disinvestment/ sale/ M&A/ private equity transaction with size of Rs
16bn or more during Apr‐2014 to Dec‐2016. Last date to submit the bids is Feb 15, 2017.
Valuation to be considered by PSU would be inclusive of discounted cash flow, relative
valuation and asset based valuation.
Cabinet has already given its in‐principle approval to sell 26% stake for strategic
disinvestment in Defense Equipment manufacturer BEML. This strategic disinvestment at a
price of Rs1,150/share would fetch the exchequer over Rs 12bn. On completion of such
strategic divestment, Government of India’s stake would decline from 54.03% to 28.03%.
(contd...) January 23, 2017 | 3
Sector | Defense & Aerospace (contd...)
Established in May‐1964, BEML operates across 3 business verticals‐Mining and Construction
Equipment, Rail and Metro and Defense and Aerospace. BEML is under administrative control
of Defense Ministry and provides equipment support to Indian Army and other Defense
forces by manufacturing variants of Tatra vehicle for all‐terrain operations. It also supports
Aerospace operations by supplying ground support equipment, such as, Aircraft Towing
Tractor, Multi‐Purpose Weapon Loader, and Crash Fire Tender.
Our View:
As highlighted earlier, we see this development to be positive for BEML in long‐run, as the
strategic investor would look at BEML investment to fill gaps in their product offerings,
diversify and scale their business. Strategic investor would also look for areas to bring
operational efficiencies in to the existing business. In the backdrop of such divestment,
strategic investor would look at 2 challenges: (1) Management control, and (2) any resistance
from the BEML trade unions.
We are of view that it could be tough for strategic Defense player willing to invest in BEML, as
the company just gets ~11% of its revenues (as of FY2016; exc. Defense spare parts) from
Defense. Considering that Construction & Mining Equipment industry is already crowded and
all major players in Metro and Rail Coach Space are already in India, only a highly diversified
player with long‐term vision could look at this strategic acquisition. Further, it would be
challenging for any diversified player to enter Defense space, as running a Defense business is
different in many aspects to running a non‐defense capital goods company.
Unless more clarity emerges on this new strategic investor, their long‐term vision and role
within the organization, we expect stock to remain volatile.
ABG in talks with potential buyers
ABG Shipyard, a commercial Shipbuilder, has got proposals from Reliance Defense, Shapoorji
Pallonji Group, a Russian shipbuilder and UKs Liberty House Group to acquire the company.
Media reports highlight that the talks with Russian shipbuilder are at advanced stages and the
Russian shipbuilder has all approvals in place. Apart from the Russian shipbuilder, ABG has
not received any expression of interest/ concrete proposal from any side. The ongoing
discussions are at early stages, as all of them have signed non‐disclosure agreement.
Management is hopeful that a deal is expected should get closed in next 3‐4 months.
This development comes after ABG Shipyard earlier said that board has decided to divest its
subsidiary, Western India Shipyard Ltd. Incorporated in 1985, ABG Shipyard has 2 yards in
Gujarat (at Dahej and Surat) and is the flagship company of ABG group. It is 1 of the 3 private
shipyards approved by IN to build various types of naval vessels (built 23 vessels for IN).
Our View:
In the backdrop of slump in global shipbuilding industry since 2011, ABG like its other peers
(Bharati Shipyard) witnessed loss of orders. Buyers started cancelling the orders, took their
money back, leaving large unfinished ships in their yard, resulting in stretched working capital
cycles for the shipbuilder. Deteriorating financials forced lenders categorize ABG as a ‘failed
exit’ from the Corporate Debt Restructuring (CDR).
Even though awarding from global shipbuilding industry has not shown any signs of pick‐up,
Defense awarding pipeline looks strong. However, it needs to be seen how strategic investor
would look upon this investment opportunity in ABG and what valuations would be
comforting for them. Notably, Germany based Privinvest Holding in Dec‐2016 backed‐off
from financial collaboration as it felt that ABG’s balance sheet was much bigger than size of
its facilities.
(contd...) January 23, 2017 | 4
Sector | Defense & Aerospace (contd...)
Upcoming Defense Bids:
Project Released Last Date for Final
Project details Status Bids Issued to Criterions
Cost by Quotations Selection
State‐of‐the‐art electronically scanned
array radars and electronic warfare
Elta (Israel), Raytheon &
self‐protection jammer pods for 2 Systems
Northrop Grumman (US), SAAB
forthcoming modified version of the RFQ $ 1.85 bn HAL Feb‐17 Apr‐17 will be
(Sweden), Thales (France) and
indigenously developed Light Combat selected
Rosoboronoexport (Russia)
Aircraft Mark‐1A aircraft (100 AESA
Radars)
Elta, Raytheon, Northrop
Grumman, SAAB, Thales,
100 electronic‐warfare jammer pods
RFQ $ 200 mn HAL Rosoboronoexport, Indra Feb‐17 Apr‐17
will be procured from overseas
(Spain), Leonardo‐subsidiary
Finmeccanica (Italy)
15,000 night vision devices (NVDs) for
RFI IA
Rocket Launchers
5,000 night vision devices (NVDs) for
RFI IA
Medium Machine Guns
125,000 night vision devices (NVDs)
RFI IA
for Other Small handheld Arm
$ 3.2 bn
1,400 Uncooled Thermal Imager based
Driver's Night Sight (DNS) with fusion
technology for Russian‐origin T‐90
RFI IA
tanks. Army requires range of
detection of human target at
minimum 1,000m
Elbit Systems and Elta Systems
(Israel), Saab (Sweden), Thales
83 Electronic Warfare (EW) self‐
$ 200 mn HAL (France), Elettronicas (Italy), Apr‐17
protection Suites
Raytheon (US), Indra Systems
(Spain)
Possible contest amongst these
Medium multi‐role Fighter (Single RFI
IAF 2 Bidders: Saab’s Gripen E,
Engine) with transfer of Technology (equivalent)
Lockheed Martin’s F‐16 Block 70
Designs for SDR’s that can be mounted
on trucks, armored fighting vehicles RFI IA Feb‐17
(AFVs) and helicopters
Designs for handheld and man‐pack
RFI IA Feb‐17
Software Designed Radios (SDRs)
Source: IndiaNivesh Research
(contd...) January 23, 2017 | 5
Sector | Defense & Aerospace (contd...)
Annexure:
FDI flow in Defense (in $)
900,000
822,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
78,000 95,000
100,000
0
FY2014 FY2015 FY2016
UK France, Israel France
Source: IndiaNivesh Research, MOD
DPSU’s ‐ Value of Production (Rs bn)
163
180
159
160
142
140
120
114
111
102
120
100
75
80
67
63
61
60
45
36
29
29
28
28
40
26
24
23
22
18
18
17
16
15
12
10
20
6
6
6
5
5
5
5
5
5
5
3
0 3
GRSE
HAL
BEL
BEML
BDL
GSL
HSL
MDL
OFB
MIDHANI
FY2013 FY2014 FY2015 FY2016
Source: IndiaNivesh Research
DPSU’s ‐ PAT (Rs bn)
35
30
30
27
24
25
20
15
12
10
9
9
10
6
5
4
4
4
4
3
3
5
3
1
1
1
1
1
1
1
0
0
0
0
0
0
0
MIDHANI
HAL
BEL
BEML
BDL
GSL
HSL
MDL
GRSE
(0)
(1)
(1)
(1)
(1)
(1)
(2)
(5)
Source: IndiaNivesh Research
Benefits of Off‐set Clauses likely to flow from FY2018E onwards
Sl.No. Project Details Country Off‐set Clause
1 Rafale Deal (deal value‐ Rs 600bn) France 50% offset clause to be implemented (value at Rs 300bn)
2 145 M777 Howitzer Guns (deal value‐ Rs 50bn) USA To the extent of $200mn (i.e. at ~Rs 14bn)
Source: IndiaNivesh Research
(contd...) January 23, 2017 | 6
Sector | Defense & Aerospace (contd...)
Glossary:
MoD : Ministry of Defense
IAF : Indian Air Force
IN : Indian Navy
IA : Indian Army
SPAD: Self propelled Air Defense System
RFI : Request for Information
RFQ : Request for Qualification
GoI : Government of India
(contd...) January 23, 2017 | 7
Result Today
GIC HOUSING FINANCE LTD.
IndiaNivesh Research January 23, 2017
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