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INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

Capital Goods & Engineering

2QFY20 CMIE capex data - Weakness continues in new announcements

INDIA | Sector Update

3 October 2019

CMIE recently published its India capex data for 2QFY20. Key highlights:

New announcements decline 56% yoy though improve qoq: New projects announced in 2QFY20, at Rs 959bn declined 58% yoy (but rose 14% qoq) despite a low base. Adjusted for the low visibility projects, new announcements were down 56% yoy but increased 20% qoq. We believe general slowdown in economic activity was the major reason for the continued decline in the new announcements.

Of the new announcements: Manufacturing (Rs 265bn - metals, chemicals, cement and consumer appliances), power generation (Rs 513bn), and transport infra (Rs 56bn - roads and railways) accounted for 88% of new announcements. The private sector accounted for 40% (vs. 53% in September 2018 and 48% in June 2019).

Key projects announced include: SECI's 2.7GW renewable projects (Rs 169.5bn), MP Genco's 2.6GW coal power project (Rs 106bn), NTPC 1.2GW solar project (Rs 78bn), PJSC Novolipetsk's steel plant (Rs 60bn), and TANGEDCO's 730MW North Chennai gas power plant (Rs 50bn).

Completed projects remain weak: Projects completed in the quarter declined 46% yoy / 25% qoq to Rs 567bn. Projects commissioning were weak across all the sectors except in roads and automobiles. Major projects commissioned include Kia Motors Anantapur plant (Rs 71bn), Agartala-Sabroom railway project (Rs 34bn), Aurangabad-Yedeshi highway (Rs 34bn), and Lucknow-Sultanpur highway (Rs 32bn).

Stalled projects rose significantly: ‘Projects that are under implementation, but stalled’ rose 20% yoy/3% qoq. Stalled projects now account for 12.1% vs. 10.2% yoy and 11.8% qoq of the projects under implementation. Stalled projects increased in roads (+64% qoq) - due to Bangalore elevated corridor (Rs 171bn) and Mumbai coastal road (Rs 150bn) and Irrigation (+62% qoq) - Chintalapudi lift irrigation project, Andhra Pradesh (Rs 49bn).

Reasons for stalling: ‘Other issues’ (44% of stalled projects vs. 28% in March 2014), lack of funds (14% vs. 11%), and lack of environment clearance (8% vs. 4%) are now key reasons for projects stalling.

Our take: Quality of new projects announced had improved in 2HFY19 but have deteriorated for the past two quarters. We could attribute the impact of general elections on 4QFY19 and 1QFY20 though 2QFY20 is reflective of slowdown in decision making across industries due to a weak economic scenario. We expect government facing sectors such as Railways and Defence to pick up ordering in 2HFY20 while the impact of recently announced cut in income tax rates, if any, would only be seen in FY21, in our view. Though what is worrying is the increase in stalled projects in the past four quarters as lack of funds becomes a primary cause for halting projects followed by land acquisition issues and lack of clearances. We continue to monitor the restart of stalled projects more than new announcements.

Summary: September 2019 Rs bn yoy (%) qoq (%)

New projects announced 959 -58% 14%

Less: Low visibility projects (163) -68% -9%

New projects announced (adjusted) 797 -56% 20%

Cumulative projects announced 48,496 -17% -3%

Cumulative projects under implementation 1,11,957 1% 1%

Stalled 13,555 20% 3%

Stalled % of under implementation 12.1% Completed 567 -46% -25%

Projects outstanding 1,85,126 -7% -1%

Source: PhillipCapital India Research Estimates

Jonas Bhutta, Research Analyst (+ 9122 6246 4119) [email protected] Vikram Rawat, Research Associate (+ 9122 6246 4120) [email protected] Sandesh Shetty, Research Associate (+ 9122 6246 4139) [email protected]

mailto:[email protected]



Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

CAPITAL GOODS AND ENGINEERING SECTOR UPDATE

Adjusted for projects with limited visibility, new projects fell 56% yoy

New projects announcements trends around General elections

EC date -2Q -1Q EQ +1Q +2Q

12th GE Mar-98 -43% -40% 15% -13% 54%

13th GE Oct-99 -4% -32% 186% 30% 14%

14th GE May-04 107% 21% -38% 53% 24%

15th GE May-09 -11% 41% -42% -23% 51%

16th GE May-14 26% -7% -18% 180% 180%

17th GE May-19 8% -44% -78% -58%

Source: CMIE, PhillipCapital India Research, EQ = Election Quarter

New projects announcements by Government sector around General elections


12th GE Mar-98 -84% -32% 53% -25% 598%

13th GE Oct-99 -26% -57% 160% -25% 6%

14th GE May-04 83% 54% -45% -37% -58%

15th GE May-09 30% 16% -46% 28% 55%

16th GE May-14 92% -33% -2% 182% 109%

17th GE May-19 -39% -51% -69% -47%

New projects announcements by Private sector around General elections


12th GE Mar-98 -11% -45% -35% 5% -18%

13th GE Oct-99 21% -4% 235% 241% 19%

14th GE May-04 167% -14% -27% 184% 168%

15th GE May-09 -32% 58% -40% -45% 47%

16th GE May-14 -18% 39% -39% 174% 292%

17th GE May-19 47% -38% -83% -69%

Source: CMIE, PhillipCapital India Research, EQ = Election Quarter

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New projects announced (Rs bn) Change (% yoy)

Adjusted Change (% yoy)

88% of these new announcements were: Manufacturing (Rs 265bn - metals, chemicals,

cement and consumer appliances)

Power generation (Rs 513bn)

Transport services (Rs 56bn - roads & railways)

Key projects:

SECI's 2.7GW renewable projects (Rs

169.5bn - solar Rs 97.5bn & wind Rs 72bn)

Madhya Pradesh Power Genco's 2.64GW

coal based power project (Rs 105.6bn)

NTPC 1.2GW solar project (Rs 78bn)

PJSC Novolipetsk's Auric-Shendra steel

plant (Rs 60bn)

TANGEDCO's 730MW North Chennai gas

based power plant (Rs 50bn)

Amperex Technology Maharashtra mobile

batteries & gadgets plant (Rs 42bn)



Cumulative projects under implementation are 1% higher yoy/qoq at Rs 112bn

Stalled projects account for 12.1% (vs. 10.2% yoy) of projects under implementation

Source: CMIE, PhillipCapital India Research

Stalled projects – Sector-wise mix trend

Source: CMIE, PhillipCapital India Research, *Real Estate includes hotels, educational institution & other projects

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Projects stalled (Rs bn) % of under implementation

34% 36% 39% 33% 34% 34% 35%

27% 19%

23% 23% 21% 24% 21%

3% 8%

7% 7%

1% 2% 6%

2% 2% 3%

3% 4%

4% 4%

14% 11%

9% 14%

14% 10% 9%

0% 0%

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19% 24% 18% 19% 17% 15% 15%

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Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Sep-19

Power Metals Roads Ports infra Real estate Air services Others

Projects that are stalled rose 20% yoy / 3%

qoq to Rs 13.6tn

Top-5 projects accounted for 17% of the

stalled projects, which are:

Spicejet acquisition of 100 Boeing

aircrafts (Rs 732bn)

Jet Airways acquisition of 75 Boeing

aircrafts (Rs 577bn)

Bellary steel plant, Uttam Galva (Rs

360bn)

Barendra steel plant, JSW (Rs 350bn)

Kopta (Raigad) SEZ project (Rs 300bn)



Reasons for projects stalling – Lack of funds, environment clearances and other issues

Completed projects declined 46% yoy / 25% qoq across the sectors except roads and automobiles

Shelved projects declined 51% yoy Rs 51bn

Source: PhillipCapital India Research

7% 10%

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Sep-19

Unfavourable market conditions Raw mat supply problemLack of clearances (non-enviro) Lack of enviro clearanceLack of funds Lack of promoter interestLand acquisition problem Natural calamityNot available Others

50% 51% 39% 37% 32% 33% 31%

14% 13%

15% 17% 19% 18% 17%

8% 3%

5% 6% 9% 8% 7%

28% 33% 41% 41% 41% 41% 44%

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Ministerial bottlenecks Promoter interest

Market conditions Others

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Projects shelved (Rs bn) Change (% yoy)

Projects worth Rs 567bn were completed

in 2QFY20.

Almost all the sectors had a decline in

projects completion except:

Roads (21% of completed projects) led by

projects in Uttar Pradesh & Maharashtra

Automobiles with commissioning of Kia

Motors plant in Anantapur



Cumulative projects outstanding is now at Rs 185tn, down 7% yoy / 1% qoq


New project announced: Sector-wise summary (Rs bn) FY00-04 FY05-09 FY10-14 FY15 FY16 FY17 FY18 FY19 FY15-19 1HFY20

Conventional power 4,936 27,491 17,729 2,418 1,574 552 455 417 5,416 179

Renewable power 247 782 4,040 2,644 1,487 1,121 2,194 1,591 9,037 435

Power gen 5,182 28,273 21,770 5,062 3,061 1,672 2,649 2,008 14,452 614

Power T&D 273 594 2,174 732 350 204 152 209 1,646 11

Power 5,456 28,867 23,944 5,793 3,411 1,876 2,801 2,217 16,099 625

Coal & lignite 624 1,010 586 175 66 72 27 14 355 4

Crude oil & natural gas 328 997 1,232 298 75 97 696 58 1,224 -

Petroleum products 550 3,121 3,917 305 1,787 887 469 1,526 4,975 4

Natural gas distribution 601 1,009 1,148 208 211 54 87 136 697 -

Oil & gas 1,479 5,127 6,296 811 2,073 1,039 1,252 1,721 6,895 4

Roads 1,750 4,363 5,542 1,811 2,710 2,901 2,127 1,100 10,649 52

Railways 376 4,546 9,278 2,839 2,628 1,881 1,011 285 8,645 200

Airport Infra 317 1,004 317 23 144 192 175 115 650 -

Ports 624 2,004 1,453 717 466 599 82 56 1,920 28

Water & irrigation 1,473 2,649 2,746 750 608 1,228 569 406 3,560 39

Infrastructure 4,540 14,566 19,337 6,140 6,556 6,801 3,964 1,963 25,424 318

Housing construction 213 5,205 5,307 784 799 760 660 567 3,570 93

Commercial complexes 713 5,848 1,704 244 191 348 273 226 1,281 81

Real estate 926 11,053 7,011 1,028 990 1,107 933 793 4,851 173

Hotels, Hospitals, Edu. etc 599 4,102 4,673 1,503 1,292 512 484 422 4,212 94

Metals 880 12,462 8,283 1,347 631 1,362 491 705 4,535 145

Cement 122 1,657 2,443 227 155 316 195 279 1,173 134

Electronics 75 1,549 798 364 1,347 82 173 202 2,168 -

Chemicals 590 1,661 1,193 515 823 308 515 813 2,974 92

Auto 296 1,042 1,325 197 309 200 248 165 1,118 11

F&B 232 778 862 160 322 325 193 165 1,166 43

Textiles 163 917 540 46 119 152 178 71 565 14

Pharma 100 353 330 102 62 60 125 51 399 22

Fertilisers 165 268 954 208 176 222 0 2 608 -

Telecom 282 2,214 711 83 38 582 44 2 749 2

IT 455 2,218 1,034 89 148 141 33 152 562 26

Others 586 3,344 4,251 785 1,426 577 1,172 547 4,508 93

Total ex-Air transport 17,571 93,187 84,572 19,573 19,942 15,734 12,828 10,284 78,361 1,800

Air transport services - 2,046 1,669 1,500 577 1,249 345 1,528 5,198 -

Total 17,571 95,233 86,241 21,073 20,519 16,982 13,173 11,811 83,560 1,800


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Projects outstanding (Rs bn) Change (% yoy)



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