India Captive/Back-up Power Opportunity from adversity

Continued power shortages, coupled with sustainable growth in India’s key
economic sectors as the country emerges from the downturn, are likely to be
growth drivers for captive power and back-up power equipment suppliers in India.
We initiate coverage of Thermax, which leads the captive power segment in India,
with a NEUTRAL rating, and Cummins India, which leads in back-up power
equipment, with a BUY rating.
􀂄 We believe long-term growth drivers are in place for captive/back-up power
demand in India to increase. On the supply side, this is led by a high level of
power shortages and expensive grid power for industries, due to cross-subsidies
for agricultural use. The setting up of captive power and diesel generators will
provide an alternative to tide over any power outages, in our view.
􀂄 On the demand side, while near-term visibility has been affected by the global
economic meltdown, we believe the long-term outlook for India’s industrial growth
is robust. A sustainable corporate expansion drive and India’s increased
attractiveness as a global outsourcing hub should provide long-term growth
opportunities for both captive and back-up power equipment demand.
􀂄 In addition, the country’s drive for infrastructure creation, along with the rising
trend of high-rise buildings and continued addition of telecom towers, as well as
its increased attractiveness as a global outsourcing hub, among others, are likely
to boost demand for diesel gensets, in our view.
􀂄 Nevertheless, we expect the sector’s near-term revenue to decline 0-10%, leading
to lower margins and returns. In the longer term, we believe the sector’s returns will
remain attractive with a sustainable double-digit growth rate. Competition from
Chinese players, an appreciating rupee and rising fuel prices (such as coal and
diesel) are key risks to captive/back-up power demand, in our opinion.
􀂄 We initiate coverage of Cummins India, the leading back-up power equipment
supplier in India, with a BUY rating and a 12-month price target of INR360,
representing potential upside of 38% from the current level
􀂄 We initiate coverage of Thermax, the leading captive power supplier in India,
with a NEUTRAL rating and a 12-month price target of INR450, as we believe
the share price has captured most of the potential upside.

Table of Contents
Coverage summary ............................................................................................ 3
Investment summary ............................................................................................ 4
Investment risks ................................................................................................ 10
Long-term growth drivers in place ........................................................................ 11
Industrial capex – the key variable in spurring demand upturn .................................. 16
Outlook for captive/back-up power sector............................................................ 23
Valuation........................................................................................................ 25
Thermax......................................................................................................... 28
Cummins India ................................................................................................ 30