Thursday, April 8, 2010


Power generation space would continue to offer significant opportunities to equipment manufacturers for the next few years as the country grapples to manage the huge peaking shortages that is currently faced. We believe the ever-increasing electricity consumption also requires a quantum jump in power generation capacities. Apart from the huge market opportunity, the consistent order flows along with the superior return ratios enjoyed by the equipment companies, make the power generation space one of the most attractive segments in the capital goods industry, in our view. The Central Electricity Authority’s (CEA) planned capacity addition target for the XIIth Five Year Plan translates to a market opportunity of Rs4-4.5tn (about US$100bn), which we expect can materialise over the next three to four years.

Key investment highlights
To contain the peaking shortages and to meet the incremental demand, CEA has targeted a capacity addition of 1,00,000 MW in the XIIth Five Year Plan, a growth of 27%. We believe the plan targets would continue to increase going forward. The shelf of the projects planned for the XIIth Five Year Plan stands strong at 1,38,000 MW.

Private sector utilities are expected to account for around 50% of the capacity additions in the XIIth Five Year Plan. With private sector utilities’ better execution capabilities, a better visibility exists for equipment companies, as more projects would take off.

Power plants based on supercritical technology are expected to dominate the capacity addition plans in the XIIth and the XIIIth Five Year Plan. Hence, in our view, companies with technological tie-ups and faster indigenisation in manufacturing over the next two to three years would have an edge.

Going by the past trend, equipments order for projects related to a five year plan are placed one to two years ahead of the beginning of the plan period. Of the shelf of 1,38,000 MW for the XIIth Five Year Plan, orders for around 43,000 MW have been placed, while orders for the balance equipments are expected to be placed in the near to medium term.

We expect this to translate into robust growth for the power generation equipment companies and drive a strong growth in their order book, revenues and profits. We are positive on the industry and initiate coverage with an Overweight rating on the sector and a Buy recommendation for BHEL, BGR Energy and Thermax.

To read the full report: CAPITAL GOODS