>ALSTOM PROJECTS INDIA & ALSTOM (France): Collaboration with BHEL; Hydro - Global sourcing hub; Global engineering giant with focus on power and transport segments; Transferring boiler business to JV with Shanghai Electric

Global slowdown necessitating consolidation; Alstom SA to form JV with SEC for boiler business: The Alstom Group is undergoing significant transformation globally. Alstom SA acquired the transmission business of Areva T&D recently and has entered into an agreement with Shanghai Electric Company (SEC) to create a 50:50 JV, which will own all boiler manufacturing assets of the two companies worldwide. The company sees China and India as two key markets over the next few years. The company is very optimistic on its JVs in India - with Bharat Forge for supercritical turbine generator and with NTPC for boiler servicing.


Collaboration with BHEL to remain unaffected by JV with SEC: BHEL has a longterm technology agreement with Alstom. The formation of Alstom-SEC JV has raised concerns on the future of this collaboration, given that SEC is an active player in India. The Alstom management reiterated that these concerns are unfounded. BHEL has exclusive rights on Alstom supercritical technology in India and will continue to enjoy that status.


Indian BTG manufacturing industry lost out to Chinese manufacturers due to unpreparedness: The Indian power equipment manufacturers were not prepared when demand surge occurred in 2005-08, leaving the field open to the Chinese manufacturers. The scenario has changed over time and India has built sufficient capacity to meet domestic demand. In India, however, projects are awarded on the basis of initial cost and not on life-cycle cost, which is detrimental to the growth of sector and puts companies like BHEL and Alstom at a disadvantage.


ABBAP's 1HFY12 margins fail to impress due to disappointing performance of boiler business: During 1HFY12, ABBAP's revenue increased 31% YoY. However PAT declined 49% YoY, mainly due to disappointing performance of the boiler business. The order book currently stands at INR58b, implying BTB of 3.2x FY11 revenue. We believe that while the opportunity in hydro and transportation sectors is large, near-term demand is subdued and it will not be able to compensate for loss of boiler business in the next few years. Recovery in the
hydropower and gas segments will be critical for stock outperformance. ABBAP trades at 25% premium to BHEL on FY11 P/E and lacks near-term catalysts.




Power market facing hurdles
■ In India, demand for power and power equipments is driven by regulatory changes and hence not predictable. Demand surged in 2005-8, following the Electricity Act 2003, which attracted a large number of first-time power developers to the sector. The Indian power equipment manufacturers were not prepared for this demand surge, leaving the field open to Chinese manufacturers.


■ Mr Sharma believes that, in India there is still little focus on efficiency. Projects are awarded on the basis of initial cost and not on life-cycle costs. A large number of thermal power projects based on imported equipment may see operational cost rising over next 5-7 years, thereby significantly impacting their returns.


■ Established power equipment manufacturers, including Alstom, do not believe in following predatory prices quoted by a few suppliers. Given the risks involved with quoting low, including losses and liquidation damages, most manufacturers will not be prepared to quote below their set price bands.


■ The installed capacity has little meaning. Indian manufacturers can produce not more than 20GW per annum as of now (Indian power equipment manufacturing capacity is expected to be 36GW by FY14-15).




Alstom (France) - Transferring boiler business to JV with Shanghai Electric
■ Alstom and Shanghai Electric Company have announced their intent to create Alstom-Shanghai Electric Boilers Company (ASEBC), a 50:50 JV combining activities of both the companies in the boiler market for power plants. However, the EPC and service businesses of respective companies will not be transferred to the JV. ASEBC would be world leader, with combined annual sales of about EUR2.5b.


■ By combining the complementary assets of the two companies, the joint company will benefit from both (1) Shanghai Electric's cost competitiveness as well as its very strong positioning in China, the largest market in the world for coal-fired power plant boilers, and (2) Alstom's relationships with utilities worldwide as well as its leadership in clean coal power plants and its technologies.


■ In India, the Durgapur facility of Alstom Projects India will be transferred to the JV. Durgapur facility currently is engaged in new and spare parts manufacturing. Currently Boiler business roughly contributes 30% of the sales.


■ BHEL has a long-term technology agreement with Alstom. The agreement was signed in 2005 and is valid for 15 years. The formation of ASEBC has raised concerns on the future of this collaboration, given that Shanghai Electric is an active player in India. It has also raised a question whether Alstom, through the JV, will enter the Indian power boiler market, thereby competing with BHEL directly.


■ Alstom management re-iterated that these concerns are unfounded. BHEL has exclusive right on Alstom supercritical technology in India. The new JV will not have access to Indian market for selling supercritical boilers, and ASEBC will not directly compete.


■ The management stated that negotiations are still going on between Alstom and SEC and actual scheme of merger has yet to evolve.




Alstom (France) - Global engineering giant with focus on power and transport segments
■ Alstom globally operates in two segments, namely, a) Power and b) Transport. Headquartered in France, the company is present in over 70 countries with EUR21b of revenues (including Areva's T&D business acquired in FY11). According to the company, Alstom has supplied ~25% of the global installed power generation capacity and has rolled out 1 in 4 metro rail and 1 in 3 tramway systems globally.


■ The company is an integrated power equipment manufacturer in thermal, gas, hydro and renewable energy sectors. The company also has strong product portfolio for emission control in power generation, petrochemical and industrial sectors. It also serves demand for upgrades and modernization of existing power plants. Similarly, transport segment provides equipment and systems for rail transportation activities, including passenger trains, locomotives, signaling equipments, rail components and services.


■ The recently acquired T&D business from Areva T&D in FY11 has been added to a new segment called the 'Alstom Grid' to its erstwhile operational segment of Power and Transport. Alstom Grid has an order backlog of EUR5b, annual revenues of EUR3.6b, and OPM of 5-6%.


■ The segment employs more than 20,000 people in over 90 manufacturing sites. Alstom Grid is among top three companies in electricity transmission along with ABB and Siemens. In FY11, geographical sales split was: Europe (30%), Africa- Middle East (20%), Asia-Pacific (31%) and Americas (9%).


Aggressively tapping Indian markets through JVs
■ In India, Alstom Group intends to focus on gaining traction in power equipment space through joint ventures with leading Indian companies. India is emerging as a key destination for Alstom. Globally the company is significantly ramping up its focus towards emerging countries


■ Alstom France has formed two joint ventures with Bharat Forge. The flagship JV is setting up a plant in Gujarat to manufacture supercritical steam turbine. Another JV will have facility for turbine components. The plant, being set up at the cost of INR20b, will have capacity of 5,000MW per annum.


■ Alstom France has also entered into technical collaboration with BHEL for supercritical boilers. The agreement is valid till 2020.


■ Alstom has also formed a 50:50 JV with NTPC for servicing and retrofitting aging steam generators.




Alstom Projects India: Hydro, gas and transportation sectors to drive growth post merger of boiler manufacturing assets of Alstom-SEC
■ Alstom Projects India (APIL) is the listed Indian subsidiary of Alstom France with FY11 revenues of INR18b. In India, it has presence across the power and transportation segments (mainly, railways), with four manufacturing sites employing 4,000 people. Power is the dominant business accounting for 95% of FY11 sales while transport accounts for remaining 5%.


■ However, there is strong growth expected in railways orders in next 4-5 months, particularly for Dedicated Freight Corridor, which will increase share of transport sector in revenues in FY12-13.


■ APIL has benefited from parent's partnership with BHEL. It has spent over ~INR2b over the last 2-3 years to ramp up and upgrade its supercritical capabilities in Durgapur and Shahabad. The company is key supplier of components (pressure parts for supercritical boilers) to BHEL, which is executing 11GW of supercritical power projects and is expected to get 6.5GW from NTPC bulk tenders. In turn, Alstom could execute a good portion of the work outsourced by BHEL (roughly INR2-4b / 800MW set). Post transfer of Durgapur facility to Alstom-SEC JV, the orders will get executed by JV. However, over a period of time, BHEL will indigenize technology, thereby lowering the quantum of boiler components outsourced from
APIL.


Hydro - Global sourcing hub for Alstom Group
■ APIL has established is one of the largest hydro-power equipment manufacturing hubs of the group at Vadodara facility, along with its locations in France, China, Brazil, Switzerland, Spain and Canada. The factory has a capacity of 4,000MW and meets demand from India and other regional emerging markets. Alstom has 38% market share in Hydro power ordering in the XIIth plan.


■ CEA has identified ~25,000MW of feasible hydro-power projects for the 12th Plan. Hydro-power occupies 25% share of the power generation mix and currently the installed base stands at 37,000MW. Of this, APIL (through Alstom) has contributed towards installation of ~6,000MW. The company stands to benefit from the opportunity, though the sector is mired in environmental and rehabilitation issues.


■ The company is executing NHPC's 2000MW (8 x 250MW) hydro power project, largest in India. The project has been significantly delayed and is now expected to be completed by December 2012. Alstom has completed over 70% of work.


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