Tuesday, March 6, 2012

>INDIAN CAPITAL GOODS: Power Grid orders: A slow start to 4Q

  • Power Grid orders showed lumpiness, slowing to INR8.4bn in January (down 32% y-o-y); YTD orders are up 82% y-o-y
  • Competition remained stable in most segments, except substations, where we saw an increase in players
  • Maintain preference for EPC players; reiterate OW on KPP and KEC, UW on SIEM and ABB, and UW(V) on CRG

Slow start to 4Q: Power Grid orders came to INR8.4bn in January, down 32% y-o-y and 64% m-o-m. The total number of awarded contracts rose to 16 versus 12 last year, underpinning continued order momentum. Orders in the first 10 months of 2011 came to INR121bn, up 82% y-o-y. We expect heavy ordering of INR80-100bn in February-March, given that historically, Power Grid has awarded at least 50% of its yearly orders in 4Q. We also note that so far c43% of orders have been awarded in the tower segment, while only 29% are in the transformer and substation segment. Given that historically order distribution has been more equitable, we believe that ordering in February-March could be slightly skewed towards substations and equipment. As such, we expect Power Grid’s strong order inflow will continue, acting as a catalyst for a sector re-rating. We believe this will benefit small-cap stocks, e.g. KPP and KEC,
which trade significantly below historical averages.

Competition intensifying in substations: Competition has clearly intensified in the substation segment; there are now nine players in the 765kV space and 13 in the 400kV space. Interestingly, competition is mostly from domestic players, with only three active foreign players in the segment. As such, we believe the increase in players may put further pressure on pricing. Competition in the transformer segment remains broadly stable and the companies under our coverage retain 39% of orders in the 765kV space and 81% in the 400kV space. Competition in the tower segment is also stable, with KPP, KEC and JYS winning 19% of orders YTD versus c24% last year.

Order momentum to drive re-rating: Strength in Power Grid orders should raise confidence in the transmission capex outlook, in our view. Also, competition suggests that pricing is rationalising in the EPC segment, but may remain under pressure for substation vendors. Hence, we continue to prefer EPC players. Reiterate OW on KPP and KEC, UW on SIEM and ABB, and UW(V) on CRG.