>PGCIL orders : Chinese back with a vengeance in transformers

» PGCIL orders see a sharp pick-up in Feb, 2012 post a lull in January; Feb orders at Rs34bn (+106% YoY) and YTD orders at Rs154bn (+87% YoY). Transformer orders see the sharpest jump YTD with orders up 350% YoY and substation orders up 98%; transmission line orders up 61% YoY. We expect the traction in orders to continue into March.


» Competitive intensity remains high across segments; Chinese transformer players win 45% of the orders YTD and 55% of the 765kv orders while 765kv substation orders seeing increased domestic participation on PQ dilution. Consolidation being witnessed in the transmission line EPC segment


» We maintain our BUY rating on Crompton Greaves and SELL on Siemens India in the T&D space. KEC International is our preferred play in the transmission line EPC space


Orders gain traction in Feb, 2012; up 87% YTD
PGCIL orders in the period Apr-Feb12 at Rs154bn are up 87% YoY. Transformer orders have seen the sharpest jump with orders up 350% YoY to Rs19bn (12% of total orders) lead by higher ordering in the 765kv segment. Substation orders jump 98% YoY to Rs26bn (17% of total orders) while transmission line ordering remained robust up 61% YoY to Rs71bn (46% of total orders). There has been a clear shift towards 765kv voltage level across equipment and transmission line orders. We expect PGCIL orders to pick up further strength in March which historically sees the highest amount of ordering. For FY12, we expect orders to be ~Rs190bn compared to last year’s order flow of INR183bn.


Competitive intensity high – Chinese aggressive in transformers
Within transformers, the Chinese players (TBEA Shenyang and Baoding) took a 45% market share and a 55% share in the 765kv segment; this has been at the expense of the Koreans and Crompton Greaves. TBEA Shenyang (36% share of the 765kv orders) is setting up a factory in Gujarat and appears to be aggressively bidding for new orders. Within substations, entry of domestic players in the 765kv substation segment has lead to a sharp fall in share of the Indian MNC’s (32% YTD vs. 100% share in FY11). Within the transmission line EPC space, signs of a consolidation continue with the top 5 players garnering 70% of the orders (77% in FY11 and 57% in FY10).


Valuation and picks
Our top pick in the sector remains Crompton Greaves and upgrade KEC International to BUY; KEC International is our preferred play on the easing interest rate cycle. We maintain our SELL rating on Siemens India on expensive valuations along with a declining margin profile. Key risks to our ratings include slower than expected interest rate cuts and a sharper than expected rise in raw material prices.
RISH TRADER