>T&D EQUIPMENT SECTOR UPDATE

Analysis of tenders awarded by PGCIL indicates that ordering in FY12 has been healthy possibly due to it being the final year of the 11th plan period. However, our interaction with an industry player suggests that PGCIL ordering may decline in FY13 as it being the first year of the 12th plan period.


Equipment prices have fallen sharply in recent tenders especially in the higher rating of 765 KV transformers and reactors. Chinese companies have made a major headway in winning orders in this segment.


We continue to maintain a negative outlook on the sector in view of intense price competition from domestic and foreign players as well as sluggish market growth for T&fD. We maintain negative bias for ABB (Reduce with Target Price of Rs 670), Siemens (Reduce with Target Price of Rs 780), Crompton Greaves (Reduce with Target Price of Rs 130), Alstom T&D (Reduce with Target Price of Rs 158).


Equipment prices in 765 KV range have come under pressure
■  Ordering from PGCIL has remained strong in Apr-Feb 2012 as the company nears end of the XIth plan period.


■  In 11M-YTD FY12, the central transmission utility placed orders worth Rs 145 bn vs Rs 92.9 bn in the corresponding period of the previous fiscal. However, this is not a cause for cheer as indications are that PGCIL ordering is likely to peak out in FY12 and there could be a period of slack in the initial phase of the 12th plan period.


■  The BTG market in the power generation had already slowed down in FY11-12 and its lag impact on the T&D market has begun to feel now. 


■  The private sector demand for T&D equipment continues to remain morose. While there are projects coming up from the state electricity boards, these could face funding issues as banks have turned cautious on lending to SEBs. Change of state governments is also a risk as orders awarded by previous government could be reviewed/cancelled. There is already indication of a large T&D order being cancelled in UP.


■  We also understand that product pricing is under severe stress and likely to remain so in the foreseeable future. This is especially so in the higher range of transformer ie 765 KV.


■  There has been significant increase in competition from Chinese players. This is also corroborated by our findings from the PGCIL ordering trend in February 2012. Chinese companies like TBEA and Baoding have won 765 KV reactor orders worth Rs 5.9 bn accounting for 87% of the total ordering in the segment in
February.


■  Interactions suggest that TBEA has become aggressive in bidding as its manufacturing facility in India is expected to come onstream by the end of CY12.


■  Bulk of the order awards were accounted by the transmission line tower segment at 57%. The competition in the transmission towers segment continued to remain strong with many as 17 players announcing order wins. Having said that, top five players accounted for 63% of the ordering on the transmission line towers business. Tata Projects was the leading contractor with a 19% share in Apr- Feb 2012 period.


■ PGCIL had excluded circuit-breakers from the Sub-station package. This has significantly
reduced the entry barrier for non-T&D equipment players. As a result, competition in the substation space has increased from EPC players like Jyoti Structures, KEC, Kalpataru Power, L&T etc.


■ As discussed earlier, since banks have been reluctant to finance SEBs, cash conversion cycle for equipment companies has turned longer. Consequently, the working capital cycle of equipment companies could continue to remain on the higher side in the near term.
Near-term outlook on T&D spending remains negative


■ Our interactions with industry players indicate that ordering from state utilities
has been slack since past 18 months.


■ Due to issues like delays in land acquisition, domestic coal scarcity and soft merchant tariffs, investment in power generation has taken a hit in FY12. 


■ While Power Grid Corporation of India Limited (PGCIL), has signaled to continue investment into 12th plan period and plans to invest Rs 1.0 trn (nearly double the investment during the 11th Plan (2007-2012)), the spending tends to be slack in initial plan period. This could put further downward pressure on the equipment pricing in the market.


■ Even as the T&D market remains lackluster, entry of new players like TBEA has aggravated the pricing situation.


■ We see continued challenges (in terms of orders, margins and cash generation) for T&D equipment companies in FY13.


Remain Negative on the T&D equipment sector
We continue to maintain a negative outlook on the sector in view of intense price competition from domestic and foreign players as well as sluggish market growth for T&D. ABB (Reduce with TP of Rs 670), Siemens (Reduce with TP of Rs 735), Crompton Greaves (Reduce with TP of Rs 125), Areva T&D (Reduce with Rs 158). 


RISH TRADER