Sector Update | 2 May 2012
PowerGrid's order awards to moderate; focus shifts to SEBs
Competitive intensity restricts margins of equipment suppliers; maintain Neutral
PowerGrid (PWGR) awarded orders worth INR108b during 4QFY12, taking total awards to INR221b in FY12 (up 43% YoY).
This was higher than our estimate of INR150-170b. However, the momentum is likely to moderate over the next 1-2 years.
Competitive intensity remains high, but there are initial signs of prices bottoming. The transformer segment was worst
impacted by stiff competition with prices declining by 35-40% in past two years.
We believe the ordering pace in the T&D segment would remain subdued over the next 1-2 years. Profitability would also
remain under pressure, thereby impacting valuations.
PWGR's FY12 project awards ahead of expectations; the last 2-3 years. Recent trends suggest that prices
likely to moderate over next 1-2 years: During FY12, have bottomed out and very low prices are not
PWGR has awarded projects worth INR221b, up 43% YoY, sustainable. PWGR's increasing thrust on local
ahead of our estimate of INR150-170b. After a lull during manufacturing is likely to benefit domestic players.
1HFY12, ordering picked-up sharply during 2H, with We expect competition in the tower segment to
orders worth INR65b placed during the month of March remain high. Smaller players that were aggressive
2012 alone. Large part of the projects slated for during FY08-10 are now focusing more on execution.
commissioning in the 12th Five-Year Plan (2012-17) have The share of the top-8 players has increased
been tendered out. Given the slowdown in investment meaningfully during FY12.
in new generation capacity, we expect PWGR's ordering PWGR now excludes switchgear from its substation
to stagnate over the next 1-2 years. package orders. We believe this has reduced entry
barriers for non-T&D equipment manufacturers in
Ambitious targets for 12th Plan, but entails capex
bidding for substation execution business, thereby
stagnation: PWGR plans to install ~65,000 circuit km (ckm)
increasing competitive intensity in a segment
of transmission lines during the 12th Five-Year Plan,
otherwise dominated by MNCs.
nearly 2x the likely installation during the 11th Plan
(~30,000ckm, target of 37,000ckm) with a targeted capex Our view: Competitive intensity in the Indian T&D
of over INR1t (this is ~2x the 11th Plan capex). equipment sector remains high. We believe that low
product prices, coupled with rising input costs, would
Competitive intensity remains high; but unlikely to
keep margins under pressure in the near-term. A
recovery in profitability is a necessary condition for
Aggressive bidding by Chinese and Korean
earnings acceleration, and hence, valuation re-rating.
equipment manufacturers (these suppliers had ~60%
We remain Neutral on the T&D sector, with preference
of the EHV transformer/reactor market during FY08-
for Crompton Greaves over Siemens India/ABB.
11) had resulted in prices plunging by 30-40% over
Quarterly project awards by PWGR (INR b) Productwise order composition by PWGR
FY12 Others 4%
3% line 34%
Satyam Agarwal (AgarwalS@MotilalOswal.com) +91 22 3982 5410
Deepak Narnolia (Deepak.Narnolia@MotilalOswal.com) +91 22 3982 5126
PWGR's FY12 project awards ahead of expectations; but expect moderation
During FY12, PWGR has awarded projects worth INR221b, up 43% YoY, ahead of our
estimate of INR150-170b. After a lull during 1HFY12, ordering picked-up sharply during
2H, with orders worth INR65b placed during the month of March 2012 alone (a record
74 contracts awarded). Most segments witnessed robust YoY growth while orders for
substations declined 59% YoY on a very high base (FY11 orders included a HVDC contract
worth INR53b). During FY12, most project awards were related to evacuation of power
from upcoming projects in Chhattisgarh, Tamil Nadu, West Bengal and Jharkhand.
High Capacity Transmission Corridors are expected to account for 55% of the PWGR's
capex during the 12th Plan and most of the project awards would be completed in
FY13. Thereafter, we expect the award momentum to moderate as generation capacity
addition pace declines. After a near 6x increase in capex from INR32b in FY05, we
expect PWGR's capex to stagnate at ~INR200b pa from FY13.
Project awards up meaningfully
picked up sharply
during 2HFY12, with
order awards of
INR65b in March 2012
alone (record 74
Increased pace of investment approvals will sustain award momentum in FY13, to moderate
going forward (INR B)
65-70% of the INR391b
investment approval in
FY12 pertains to HCTC
being set up to evacuate
power from private IPP
2 May 2012 2
Capex to stagnate post FY13, in-line with project awards / investment approvals (INR b)
Given the moderation
in order awards, we
expect PWGR's capex
to stagnate at ~INR200b
in from FY13
Plan-wise 765kV substation capacity share to rise from 30% to 40%
Capacity At the end of the plan period Plan-wise addition
(MVA) 10th Plan 11th Plan (E) 12th Plan (E) 10th Plan 11th Plan (E) 12th Plan (E)
765kV 2,000 53,000 163,000 2,000 51,000 110,000
HCTC to account for 55% of 400kV 92,942 145,000 225,000 32,562 52,058 80,000
capex in the 12th Plan, and 230/220kV 156,497 230,000 325,000 40,134 73,503 95,000
several of the project awards Total 251,439 428,000 713,000 74,696 176,561 285,000
will be placed in FY13 Source: CEA
PWGR's capex composition in
12th Plan (INR b) PWGR: 12th plan capacity addition (physical)
HCTC 550 Transmission lines (ckm) 54,000 - 66,000
UMPP 140 + 600kV / 800kV HVDC 4,000-6,000
Central Govt Projects 200 765 kV AC 25,000-30,000
Grid Strengthening 110 400 kV AC 25,000-30,000
Total 1,000 New Substations (Nos.) 75-90
Source: Company/MOSL 765 / 400 kV 25-30
400/200/132 kV 50-60
1200/400 kV 1-2
Transformation capacity (MVA) 130,000-150,000
765 / 400 kV 90,000 - 100,000
400/200/132 kV 40,000 - 50,000
Competitive intensity remains severe, but pricing stabilizing
Transmission towers, substations and conductors constitute PWGR's largest project
awards. These constituted 91% and 81% of overall awards in FY11 and FY12,
respectively. Substations awards stood at INR29.3b (down 59% YoY) in FY12 over a
high base in FY11 (included HVDC orders of INR53b). Transformer orders have returned
to normal levels at INR12.7b, but are still up 65% YoY despite the sharp decline in
prices (prices declined by over 35% since the beginning of FY09 due to increasing
In the following paragraphs, we present our observations on major T&D segments:
Transformers and Reactors
Tower and transmission lines.
2 May 2012 3
Segment-wise project awards (INR b)
FY09 FY10 FY11 FY12
Transmission Line 47.4 44.0 65.4 97.1
Substation 24.8 20.6 71.0 29.3
Transformer 10.6 11.3 7.6 12.7
Reactor 2.5 12.8 2.6 13.4
Insulator 3.9 9.6 3.3 5.6
Conductor 37.0 14.8 29.8 53.2
Others 3.2 3.6 3.7 9.8
RE Works 15.2 2.7 0.0 -
Total 144.7 119.4 183.5 220.9
Transformer market Expect prices to stabilize; market share of Chinese and Korean players
The transformers/reactors segment saw total order inflow of INR26b, up 152%, during
FY12. We expect ordering to remain muted in FY13. The 765kV (EHV) segment
accounted for 61% and 84% of the total value of transformer/reactor orders awarded
in FY11 and FY12 respectively (this segment accounted for 76% of the orders since
FY09). The EHV segment comprises ~30% of total transformer capacity proposed in
the 11th Plan and ~40% in the 12th Plan.
We believe prices in the 765kV (EHV) segment have bottomed out and should not
deteriorate further because of the following reasons.
(1) Aggressive bidding by Chinese/Korean players as an entry strategy does not appear
sustainable. Chinese/Korean players have quoted prices that were 25-30% lower
than competitors in the past, resulting in transformer prices (765kV range, per
MVA) dropping by over 35% since the beginning of 2009. This, coupled with cost
increases, has hit industry profitability hard. We believe that such low prices are
not sustainable and prices would revert to normalized levels once demand picks
(2) PWGR's increasing thrust on local manufacturing would also compel Chinese/
Korean players to set up manufacturing capacity in India. For instance, China's
TBEA is setting up a manufacturing plant in Gujarat. We believe the trend would
limit the price war in the transformer market as it will provide a level playing field
to domestic players. China's Baoding (TWBB) is also investing INR4000m to set up
a 750-1200KV transformer plant in Gujarat. The plant is expected to commence
production by April 2013.
On the positive side, the market share of Chinese and Korean companies has declined
over the last 3-4 years. However with the maturity of technology, newer players have
entered the space. Chinese and Korean companies had a combined market share
~60% of the EHV transformer/reactor market during FY08-11, which declined to 41%
in FY12. Hyosung, a leading Korean player which bagged one-third of PWGR's orders
during FY08-10, has not been able to secure a single order in FY12. We believe multiple
factors like the non-sustainability of low pricing and decreasing level of proportionate
mandatory import content is helping domestic players.
2 May 2012 4
TRIL - the new entrant in 765kV transformers: Recently, Transformers and Rectifiers
(India) Limited (TRIL), one of India's larger transformer manufacturers, in a consortium
with ZTR of Ukraine, bagged an order worth INR2b for 765kV transformers from PWGR.
TRIL is the second Indian company after Crompton Greaves to receive an order for
765kV transformers, and is also amongst the selected players in 1200kV.
EHV transformer/reactor market: Chinese and Korean share coming down
FY09-10 Baoding, FY11 Alstom FY12 Others, 4%
Hyundai T&D, 3%
Hyundai TRIL, Alstom
Eng., 15% T&D, 18%
ABB, 18% ABB,
400kv Sub-station Crompton and Siemens maintaining their stronghold in 400kv segment
Competition in the 400kV segment remains very high. With increasing thrust on EHV
segment, the market size of sub-EHV segment is also unlikely to increase significantly.
Vijai Electricals, which was quite aggressive in FY11, has seen significant decline in
order awards in FY12. Crompton has gained significantly in FY12, which we believe
was driven by its aggressive pricing strategy. Siemens continue to maintain its
stronghold although its share has slightly declined in FY12 v/s FY11. Given the lack of
technology barriers and overcapacity in the market, we expect competitive intensity
to remain high.
Sub-EHV transformer/reactor market: Crompton / Siemens maintain market shares
FY09-10 Others 6% FY11 FY12 Vijai 5%
Vijai Siemens 12%
18% 31% 24%
34% BHEL, Siemens CGL
36% 31% 50%
EHV Sub-station Market getting crowed by non-equipment manufacturers
The share of EHV substation in overall substation ordering has been rising during the
last 3-4 years, in-line with the increasing thrust of the government. The share of
765kV orders have increased to 60% in FY12 from 29% in FY09. FY11 saw the biggest-
ever tender from PWGR for HVDC transmission line to the BHEL-ABB consortium worth
INR53b. Excluding these, substation orders grew 63% YoY.
2 May 2012 5
Traditionally, due to requirement of high-system reliability and technology barriers,
MNCs like Siemens, ABB and Areva, which have their own manufacturing capacity,
dominated the EHV substation market. However, the substation package which
consists of civil, mechanical and electrical works is going through a change in the mix
of competing players. PWGR recently eased its requirements for substation package,
leading to increasing presence of EPC players. The company has started excluding
switchgears from substation package ordering. We believe this has reduced the entry
barriers for non-T&D equipment manufacturing companies. Recently, Jyoti Structures
and Techno Electric Engineering have bagged large orders in the EHV substation space.
In FY12, these non-equipment manufacturing EPC players have bagged around 1/3rd
of the total order awards in comparison to nil orders in the past. Apart from these EPC
players CRG has also made its entry into the 765KV substation space with its maiden
order for pooling station in Raipur.
Break-up of EHV substation market
FY09-10 FY11 Alstom FY12
T&D Others ABB
ABB 9% 10% 10%
Siemens 38% 10% 15%
ABB - BHEL
76% Siemens L&T Jyoti 15%
T&D, 10% 14%
Tower package market Bigger players gaining; smaller players focusing on execution
During FY12, orders for tower/transmission line packages increased by 48% YoY on
the back of major orders related to evacuation of power from upcoming projects in
Chattishgarh and Tamil Nadu. However, competitive intensity in the transmission
tower segment remains high and has resulted in pressure on profitability. The market
for towers continues to remain overcrowded because of limited design content.
Although the order awards are based on strong prequalification norms both on net-
worth and project execution track record, expertise in civil construction still remains
a major consideration. On the positive side, foreign players continue to be absent
from the segment.
We believe competition is likely to remain high in the tower segment. However,
smaller players like EMCO, ICOMM, A2Z and Rajit Singh who were aggressive in FY08-
10, have been focusing more on execution. The market share of top 8 players, including
Deepak Cables and JVs, has increased from 69% over FY8-10 to 76% in FY11 and further
to 89% in FY12.
Buoyed by strong volume growth, a number of players which did not have any past
experience in tower installation entered this space. However, most of these
companies are now facing serious execution problem. This can be corroborated from
the fact that IVRCL, EMCO and SPIC's JVs are conspicuous by their absence. Given the
2 May 2012 6
large number of players and peak competitive intensity, we do not expect too many
new players to enter, though the year saw two new players - NCC and Simplex Projects.
Tower segment competitive landscape
Value (INR m) % Share
Contrator name FY08-10 FY11 FY12 FY08-10 FY11 FY12
Jyoti Structure 11,699 689 7,277 13 1 7
Tata Projects 10,423 13,344 16,075 11 20 17
Gammon India 9,963 4,055 12,676 11 6 13
Kalpatru 8,376 7,234 9,284 9 11 10
KEC 8,065 7,420 6,094 9 11 6
L&T 7,263 3,885 10,823 8 6 11
JV Of EMC & Others 7,044 13,485 9,146 8 21 9
EMCO 4,834 5
IVRCL 3,714 3,596 4 5
JV of SPIC & Others 3,569 6,268 4 10
ICOMM Tele 3,494 4
A2Z 2,421 714 3 1
Ranjit Singh and JV 2,034 721 4,619 2 1
Bajaj Electrical 1,717 1,081 2
Aravali Infra Power 1,604 361 2 1
Shyama Power 417 2,417 1,330 4 1
JV of NCC & others 1,819 2
Simplex Projects 626 1
Deepak Cables JVs 880 9,782 10
Others 3,888 1,203 6,421 4 2 7
Total 91,405 65,392 97,053 100 100 100
Valuation and view Prefer Crompton Greaves over Siemens/ABB
Competitive intensity in the Indian T&D equipment sector remains high, which
continues to impact pricing. Low product prices coupled with rising input costs would
keep margins under pressure in the near-term. We believe ordering is likely to
moderate over the next 1-2 years due to slowdown in investment in generation
capacity impacting profitability of the domestic companies. We remain Neutral on
the T&D sector, with preference for Crompton Greaves over Siemens/ABB.
Capital Goods: Valuation summary
Rating Mkt Cap CMP EPS (INR) P/E EV/EBITDA (x) RoE (%)
(INR b) (INR) FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13
ABB# Neutral 3.5 813 3.0 8.7 17.0 272.7 93.4 47.8 198.8 64.2 30.3 2.6 7.4 13.4
BHEL Neutral 11.1 225 23.1 27.7 25.6 9.7 8.1 8.8 5.7 5.1 5.4 31.4 30.2 23.3
BGR Energy Neutral 0.5 329 44.7 29.3 26.0 7.4 11.2 12.7 4.8 6.7 8.3 38.9 20.8 16.4
Crompton Neutral 1.7 132 14.3 7.1 10.6 9.2 18.6 12.4 5.9 9.2 5.4 30.5 14.6 18.0
Cummins Buy 2.7 482 21.3 19.9 23.9 22.6 24.2 20.1 16.2 17.1 14.5 35.5 30.0 33.5
L&T Buy 14.9 1,226 69.7 75.1 83.6 17.6 16.3 14.7 14.2 12.5 11.7 18.3 17.6 15.6
Siemens## Neutral 5.4 775 25.1 22.4 29.1 30.9 34.6 26.6 18.4 20.3 15.2 23.2 18.9 22.1
Thermax Neutral 1.0 446 32.0 34.4 34.5 13.9 13.0 12.9 8.5 7.3 7.2 31.9 28.1 23.6
Havells Buy 1.4 555 22.0 29.9 39.1 25.2 18.6 14.2 15.0 11.4 9.0 42.0 38.8 35.5
# Year end December; ## Year end September Source: MOSL
2 May 2012 7
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