Capital Goods – Positive: Daiwa

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Sector thesis: focus likely to shift to T&D from BTG
Our primary thesis of continued investment in the domestic power sector holds
even for FY12. However, we expect the focus to shift to the transmission and
distribution (T&D) space from main plant equipment (BTG).



We estimate that about 30-35GW of orders were placed with BTG suppliers in
FY10 alone, of which 20GW were placed with domestic suppliers and the balance
with overseas companies, mainly from China. In addition, over the next three years
(FY12-14), we estimate about 63GW of power capacity will be added, the main
plant orders for which have already been placed. Hence, we believe that over the
next few years the focus of government and private-sector spending will be on
building the requisite T&D networks to match capacity additions.

Structural outlook: three-year view
Pace of BTG orders likely to continue but competition should make it unattractive
We maintain our view that India still holds the potential to award about 20GW of
BTG orders over the next few years. However, incrementally we believe the BTG
market has become crowded with new domestic entrants. In FY09, domestic
manufacturing capacity was 19GW, which increased to 26GW for boilers and
32GW for turbines in FY10-11. Hence, with no sign of the competition from the
China companies abating, we believe new domestic entrants would lead to a
substantial increase in competitive intensity in this market.

PGCIL ordering … if not now then when?
We expect Power Grid Corp (Not rated) (PGCIL) orders for T&D to resume
following a dry spell over the past two quarters. We expect PGCIL to place orders
worth Rs220bn over the next two years, based on the balance of spending for the
11th Five Year Plan (FY07-12). Consequently, it should also start awarding
contracts for 12th Five Year Plan projects, which would include Rs580bn of
high-capacity transmission corridors. In addition, we believe the opportunity size
for capex by state utilities is as big as that of PGCIL, and that continued spending
by them will benefit the T&D companies.

Increasing industrial capex should also benefit capital-goods companies
Earlier this year, we said we expected industrial capex to pick up steam in 2H
FY11 on the back of the contribution from the metals, oil and gas, and cement
sectors. We have seen the initial signs of a pick-up in ordering from these sectors
after the economic downturn. Going forward, we believe companies in the
capital-goods sector will benefit from this rising capex, not just from the sectors we
have mentioned, but also from others, such as mining, railways and defence.
Structural challenges
We believe the key structural challenges for the sector relate to: 1) execution, 2)
regulatory approval, and 3) financing.