Citi :Electric Equipment: 2011 Sector Outlook

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Remain Selective
 Capex remains strong — Generation capex has continued unabated through
the financial crisis and thereafter owing to conducive regulatory regime,
continuing energy deficit, relatively high merchant prices and availability of
abundant domestic funding sources. Transmission capex, which had slowed
down due to delay in PGCIL orders, is now picking up in pace.


 Competitive intensity may have moderated in transmission segment — The
depressed scenario in the T&D markets from Sep08 continued in CY10 with
–ve growth in 1HCY10 (1st time last 5 years). Several EPC contractors
 Prices now stable — Price falls have reduced now). Since September 2008
transmission prices are down 25% and distribution prices are down 32%.
Our channel checks suggest that prices have stabilized now.
 However competition remains a risk in generation — Competition is looming
in the horizon with a host of players intending to set up or setting up boiler
and turbine generator manufacturing plants in India (L&T-MHI, Bharat
Forge-Alstom, JSW-Toshiba, Doosan, Ansaldo-GB Engg, Cethar Vessels-Riley
Power-Power Machines, BGR-Hitachi, Thermax-Babcock Wilcox). Large
orders placed by Lanco (~10GW) and R-Power (~25GW) on Chinese
suppliers and Government’s decision to not levy import duty on Chinese
equipment are worrying signs. We remain selective. Our top picks in the
space are Thermax and Areva T&D. ABB is our top sell in the sector.

 Thermax — Company is seeing strong momentum across businesses. B&W
JV has bought land and ~50 people have been hired so far. The technology
transfer has started and it will bid for supercritical boilers from 4QFY11.
 Areva T&D — Areva is most levered to uptick in transmission capex. In the
competitive phase company booked orders at a brisk pace and has a healthy
backlog to sustain the revenue growth momentum. EBIT margins have
improved 446bps and 236bps QoQ in 2QCY10 and 3QCY10 respectively.
This implies that lower prices/ higher capital costs are already in company’s
cost structure.
 ABB — Business continues to suffer due to lower price realizations,
relatively lesser revenue and continued costs on exit from rural
electrification. Major portion of backlog comprises of long gestation projects.