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Industrials
India
PGCIL 765 KV ordering; one makes all the difference. Live tenders for 765 KV
equipment from PGCIL mandate that Indian plants do not strictly need two-year track
record and thus CRG, Areva and Siemens can bid purely based on Indian mfg. PGCIL
actually mandates at least one of the transformers be made in India. This can be done
by (1) Indian (Crompton, ABB etc.) or (2) foreign (ZTR, Ukraine) either in subs. or JV with
existing Indian manufacturers (TRIL etc.). While obviating pure-play foreign competition,
this would increase comp’n by (1) opportunity for smaller players to set up JVs and
enter 765 KV segment (repeat of BTG bulk tendering) and (2) allow everybody to bid on
Indian costs (ABB, Siemens’ Indian plants do not have two-year track record as yet).
PGCIL mandates domestic mfg.; obviates pure foreign play but likely to induce more competition
Review of bid documents for open tenders (last date by Dec10-end) of 765 KV transformers (about
55 – worth about Rs7 bn) and reactors (about 120) suggests that PGCIL has mandated that at
least one of the transformers needs to be manufactured in India. This in turn would imply that all
elements of manufacturing such as core & winding facility, tanking, vacuum dryer, testing,
overhead crane have to be established. Pure-play foreign bidders cannot participate directly and
have to either (1) set up joint venture (with Indian transformer manufacturers – need to have type
tested 345 KV transformer – BHEL, EMCO, Vijay, TRIL could meet this condition) or (2) set up
subsidiary or (3) at least give a commitment to do one of the previous two options within six
months. While this may have been expected to reduce competition, but it may actually incentivize
JVs of foreign players with existing Indian manufacturers and thus some of smaller players may
scale up to compete with established players in this segment (repeat of BTG bulk tendering). In the
near term though this may avoid pure foreign manufacturing-based competition as we saw in
previous round with Hyosung and TBEA winning large orders.
Two-year exp. requirement softened; would allow bids purely on domestic manufacturing
Unlike previous instance of bidding, two-year track record (of having supplied 765 KV
transformers) has been done away with for Indian manufacturers as long as their parent (in case of
ABB, Siemens), subsidiary (Ganz in case of Crompton) and collaborator meet that requirement.
Indian transformer manufacturer now only need to have supplied one transformer above 715 KV
prior to bid. Thus Siemens, CRG and Areva can now bid for 765 KV purely based on domestic mfg.
Recent TRIL meeting suggests that competition is gearing up; cost of capacity addition low
We recently met TRIL and key takeaways were: (1) Established in 1981, company claims to have
25% market share in 220 KV, (2) has supplied few 400 KV transformers recently, (3) extremely
keen to get a part of the upcoming 765 KV orders based on recent JV with a partner, (4) expect
Chinese to be unable to compete as transformer is a custom (vs mass) manufactured product, (5)
very optimistic of the long-term opportunity even though capacity utilization is still running low
(about 50-55%). TRIL has recently added 16,000 MVA (23,000 MVA total) to its capacity through
its Greenfield plant near Ahemadabad for a total capex of just about Rs0.7 bn.
CRG -ve (loses head start); ABB, Siemens +ve (competitive bids possible); smaller players big +ve
This is marginally negative for Crompton as it loses its temporary head start over others of
supplying 765 KV transformers if two-year track record would have been maintained. ABB,
Siemens and Areva can now bid for these tenders purely based on domestic manufacturing (their
bids were clearly uncompetitive in case they needed part mfg. at European plants). This provides
an opportunity for smaller players like TRIL etc. to form JVs and get into this segment of market.
PGCIL mandates domestic production of at least one transformer; potentially
encourages more players to enter
Review of bid documents for open tenders for 765kV equipment suggests that PGCIL has
mandated that at least one of transformers is domestically manufactured. This implies that
capacity would have to be established for such manufacturing. The new norms mandate
that a foreign transformer manufacturer can bid for transformer tenders either through the
subsidiary or the JV route or give an undertaking to establish one within six months of
winning of bid. Subsidiaries and JVs have to be registered in India for manufacturing of
transformers.
In case of a subsidiary, the foreign transformer manufacturer should have manufactured a
715kV+transformer. The same should have been in operation for at least 2 years as on the
date of bid opening. In addition, the subsidiary needs to have a manufacturing base in India.
The foreign manufacturer also needs to maintain a minimum 51% stake in the subsidiary for
a minimum lock-in period of 7 years from the date of incorporation of the subsidiary or up
to the end of the defect liability period of the contract, whichever is later.
If the JV route is undertaken, then the Indian transformer manufacturer with whom JV is
done, needs to have a minimum 51% stake for lock-in period of seven years or end of
defect liability period. The foreign bidder also needs to maintain a 26% stake for the same
lock-in period. Moreover, the Indian transformer manufacturer should have designed,
manufactured, tested and supplied at least one number of 345kV or above class transformer.
We believe several Indian manufacturers who are not competing in the 765 KV category
currently would be able to complete based on JVs with foreign transformer manufacturers.
We expect that based on above requirements, Vijay Electricals, EMCO, TRIL and BHEL would
be able to qualify for a JV and thus may attempt to enter 765 KV manufacturing arena.
JV may be preferable as it leverages existing manufacturing capabilities
JV may be the preferred way for foreign manufacturers as existing manufacturing facilities of
the Indian transformer manufacturer partner can be leveraged. Relationships of Indian
partners would also be handy in navigating the actual business situation on the ground.
Smaller players would avail of opportunity to get into 765 KV segment as well;
repeat BTG bulk tender experience
May encourage smaller transformer manufacturers to get into JVs with foreign transformer
manufacturers who meet the experience and avail of an opportunity to enter 765 KV arena
in which they may not have been able to participate so far. This would end up repeating the
experience of bulk tendering by NTPC to encourage domestic manufacturing which has
catalyzed more competition in the BTG space
One makes all the difference; one or all – same mfg. facility would need to be
established
Apart from technology understanding, experience and track record (all of which can be
brought from abroad or other players), manufacturing of 765 KV transformer would require
appropriate facilities. Once such facilities have been set up it does not make any difference
whether one transformer is manufactured or all.
We understand key constraint in manufacturing higher size transformers are as follows: (1)
Overhead cranes – have to have capacity to lift equipment of such weight, (2) overhead
clearance to move around this size of equipment particularly in test lab once it is fully
assembled, (3) sanitized winding and core building work space – dust tolerance at high
voltages and energy flow is low, (4) vacuum drying etc. have to have facility for this size of
equipment, (5) equipment at test lab to generate requisite testing surge etc. and (6)
generator of sufficient size to supply power in test lab at least equivalent to energy loss in
the transformer during load test (500 MVA transformer may need 10-15 MW generator for
supplying 2-3% loss).
Two year exp. requirement softened; would allow bids purely on domestic
manufacturing and thus increase competition
Unlike previous instance of bidding, two-year track record (of having supplied 765 KV
transformers) has been done away with for Indian manufacturers as long as their parent (in
case of ABB, Siemens), subsidiary (Ganz in case of Crompton) and collaborator meets that
requirement. Indian transformer manufacturers now only need to have supplied one
transformer above 715 KV prior to bid. Siemens, CRG and Areva can now bid for 765 KV
purely based on domestic mfg.
Previous round insistence on two-year track record made MNCs uncompetitive
In the previous round of bidding PGCIL insisted that Indian plants should have had two-year
track record of supply otherwise some portion of the tender should be supplied from plants
which have a two-year track record. This requirement meant that Indian MNC players like
ABB, Siemens and Areva had to use overseas plants for a portion of supply as their Indian
plants did not have the two-year track record of supply. This made their bids prohibitively
uncompetitive and handed out a huge advantage to players like Hyosung, TBEA which won
these tenders purely based on overseas manufacturing.
Level-playing field (Indian mfg requirement) would increase competition
Level-playing field wherein most of the major Indian players like Crompton, ABB, Siemens
and Areva can bid for the tender purely based on domestic manufacturing would increase
competition. We believe that these developments in PGCIL norms will lead to reduction in
market share of players such as Hyosung and TBEA. These companies had bid aggressively
for T&D orders in the last 2 years and have been able to gain significant market share from
domestic players. They were so far able to compete without setting up their base in India.
The present norms would inhibit them from operating from abroad and hence would
benefit domestic equipment manufacturers
While In the near term this may avoid pure foreign manufacturing-based competition, it may
actually incentivize JVs of foreign players with existing Indian manufacturers.
Snapshot of current 765kV ordering activity by PGCIL
PGCIL has recently started ordering activity for fresh round of 765kV equipment. Following
is the snapshot of live tenders at PGCIL’s website, for 765kV segment. Most of the ordering
activity is happening from pooling stations in Orissa, Madhya Pradesh and Chhattisgarh.
BHEL Toshiba JV to further fuel competition
BHEL and Toshiba are close to wrapping up joint venture agreement for manufacture of
765kV transformer and reactors. The agreement is supposed to be finalized by 1QFY12E.
Though BHEL has a significant presence in the overall transformer market, it has a negligible
share in the 765kV segment. We expect that once BHEL sets its manufacturing plant for the
JV, competition would further increase in the transformer segment.
New PGCIL norms, low cost to drive further capacity additions for domestic
transformers
We believe that domestic manufacturers have either already added capacity or are in the
process of ramping up capacity based on (1) low cost of capacity addition and (2) potential
demand for domestic transformers due to change in PGCIL bidding norms.
Transformer capacity for the major domestic players has more than doubled over FY2007-10
with capacity utilization falling to 63% in FY2010 as compared average of 77% over
FY2007-09.
Among domestic players, TRIL and Areva have significantly ramped up their capacity in
FY2010 and are currently operating at capacity utilizations of 52% and 49%, respectively.
We therefore believe these companies are best positioned to gain share from foreign bidders.
Recent TRIL meeting suggest that competition is gearing up; cost of capacity
addition low
We recently met TRIL and key takeaways were: (1) Established in 1981, company claims to
have 25% market share in 220 KV, (2) has supplied few 400 KV transformers recently, (3)
extremely keen to get a part of the upcoming 765 KV orders based on recent JV with a
partner, (4) expect Chinese to be unable to compete as transformer is a custom (vs mass)
manufactured product, (5) very optimistic of the long-term opportunity even though
capacity util’n is still running low (about 50-55%). TRIL has recently added 16,000 MVA
(23,000 MVA total) to its capacity through its Greenfield plant near Ahemadabad for a total
capex of just about Rs0.7bn. Capacity expansion for a name plate capacity of 16,000 MVA
has been done for only Rs0.69 bn. We believe the Moraiya plant strongly indicates the low
cost of capacity addition for domestic manufacturers.
CRG -ve (loses head start); ABB, Siemens +ve (competitive bids possible); smaller
players +ve
This is marginally negative for Crompton as it loses its temporary head start over others of
supplying 765 KV transformers, if two-year track record would have been maintained. CRG
was also benefitting from absence of MNC players like ABB, Siemens and Areva from 765
KV PGCIL transformer bids so far.
ABB, Siemens and Areva can now bid for these tenders purely based on domestic
manufacturing (their bids were clearly uncompetitive in case they needed part mfg. at
European plants). This would be beneficial for them even though overall the segment would
remain very competitive and thus advantages of prior global technology edge would not be
as useful as envisaged earlier.
This provide an opportunity for smaller players like TRIL etc to form JVs and get into this
segment of market and emerge as large players in transformer manufacturing, a growing
market with several years of visibility.
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