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We analyse ordering data as available from Power Grid’s (PGCIL) website and
find momentum has picked up since December 2010. However, 80% of
incremental orders are for towers and conductors, while transformer/substation
orders remain subdued. This corroborates the outlook of key transmission
equipment makers that transformer/substation orders will likely improve from
2HCY11. CRG remains our only pick in the space, especially as its
international presence helps it to diversify amid a domestic slowdown.
Catalysts
Stronger-than-expected recovery and early award of orders are key triggers for
Transmission and Distribution (T&D) equipment makers, in our view.
Anchor themes
Decades of under-investment followed by a sudden march toward building sufficient
power for the nation indicate significant opportunities for T&D equipment makers.
Power Grid orders pick up, but…
…awards in transformer/substation segment are down
Order data from PGCIL suggests that activity increased during Dec-10 to Feb-11
– total awards stood at INR48.3bn, vs INR34bn in the first 8 months of FY11.
However, we note that >80% of the incremental orders were for towers (65%)
and conductors (16.7%), while transformer/sub-station orders were just ~10%.
Note that these numbers do not include the ~INR60bn 800kV HVDC sub-station
order for which the ABB-BHEL consortium has qualified as the lowest bidder.
While adjusting for this HVDC order could change relative shares, several large
companies are still waiting for meaningful orders, in our view. Recall that during
post 3Q FY11 results conference calls, most companies in the sector guided for
an equipment order pick-up only in 2H CY11.
Meanwhile, competition continues to increase across segments
We also note that competition levels have increased across segments for
PGCIL orders. For example, Siemens, Areva T&D and Vijai Electricals are the
new leaders in the transformer segment YTD FY11 (vs CRG and China/Korea
in FY10). In the sub-station segment, smaller player G.E.T. Power has bagged
a 21% share (while Siemens is at 22%, vs 44% in FY10). The tower segment
has seen several new entrants, including the return of EPC contractors. The
conductors segment is the only exception, where the market leader (Sterlite
Technologies) has increased its share from 28% in FY10 to 44% in YTDFY11.
Sector outlook remains challenging; CRG is the only pick
On continuing concerns such as i) land & environmental hurdles and
generation project delays hampering T&D execution, ii) poor health of state
electricity boards (that contribute larger share of T&D orders) restricting new
order flow, and iii) rising competition from China/Korea pressuring margins, we
believe the outlook for T&D equipment makers remain challenging in the near
term, even as we remain positive on the longer term. CRG is our only pick as it
posts market-share gains in the domestic segment and is simultaneously
increasing margins.
Valuation methodology and risks
Crompton Greaves (CRG IN; BUY; 17 Mar close INR269; PT INR380)
We value the core business at 20x Sep 12F EPS and the stake in Avantha Power at
4x book value to arrive at our PT of INR380. Risks to our PT include the following: 1)
slowdown in power sector investments; 2) rising competition in projects business; and
3) substantial rise in commodity prices could hit margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action
We analyse ordering data as available from Power Grid’s (PGCIL) website and
find momentum has picked up since December 2010. However, 80% of
incremental orders are for towers and conductors, while transformer/substation
orders remain subdued. This corroborates the outlook of key transmission
equipment makers that transformer/substation orders will likely improve from
2HCY11. CRG remains our only pick in the space, especially as its
international presence helps it to diversify amid a domestic slowdown.
Catalysts
Stronger-than-expected recovery and early award of orders are key triggers for
Transmission and Distribution (T&D) equipment makers, in our view.
Anchor themes
Decades of under-investment followed by a sudden march toward building sufficient
power for the nation indicate significant opportunities for T&D equipment makers.
Power Grid orders pick up, but…
…awards in transformer/substation segment are down
Order data from PGCIL suggests that activity increased during Dec-10 to Feb-11
– total awards stood at INR48.3bn, vs INR34bn in the first 8 months of FY11.
However, we note that >80% of the incremental orders were for towers (65%)
and conductors (16.7%), while transformer/sub-station orders were just ~10%.
Note that these numbers do not include the ~INR60bn 800kV HVDC sub-station
order for which the ABB-BHEL consortium has qualified as the lowest bidder.
While adjusting for this HVDC order could change relative shares, several large
companies are still waiting for meaningful orders, in our view. Recall that during
post 3Q FY11 results conference calls, most companies in the sector guided for
an equipment order pick-up only in 2H CY11.
Meanwhile, competition continues to increase across segments
We also note that competition levels have increased across segments for
PGCIL orders. For example, Siemens, Areva T&D and Vijai Electricals are the
new leaders in the transformer segment YTD FY11 (vs CRG and China/Korea
in FY10). In the sub-station segment, smaller player G.E.T. Power has bagged
a 21% share (while Siemens is at 22%, vs 44% in FY10). The tower segment
has seen several new entrants, including the return of EPC contractors. The
conductors segment is the only exception, where the market leader (Sterlite
Technologies) has increased its share from 28% in FY10 to 44% in YTDFY11.
Sector outlook remains challenging; CRG is the only pick
On continuing concerns such as i) land & environmental hurdles and
generation project delays hampering T&D execution, ii) poor health of state
electricity boards (that contribute larger share of T&D orders) restricting new
order flow, and iii) rising competition from China/Korea pressuring margins, we
believe the outlook for T&D equipment makers remain challenging in the near
term, even as we remain positive on the longer term. CRG is our only pick as it
posts market-share gains in the domestic segment and is simultaneously
increasing margins.
Valuation methodology and risks
Crompton Greaves (CRG IN; BUY; 17 Mar close INR269; PT INR380)
We value the core business at 20x Sep 12F EPS and the stake in Avantha Power at
4x book value to arrive at our PT of INR380. Risks to our PT include the following: 1)
slowdown in power sector investments; 2) rising competition in projects business; and
3) substantial rise in commodity prices could hit margins.
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