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T&D EQUIPMENT SECTOR UPDATE
q The T&D equipment sector reported lackluster order intake and continued
pricing pressure across product segments especially in the transformer
space.
q The order intake and profitability of the major Conductor manufacturers
also suffered during the quarter.
q Transmission Tower companies managed to retain profitability.
q We remain negative on ABB, Siemens, Areva on account of poor nearterm earnings growth and rich valuations. Prefer CGL and Voltamp
among equipment manufacturers. In conductors, we prefer Diamond
Power Infrastructure and Kalpataru Power in transmission towers.
T&D equipment makers report sedate order intake on sluggish
spending by PGCIL
n During the current fiscal, ordering of projects has been well below expectations
both from state utilities as well as private sector.
n Ordering from Central Utilities has been delayed partly due to non-availability of
land on time, delays in power generation projects as well as changes in bidding
norms.
n Number of 765 KV projects ordered in CY10 was less than 50% of those in
CY09. Similarly, state utilities have also gone slow on ordering for equipments.
n Even as the government utilities have slowed down their ordering, private sector
capex is yet to reach full potential.
n The PGCIL has also modified its ordering system, which has pushed finalization
of orders. As a result, several projects tendered in November 2010 have not
been awarded so far. PGCIL has now excluded circuit-breakers from the Sub-station package. This has significantly reduced the entry barrier for non-T&D equipment players. As a result, competition is likely to increase from EPC players like
Jyoti Structures, KEC, Kalpataru Power, L&T etc
Competitive Scenario has continued to remain intense
n Price erosion has persisted in CY10 as well. This comes despite commodity prices
of copper and aluminum being higher in CY10.
n Several 765 KV orders have gone to Koreans & Chinese suppliers who continue
to quote very aggressive prices in transformers. In some cases, pricing has been
so intense that in few 765 KV orders, the price bid of Korean/Chinese companies
is even lower than the raw material costs of the Indian manufacturer.
n Moreover, the price competition is not limited to a particular segment but is
spreading to other product segments as well.
n CGL has managed to maintain margins at high levels due to its focus on equipments as against turnkey projects.
n Voltamp Transformers indicated that several customers have been delaying taking delivery of products. As a result, it is has been cautious in taking orders
Conductor manufacturers reported subdued order intake as well
as drop in margins
During the December ending quarter, Sterlite Technologies as well as Apar Industries reported sharp drop in segment margins. Sterlite management indicated in the
earlier part of the fiscal, there was a severe paucity of conductor orders. As a result,
the company took orders at thin margins. Diamond Power Infrastructure managed to
sustain its profitability due to focus on niche orders.
Transmission Tower companies managed to retain margins
KEC reported impressive growth in order backlog driven by significant orders from
domestic as well as international geographies. Transmission Tower companies also
managed to retain their margins.
Outlook for T&D spending remains positive
n It is expected that PGCIL would execute almost 84% of the 11th plan target and
the sluggish trend is expected to reverse in the following quarters, resulting in
clearing of backlogs and tendering in order allocation.
n Based on management interactions, PGCIL is expected to release around
240,000 metric tons of conductors in the current fiscal pertaining to previous and
current tenders. Out of this a bulk of the orders almost 180,000 tons of orders
should be released in the Q4 of the current year.
n We prefer to play the growth of T&D sector through
n Crompton Greaves - Globalised scale of operations and above industry EBITDA
margins. Valuations are attractive at 15.8x FY12 earnings.
n Kalpataru Power - Order book provides adequate revenue visibility. Valuations
are attractive at 7.4x FY12 earnings.
n Diamond Power Infrastructure - At the fag end of significant capacity expansion programme which will drive volumes in FY12. Valuations are attractive at
4.3x FY12 earnings.
Concerns
Significant increase in commodity prices of Copper and Aluminum, which may further pressurize the EBITDA margins in the near-term. Copper prices have averaged
at USD 9731 per ton in the current quarter as compared to USD 7200 per ton in Q4
FY10.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
T&D EQUIPMENT SECTOR UPDATE
q The T&D equipment sector reported lackluster order intake and continued
pricing pressure across product segments especially in the transformer
space.
q The order intake and profitability of the major Conductor manufacturers
also suffered during the quarter.
q Transmission Tower companies managed to retain profitability.
q We remain negative on ABB, Siemens, Areva on account of poor nearterm earnings growth and rich valuations. Prefer CGL and Voltamp
among equipment manufacturers. In conductors, we prefer Diamond
Power Infrastructure and Kalpataru Power in transmission towers.
T&D equipment makers report sedate order intake on sluggish
spending by PGCIL
n During the current fiscal, ordering of projects has been well below expectations
both from state utilities as well as private sector.
n Ordering from Central Utilities has been delayed partly due to non-availability of
land on time, delays in power generation projects as well as changes in bidding
norms.
n Number of 765 KV projects ordered in CY10 was less than 50% of those in
CY09. Similarly, state utilities have also gone slow on ordering for equipments.
n Even as the government utilities have slowed down their ordering, private sector
capex is yet to reach full potential.
n The PGCIL has also modified its ordering system, which has pushed finalization
of orders. As a result, several projects tendered in November 2010 have not
been awarded so far. PGCIL has now excluded circuit-breakers from the Sub-station package. This has significantly reduced the entry barrier for non-T&D equipment players. As a result, competition is likely to increase from EPC players like
Jyoti Structures, KEC, Kalpataru Power, L&T etc
Competitive Scenario has continued to remain intense
n Price erosion has persisted in CY10 as well. This comes despite commodity prices
of copper and aluminum being higher in CY10.
n Several 765 KV orders have gone to Koreans & Chinese suppliers who continue
to quote very aggressive prices in transformers. In some cases, pricing has been
so intense that in few 765 KV orders, the price bid of Korean/Chinese companies
is even lower than the raw material costs of the Indian manufacturer.
n Moreover, the price competition is not limited to a particular segment but is
spreading to other product segments as well.
n CGL has managed to maintain margins at high levels due to its focus on equipments as against turnkey projects.
n Voltamp Transformers indicated that several customers have been delaying taking delivery of products. As a result, it is has been cautious in taking orders
Conductor manufacturers reported subdued order intake as well
as drop in margins
During the December ending quarter, Sterlite Technologies as well as Apar Industries reported sharp drop in segment margins. Sterlite management indicated in the
earlier part of the fiscal, there was a severe paucity of conductor orders. As a result,
the company took orders at thin margins. Diamond Power Infrastructure managed to
sustain its profitability due to focus on niche orders.
Transmission Tower companies managed to retain margins
KEC reported impressive growth in order backlog driven by significant orders from
domestic as well as international geographies. Transmission Tower companies also
managed to retain their margins.
Outlook for T&D spending remains positive
n It is expected that PGCIL would execute almost 84% of the 11th plan target and
the sluggish trend is expected to reverse in the following quarters, resulting in
clearing of backlogs and tendering in order allocation.
n Based on management interactions, PGCIL is expected to release around
240,000 metric tons of conductors in the current fiscal pertaining to previous and
current tenders. Out of this a bulk of the orders almost 180,000 tons of orders
should be released in the Q4 of the current year.
n We prefer to play the growth of T&D sector through
n Crompton Greaves - Globalised scale of operations and above industry EBITDA
margins. Valuations are attractive at 15.8x FY12 earnings.
n Kalpataru Power - Order book provides adequate revenue visibility. Valuations
are attractive at 7.4x FY12 earnings.
n Diamond Power Infrastructure - At the fag end of significant capacity expansion programme which will drive volumes in FY12. Valuations are attractive at
4.3x FY12 earnings.
Concerns
Significant increase in commodity prices of Copper and Aluminum, which may further pressurize the EBITDA margins in the near-term. Copper prices have averaged
at USD 9731 per ton in the current quarter as compared to USD 7200 per ton in Q4
FY10.
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