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Industrials
India
TRIL wins 765 kV tender; incremental competition on back of PGCIL norms. We
highlight entry of TRIL into 765 kV transformer segment through a JV with ZTR Ukraine
(L1 in 14 unit PGCIL order). TRIL does not pay for the technology from ZTR but supplies
its share (8 units) at aggressive entry level prices (favorable pricing for ZTR share). The JV
was facilitated by PGCIL’s change of bidding norms for 765 kV orders (1) mandating
domestic supply of at least one unit and (2) allowing two-year experience to be fulfilled
by foreign JV partner. Low cost of capacity addition (Rs0.7 bn for 15,000 MVA at
Moraiya) and technology (TRIL-ZTR model) likely hint at perpetual overcapacity in T&D.
TRIL makes entry into 765 kV segment through JV with ZTR Ukraine at zero technology cost
TRIL management communicated in its conference call that the company is L1 for PGCIL’s 765 kV
transformer order. TRIL bid for the order through its JV with ZTR Ukraine and would supply 8
transformers out of the 14 units (rest to be supplied by ZTR). The JV has been signed at zero
technology cost from ZTR though TRIL would pay ZTR favorably for its share of supply. Additionally,
TRIL will also supply the transformers to PGCIL at aggressive entry level prices. Pricing for the order
seems to be broadly in the same range as that offered by Crompton and Areva. Other takeaways
include (1) margin compression due to aggressive bidding and increasing competition, and (2)
lower realization as sales growth fails to match MVA growth.
TRIL-ZTR JV facilitated by change in PGCIL bidding norms; may just be the first of many such bids
We had highlighted the change in PGCIL’s bidding norms in our earlier note (December 20, 2010).
PGCIL had recently mandated domestic production of at least one unit for supply of 765 kV orders
requiring foreign players to either set up a subsidiary or form a JV with an existing domestic
manufacturer. It also provided a window of opportunity to smaller but aggressive domestic players
by allowing the 2-year experience requirement for 765 kV bidding to be fulfilled by foreign partner
(in case of a JV). The TRIL-ZTR JV may therefore be just the first of many such agreements
potentially benefiting other players also, like Vijay Electricals and EMCO.
Low entry barriers (cost of capacity and technology is low); competition and perpetual overcapacity
Barriers to entry seem low based on (1) cost of capacity is low: TRIL had recently set up its 15,000
MVA Moraiya facility for just Rs0.7 bn, taking its total capacity to 23,200 MVA (with further aim to
expand to 40,000 MVA), and (2) technology/know-how is easily available: Cost of know-how for
entering new segments of business is also relatively low with TRIL not paying anything to ZTR for
this opportunity. Such low barriers to entry hint at a possibility that the T&D equipment industry
may remain in perpetual overcapacity barring periods of surprising demand spikes as we saw in
CY2006 and CY2007. The domestic transformer capacities have more than doubled over FY2007-
10 in contrast to about a 65% rise in production.
Prefer Crompton on diversified business, resilient consumer business, overseas business recovery
We reiterate our BUY rating on Crompton (TP: Rs310) based on (1) diversified business profile, (2)
resilient consumer-facing business (about 37% of EBIT), (3) strong cash-flow generation
characteristics, and (4) recovery in overseas subsidiaries (about 25% of EBIT).
We retain our negative stance on ABB (REDUCE, TP: Rs660) and Siemens (REDUCE, TP: Rs735),
primarily based on sector-level pricing pressures, company-specific issues, volatility in operating
performance and very high valuations and growth expectations.
TRIL makes entry into 765 kV segment with ZTR of Ukraine
TRIL has been adjudged L1 in PGCIL tender for 765 kV tenders in a JV with ZTR of Ukraine.
This order is for 14,765 kV transformers and TRIL would manufacture 8 out of the 14 units
while the rest would come from ZTR Ukraine. Pricing seems to be broadly in the same range
as that offered by Crompton and Areva recently; however, precise details were not shared as
this entity has not yet received LOI for this order.
Zero technology cost to TRIL in lieu of a share in supply for ZTR
TRIL has formed the JV with ZTR at zero technology cost in lieu of giving ZTR a share in
supply at favorable rates. TRIL is also hit by aggressive bidding for such orders to gain entry.
One industry source suggested that ZTR has very large capacity in the order of 70-80,000
MVA and was quite desperate to get whatever business it can from the Indian market. This
may have helped TRIL form the JV at no technology cost as ZTR gets to have access to the
Indian market based on this alliance. ZTR had previously tied up with Crompton for similar
reactor order as well.
TRIL already equipping itself with 400 kV qualifications
This entity seems to be successfully scaling up to do 400 kV manufacturing and may bid for
PGCIL tenders as well in the second half of this year.
This further enhances the competitive intensity of transformer manufacturing and 765 kV
remain no different as we can see more such bids going forward.
Key takeaways from 4Q conference call
4Q margins affected by aggressive bidding, order delays: TRIL reported 4QFY11
EBITDA margin of 9.7% versus 15.8% a year ago. The company attributed the fall to (1)
increased competition versus subdued demand, (2) aggressive bidding for 400/765 kV
tenders to gain experience, and (3) delay in acceptance of about 1,000 MVA of
transformers (to be accounted for in 1QFY12E).
Loss in per MVA realization reflecting competitive intensity: Full-year sales grew
about 4% to Rs5.2 bn (4Q revenues of Rs2.2 bn, up 3% yoy). In contrast, MVA growth
for FY2011 was 9% (12,557 MVA versus 11,498 in FY2010). This implies the decline on
per MVA realization for TRIL.
Guidance for flat margins in FY2012E: The management guided for margins of around
12% for FY2012E as they expect aggressive bidding for 400/765 kV orders to continue
for the next 9-12 months. Such business is expected to contribute about 10% of sales in
FY2012E. Though they believe that PGCIL should increase the quantum of transformer
ordering, they see competition to keep a curb on margins.
PGCIL recently opened opportunity for such JVs
PGCIL had recently opened up a window of opportunity for such JV bids as it mandates
domestic manufacturing of at least one transformer (TRIL contributes here as it had
manufacturing facilities that can be used for 765 KV as well) and the two-year experience
track record can be fulfilled by foreign player (ZTR). To do such a JV, the Indian transformer
manufacturer should have supplied one transformer above 345 kV. This seemed specifically
suited to TRIL as TRIL had recently supplied its first 765 kV transformer.
New norms mandate domestic supply of at least one unit
Review of bid documents for open tenders for 765 kV 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
715 kV+ transformer. The same should have been in operation for at least two years as of
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 seven 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 345 kV or above class
transformer.
Two-year experience requirement softened
Unlike previous instances 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.
Low entry barriers in cost and technology may prolong overcapacity
Capacity of TRIL has been added at low cost (15,000 MVA at about Rs0.7 bn). Even the
technological know-how required to enter higher kV categories is not difficult to acquire
(TRIL-ZTR deal at zero technology cost). If cost of capacity and technology acquisition is as
low, then barring demand spikes as in CY2007, the industry may remain under perpetual
overcapacity.
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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Industrials
India
TRIL wins 765 kV tender; incremental competition on back of PGCIL norms. We
highlight entry of TRIL into 765 kV transformer segment through a JV with ZTR Ukraine
(L1 in 14 unit PGCIL order). TRIL does not pay for the technology from ZTR but supplies
its share (8 units) at aggressive entry level prices (favorable pricing for ZTR share). The JV
was facilitated by PGCIL’s change of bidding norms for 765 kV orders (1) mandating
domestic supply of at least one unit and (2) allowing two-year experience to be fulfilled
by foreign JV partner. Low cost of capacity addition (Rs0.7 bn for 15,000 MVA at
Moraiya) and technology (TRIL-ZTR model) likely hint at perpetual overcapacity in T&D.
TRIL makes entry into 765 kV segment through JV with ZTR Ukraine at zero technology cost
TRIL management communicated in its conference call that the company is L1 for PGCIL’s 765 kV
transformer order. TRIL bid for the order through its JV with ZTR Ukraine and would supply 8
transformers out of the 14 units (rest to be supplied by ZTR). The JV has been signed at zero
technology cost from ZTR though TRIL would pay ZTR favorably for its share of supply. Additionally,
TRIL will also supply the transformers to PGCIL at aggressive entry level prices. Pricing for the order
seems to be broadly in the same range as that offered by Crompton and Areva. Other takeaways
include (1) margin compression due to aggressive bidding and increasing competition, and (2)
lower realization as sales growth fails to match MVA growth.
TRIL-ZTR JV facilitated by change in PGCIL bidding norms; may just be the first of many such bids
We had highlighted the change in PGCIL’s bidding norms in our earlier note (December 20, 2010).
PGCIL had recently mandated domestic production of at least one unit for supply of 765 kV orders
requiring foreign players to either set up a subsidiary or form a JV with an existing domestic
manufacturer. It also provided a window of opportunity to smaller but aggressive domestic players
by allowing the 2-year experience requirement for 765 kV bidding to be fulfilled by foreign partner
(in case of a JV). The TRIL-ZTR JV may therefore be just the first of many such agreements
potentially benefiting other players also, like Vijay Electricals and EMCO.
Low entry barriers (cost of capacity and technology is low); competition and perpetual overcapacity
Barriers to entry seem low based on (1) cost of capacity is low: TRIL had recently set up its 15,000
MVA Moraiya facility for just Rs0.7 bn, taking its total capacity to 23,200 MVA (with further aim to
expand to 40,000 MVA), and (2) technology/know-how is easily available: Cost of know-how for
entering new segments of business is also relatively low with TRIL not paying anything to ZTR for
this opportunity. Such low barriers to entry hint at a possibility that the T&D equipment industry
may remain in perpetual overcapacity barring periods of surprising demand spikes as we saw in
CY2006 and CY2007. The domestic transformer capacities have more than doubled over FY2007-
10 in contrast to about a 65% rise in production.
Prefer Crompton on diversified business, resilient consumer business, overseas business recovery
We reiterate our BUY rating on Crompton (TP: Rs310) based on (1) diversified business profile, (2)
resilient consumer-facing business (about 37% of EBIT), (3) strong cash-flow generation
characteristics, and (4) recovery in overseas subsidiaries (about 25% of EBIT).
We retain our negative stance on ABB (REDUCE, TP: Rs660) and Siemens (REDUCE, TP: Rs735),
primarily based on sector-level pricing pressures, company-specific issues, volatility in operating
performance and very high valuations and growth expectations.
TRIL makes entry into 765 kV segment with ZTR of Ukraine
TRIL has been adjudged L1 in PGCIL tender for 765 kV tenders in a JV with ZTR of Ukraine.
This order is for 14,765 kV transformers and TRIL would manufacture 8 out of the 14 units
while the rest would come from ZTR Ukraine. Pricing seems to be broadly in the same range
as that offered by Crompton and Areva recently; however, precise details were not shared as
this entity has not yet received LOI for this order.
Zero technology cost to TRIL in lieu of a share in supply for ZTR
TRIL has formed the JV with ZTR at zero technology cost in lieu of giving ZTR a share in
supply at favorable rates. TRIL is also hit by aggressive bidding for such orders to gain entry.
One industry source suggested that ZTR has very large capacity in the order of 70-80,000
MVA and was quite desperate to get whatever business it can from the Indian market. This
may have helped TRIL form the JV at no technology cost as ZTR gets to have access to the
Indian market based on this alliance. ZTR had previously tied up with Crompton for similar
reactor order as well.
TRIL already equipping itself with 400 kV qualifications
This entity seems to be successfully scaling up to do 400 kV manufacturing and may bid for
PGCIL tenders as well in the second half of this year.
This further enhances the competitive intensity of transformer manufacturing and 765 kV
remain no different as we can see more such bids going forward.
Key takeaways from 4Q conference call
4Q margins affected by aggressive bidding, order delays: TRIL reported 4QFY11
EBITDA margin of 9.7% versus 15.8% a year ago. The company attributed the fall to (1)
increased competition versus subdued demand, (2) aggressive bidding for 400/765 kV
tenders to gain experience, and (3) delay in acceptance of about 1,000 MVA of
transformers (to be accounted for in 1QFY12E).
Loss in per MVA realization reflecting competitive intensity: Full-year sales grew
about 4% to Rs5.2 bn (4Q revenues of Rs2.2 bn, up 3% yoy). In contrast, MVA growth
for FY2011 was 9% (12,557 MVA versus 11,498 in FY2010). This implies the decline on
per MVA realization for TRIL.
Guidance for flat margins in FY2012E: The management guided for margins of around
12% for FY2012E as they expect aggressive bidding for 400/765 kV orders to continue
for the next 9-12 months. Such business is expected to contribute about 10% of sales in
FY2012E. Though they believe that PGCIL should increase the quantum of transformer
ordering, they see competition to keep a curb on margins.
PGCIL recently opened opportunity for such JVs
PGCIL had recently opened up a window of opportunity for such JV bids as it mandates
domestic manufacturing of at least one transformer (TRIL contributes here as it had
manufacturing facilities that can be used for 765 KV as well) and the two-year experience
track record can be fulfilled by foreign player (ZTR). To do such a JV, the Indian transformer
manufacturer should have supplied one transformer above 345 kV. This seemed specifically
suited to TRIL as TRIL had recently supplied its first 765 kV transformer.
New norms mandate domestic supply of at least one unit
Review of bid documents for open tenders for 765 kV 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
715 kV+ transformer. The same should have been in operation for at least two years as of
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 seven 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 345 kV or above class
transformer.
Two-year experience requirement softened
Unlike previous instances 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.
Low entry barriers in cost and technology may prolong overcapacity
Capacity of TRIL has been added at low cost (15,000 MVA at about Rs0.7 bn). Even the
technological know-how required to enter higher kV categories is not difficult to acquire
(TRIL-ZTR deal at zero technology cost). If cost of capacity and technology acquisition is as
low, then barring demand spikes as in CY2007, the industry may remain under perpetual
overcapacity.
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.
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