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India Equity Research Reports, IPO and Stock News
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Prefer Indian players
Power capacity addition in China is likely to be stagnant, while in India it
will continue to grow. Indian equipment suppliers have also controlled
their costs better and offer substantially higher return on capital. While
orderflow for Chinese equipments suppliers is likely to drop 5-22% in
2011, BHEL has guided for a 10% increase. After trading at a premium for
many years, BHEL is now trading at a discount to Dongfang and at
multiples close to Shanghai Electric (SEG) though it offers higher earnings
growth. We also like Crompton Greaves. In China, our relative preference
is for SEG which is better positioned to bag overseas orders.
Capacity addition growing in India; stagnant in China
‰ Current power shortages in China are due to low tariffs and insufficient interregional transmission and not due to capacity shortage. Utilisation of thermal
capacity at 59% is substantially lower than previous shortages and vs. India (75%).
‰ Our estimates factor in flat power capacity addition in China, the risk to which is on
the downside. IPPs are reluctant to add capacity and any efforts by NDRC to inject
capital/speed up approvals will only help keep capacity additions stagnant.
‰ On the other hand, India’s power demand is set to accelerate. Its thermal power
capacity installation growth will surpass that of China over the next few years.
Indian equipment suppliers offer higher growth; better returns
‰ Over last four years Chinese power equipment suppliers have shown negligible
growth in Ebit, compared to 20-30% Cagr reported by Indian suppliers.
‰ The costs below gross margin line (staff, administrative, bad debts, R&D expenses)
have grown faster than revenues for Chinese suppliers. We are giving a benefit of
doubt and assuming slower increase in these costs.
‰ Tax rates for Chinese equipment suppliers should also rise from current low levels.
‰ Over next three years we expect 0-10% earnings Cagr for Chinese suppliers versus
18-21% earnings Cagr for BHEL and Crompton Greaves.
‰ ROAE, ROCE for Indian suppliers is 24-40% versus 6-23% for Chinese suppliers.
BHEL’s valuations are now at discount to Dongfang
‰ BHEL is now trading at discount to Dongfang and at multiples close to SEG due to
due to overdone competition concerns. BHEL has sustainable advantages including
scale, higher in-house manufacturing, ability to lock in vendor capacities etc.
‰ BHEL’s discount to Chinese equipment suppliers despite higher growth, better
return ratios is not justified. We maintain BUY. We also like Crompton Greaves. A
pick up in orders from Power Grid should be the main trigger.
‰ In China, Dongfang trades at a premium to SEG due to its exposure to wind and
nuclear. We see little growth in wind revenues; nuclear power orders are also
unlikely to pick up. We prefer SEG which is better placed to get overseas orders
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Prefer Indian players
Power capacity addition in China is likely to be stagnant, while in India it
will continue to grow. Indian equipment suppliers have also controlled
their costs better and offer substantially higher return on capital. While
orderflow for Chinese equipments suppliers is likely to drop 5-22% in
2011, BHEL has guided for a 10% increase. After trading at a premium for
many years, BHEL is now trading at a discount to Dongfang and at
multiples close to Shanghai Electric (SEG) though it offers higher earnings
growth. We also like Crompton Greaves. In China, our relative preference
is for SEG which is better positioned to bag overseas orders.
Capacity addition growing in India; stagnant in China
‰ Current power shortages in China are due to low tariffs and insufficient interregional transmission and not due to capacity shortage. Utilisation of thermal
capacity at 59% is substantially lower than previous shortages and vs. India (75%).
‰ Our estimates factor in flat power capacity addition in China, the risk to which is on
the downside. IPPs are reluctant to add capacity and any efforts by NDRC to inject
capital/speed up approvals will only help keep capacity additions stagnant.
‰ On the other hand, India’s power demand is set to accelerate. Its thermal power
capacity installation growth will surpass that of China over the next few years.
Indian equipment suppliers offer higher growth; better returns
‰ Over last four years Chinese power equipment suppliers have shown negligible
growth in Ebit, compared to 20-30% Cagr reported by Indian suppliers.
‰ The costs below gross margin line (staff, administrative, bad debts, R&D expenses)
have grown faster than revenues for Chinese suppliers. We are giving a benefit of
doubt and assuming slower increase in these costs.
‰ Tax rates for Chinese equipment suppliers should also rise from current low levels.
‰ Over next three years we expect 0-10% earnings Cagr for Chinese suppliers versus
18-21% earnings Cagr for BHEL and Crompton Greaves.
‰ ROAE, ROCE for Indian suppliers is 24-40% versus 6-23% for Chinese suppliers.
BHEL’s valuations are now at discount to Dongfang
‰ BHEL is now trading at discount to Dongfang and at multiples close to SEG due to
due to overdone competition concerns. BHEL has sustainable advantages including
scale, higher in-house manufacturing, ability to lock in vendor capacities etc.
‰ BHEL’s discount to Chinese equipment suppliers despite higher growth, better
return ratios is not justified. We maintain BUY. We also like Crompton Greaves. A
pick up in orders from Power Grid should be the main trigger.
‰ In China, Dongfang trades at a premium to SEG due to its exposure to wind and
nuclear. We see little growth in wind revenues; nuclear power orders are also
unlikely to pick up. We prefer SEG which is better placed to get overseas orders
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