India T&D: Weak ordering, intense competition ::CLSA

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Weak ordering, intense competition
We met two T&D companies, Areva T&D and Jyoti Structures, recently.
Order inflows from PowerGrid and SEBs have dried up, especially for
transformers; both Areva and Jyoti are hopeful of a revival in 2H.
Competition is intense, with pricing down 20-25% in the last three years.
We moderate our operating margin expectations for Crompton, leading to
3-4% cut in FY12-13 EPS. We are cutting our target price multiple for
Crompton to 15x FY13 PE (16x earlier), leading to 8% cut in TP, and
downgrade reco by one notch to O-PF (BUY earlier).
Weak PowerGrid and SEB ordering in 1Q
q PowerGrid awarded only Rs3bn orders in 1QFY12 (1Q is typically ~10% of annual
orders), down 52% YoY.
q Ordering for transformers has been particularly weak by PowerGrid over the last
few quarters (1QFY12: Rs154m; FY11: Rs9bn, down 63% YoY).
q Our conversations suggest that SEB orders have also dried up over last few
quarters, on account of procedural delays as well as poor financial health of SEBs.
PowerGrid ordering to revive in 2H; intense competition in short term
q Orders for transformers are typically placed 6-12 months after transmission
line/tower orders. Given that ordering for transmission towers has been strong over
the last few quarters, transformer orders should also pick up.
q Both the companies highlighted that PowerGrid has generally succeeded in meeting
its spending targets. In the XII plan, it targets doubling its spending to US$22bn.
q However, intense competition remains a concern. Pricing for transformers has fallen
by 20-25% over last three years; pressure has more severe for 765kV category.
q With PowerGrid now awarding sub-stations and circuit breakers separately,
competition in 765kV sub-station category has also intensified.
SEB orders are the key; hopefully state elections will help orders
q Competition is less intense in SEB orders, as Chinese and Korean players do not
participate. Margins are consequently better.
q SEB orders constitute 30-60% of order booking for most T&D companies. Revival of
SEB ordering will be the key for revenue and profit growth for most companies.
q Companies hoped that SEB ordering will recover with approaching elections. We
note that elections are due in seven states in 2012.
Cut Crompton’s EPS by 3-4%; TP by 8%; downgrade reco to O-PF
q We cut Crompton’s FY12-13 EPS by 3-4% as we build in lower margins.
q We now base our target price of Rs275/sh at 15x FY13 PE (16x earlier). Cut reco by
one notch to O-PF (from BUY earlier).
q From a longer term perspective, we continue to like Crompton. It is the most
efficiently managed T&D company, with a diversified presence across businesses
and geographies. We also like its strategy of making focussed acquisitions.