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Industrials
India
BGR regains foothold; negative for sector as competitive intensity scales up. BGR
emerged as the lowest bidder for the turbine component of 9X800 MW NTPC bulk
tender with a relatively aggressive bid of Rs9 mn/MW. The management is, however,
confident of making 10% PBT margins on Hitachi sourcing agreement and potential inhouse
value add. This order was the key for BGR to regain a foothold post very sedate
inflows in the past 12-18 months. We believe that Chinese dominance in the private
power equipment market may decrease as relative price and delivery advantage erodes.
BGR management confident of 10% PBT margin on Hitachi sourcing agreement, in-house value add
The BGR management stated that they expect to make about 10% PBT margins on this tender at
a price of Rs9 mn/MW (versus Rs12.5 mn/MW quote from Bharat Forge-Alstom in 11X660 MW
bulk tender). The total order size for the five units would be Rs35 bn. We believe that this
confidence originates from (1) sourcing agreement with Hitachi - may have quoted a very
competitive price; first three turbines are likely to be completely imported and (2) BGR would
capture value of design, engineering and sourcing and may also manufacture 40-50% of the
turbine BoP (15-20% of total turbine tender) and thus capture value for itself.
Key for BGR to regain a foothold; may intend to round it up by winning in 660 MW boiler tender
After not having won any sizeable order in the Indian market since Kalisindh and Mettur order
wins in June 2008, it was important for BGR to arrest the slide and regain a foothold in the Indian
power equipment market. We believe that this purpose has been served to some extent. BGR
would intend to extend the credibility earned in this tender win as a supplier for prestigious NTPC
order in winning other business as well. BGR can attempt to make inroads in the private utilities
market. BGR would also compete aggressively in the state and central utilities market and this
order may also help BGR in catalyzing an order from the Rajasthan SEB in its favor.
Dragon’s hold set to loosen as relative price and delivery advantage of the Chinese erodes
We believe that Indian private utilities may eventually rely on domestic manufacturers rather than the
Chinese as the former may offer more competitive price and stricter delivery schedule along with
long-term reliability; however, utilities would wait for more progress on this front. Chinese price
advantage may also erode on competition and currency appreciation; some funding advantage may
persist but may not be enough to arrest the decline.
Bids likely to remain aggressive; may be a negative development for dominant players (BHEL, L&T)
We believe that strong competition would continue to prevail and bids would remain aggressive in
the sector. This development may be negative for sector leaders as the value of business may be
lost to competitive dynamics. This is particularly possible for BHEL as it may stand to lose market
share, margins as well as somewhat preferential relationship with public utilities. Break in power
capacity addition momentum in the near term would also remain as a negative overhang.
BGR - revise rating to REDUCE (TP: Rs400); retain REDUCE on BHEL and L&T
BGR: Revise target price to Rs400 (from Rs315) on revised target multiple to 10X FY2013E as
revenue visibility improves and correspondingly revise our rating to REDUCE from SELL.
However, margins and incremental order inflows remain a risk.
BHEL: Retain estimates and our REDUCE (TP: Rs1,800) rating on (1) coal availability concerns
affecting execution of the current backlog and (2) potential slowdown in utilities capex.
L&T: Retain REDUCE rating (TP: Rs1,800) on weak demand environment and potential margin
contraction.
Confident of 10% PBT margin on Hitachi sourcing agreement, in-house value add
BGR management stated that they expect to make about 10% PBT margins on this tender
at a price of Rs9.25 mn/MW (versus Rs12.5 mn/MW quote from Bharat Forge-Alstom in
11X660 MW bulk tender). We believe that this confidence is originating from:
Sourcing agreement with Hitachi. First three turbines for the order are likely to be
completely imported and the remaining two turbines would also be imported to the
extent that domestic manufacturing cannot contribute to that. Hence, essentially this
tender is equivalent to a back-to-back sourcing agreement from Hitachi. Hitachi may have
quoted a very competitive price as this is a JV customer and Hitachi may be intent on
developing this JV as a global manufacturing hub. The first turbine would have to be
commissioned within 42 months (delivery within 34 months) of the award of the order
and then post that each subsequent turbine at a gap of two months for the same site.
In-house design, engineering and manufacturing of some part of turbine BoP. The
tender scope also specifies items such as Low Pressure Heater, High Pressure Heater,
Condensate Polishing Unit, Boiler Feed Pump, Pipes, Valves, Control and Instrumentation,
which may be about 40-45% of the total tender. BGR would capture value of design,
engineering and sourcing form this part of the tender which would contribute to the
overall margins. BGR may also manufacture 40-50% of the turbine BoP (15-20% of total
turbine tender) and thus capture value for itself.
BGR to get 5 units with a total order size of Rs35 bn; aggressive versus Alstom’s
bid in 11X660 MW tender
BGR Energy has emerged as the lowest bidder for the turbine component of the 9X800 MW
NTPC bulk tender. The company is slated to get five of the nine units and the remaining four
units would be split between BHEL and L&T (provided they match the L1 bid).
The total order size for the five units would be Rs35 bn implying a realization of about Rs9
mn/MW. The pricing appears relatively aggressive versus previous turbine bulk tender bid
won by Bharat Forge-Alstom – recently was placed L1 in the 11X660 MW turbine bulk
tender from NTPC for an average realization of about Rs12.5 mn per MW. However, the
BGR management cited that the previous tender had relatively no competition as each of
the three bidders were assured some part of the business (11 units were to be split between
three vendors and the tender had only three bidders). This was versus five bidders in the
current bulk tender vying for business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Industrials
India
BGR regains foothold; negative for sector as competitive intensity scales up. BGR
emerged as the lowest bidder for the turbine component of 9X800 MW NTPC bulk
tender with a relatively aggressive bid of Rs9 mn/MW. The management is, however,
confident of making 10% PBT margins on Hitachi sourcing agreement and potential inhouse
value add. This order was the key for BGR to regain a foothold post very sedate
inflows in the past 12-18 months. We believe that Chinese dominance in the private
power equipment market may decrease as relative price and delivery advantage erodes.
BGR management confident of 10% PBT margin on Hitachi sourcing agreement, in-house value add
The BGR management stated that they expect to make about 10% PBT margins on this tender at
a price of Rs9 mn/MW (versus Rs12.5 mn/MW quote from Bharat Forge-Alstom in 11X660 MW
bulk tender). The total order size for the five units would be Rs35 bn. We believe that this
confidence originates from (1) sourcing agreement with Hitachi - may have quoted a very
competitive price; first three turbines are likely to be completely imported and (2) BGR would
capture value of design, engineering and sourcing and may also manufacture 40-50% of the
turbine BoP (15-20% of total turbine tender) and thus capture value for itself.
Key for BGR to regain a foothold; may intend to round it up by winning in 660 MW boiler tender
After not having won any sizeable order in the Indian market since Kalisindh and Mettur order
wins in June 2008, it was important for BGR to arrest the slide and regain a foothold in the Indian
power equipment market. We believe that this purpose has been served to some extent. BGR
would intend to extend the credibility earned in this tender win as a supplier for prestigious NTPC
order in winning other business as well. BGR can attempt to make inroads in the private utilities
market. BGR would also compete aggressively in the state and central utilities market and this
order may also help BGR in catalyzing an order from the Rajasthan SEB in its favor.
Dragon’s hold set to loosen as relative price and delivery advantage of the Chinese erodes
We believe that Indian private utilities may eventually rely on domestic manufacturers rather than the
Chinese as the former may offer more competitive price and stricter delivery schedule along with
long-term reliability; however, utilities would wait for more progress on this front. Chinese price
advantage may also erode on competition and currency appreciation; some funding advantage may
persist but may not be enough to arrest the decline.
Bids likely to remain aggressive; may be a negative development for dominant players (BHEL, L&T)
We believe that strong competition would continue to prevail and bids would remain aggressive in
the sector. This development may be negative for sector leaders as the value of business may be
lost to competitive dynamics. This is particularly possible for BHEL as it may stand to lose market
share, margins as well as somewhat preferential relationship with public utilities. Break in power
capacity addition momentum in the near term would also remain as a negative overhang.
BGR - revise rating to REDUCE (TP: Rs400); retain REDUCE on BHEL and L&T
BGR: Revise target price to Rs400 (from Rs315) on revised target multiple to 10X FY2013E as
revenue visibility improves and correspondingly revise our rating to REDUCE from SELL.
However, margins and incremental order inflows remain a risk.
BHEL: Retain estimates and our REDUCE (TP: Rs1,800) rating on (1) coal availability concerns
affecting execution of the current backlog and (2) potential slowdown in utilities capex.
L&T: Retain REDUCE rating (TP: Rs1,800) on weak demand environment and potential margin
contraction.
Confident of 10% PBT margin on Hitachi sourcing agreement, in-house value add
BGR management stated that they expect to make about 10% PBT margins on this tender
at a price of Rs9.25 mn/MW (versus Rs12.5 mn/MW quote from Bharat Forge-Alstom in
11X660 MW bulk tender). We believe that this confidence is originating from:
Sourcing agreement with Hitachi. First three turbines for the order are likely to be
completely imported and the remaining two turbines would also be imported to the
extent that domestic manufacturing cannot contribute to that. Hence, essentially this
tender is equivalent to a back-to-back sourcing agreement from Hitachi. Hitachi may have
quoted a very competitive price as this is a JV customer and Hitachi may be intent on
developing this JV as a global manufacturing hub. The first turbine would have to be
commissioned within 42 months (delivery within 34 months) of the award of the order
and then post that each subsequent turbine at a gap of two months for the same site.
In-house design, engineering and manufacturing of some part of turbine BoP. The
tender scope also specifies items such as Low Pressure Heater, High Pressure Heater,
Condensate Polishing Unit, Boiler Feed Pump, Pipes, Valves, Control and Instrumentation,
which may be about 40-45% of the total tender. BGR would capture value of design,
engineering and sourcing form this part of the tender which would contribute to the
overall margins. BGR may also manufacture 40-50% of the turbine BoP (15-20% of total
turbine tender) and thus capture value for itself.
BGR to get 5 units with a total order size of Rs35 bn; aggressive versus Alstom’s
bid in 11X660 MW tender
BGR Energy has emerged as the lowest bidder for the turbine component of the 9X800 MW
NTPC bulk tender. The company is slated to get five of the nine units and the remaining four
units would be split between BHEL and L&T (provided they match the L1 bid).
The total order size for the five units would be Rs35 bn implying a realization of about Rs9
mn/MW. The pricing appears relatively aggressive versus previous turbine bulk tender bid
won by Bharat Forge-Alstom – recently was placed L1 in the 11X660 MW turbine bulk
tender from NTPC for an average realization of about Rs12.5 mn per MW. However, the
BGR management cited that the previous tender had relatively no competition as each of
the three bidders were assured some part of the business (11 units were to be split between
three vendors and the tender had only three bidders). This was versus five bidders in the
current bulk tender vying for business.
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