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Industrials
India
Outlook clouded by new competition, ordering binge and fuel concerns. Bulk
tender sees a new credible contender (Doosan) and triggers more aggressive bids in
coming tenders as L&T, BGR, Thermax, (L2, L3 and L4) fight for business. The price per
unit may look good but it has to factor in stiff NTPC conditions, scope and commodity
escalation and longer lead time for delivery (higher inflation) in these tenders. High
quantum (106 GW) of projects already in the works along with fuel concerns may
constrain incremental orders. Dependence on linkage coal (69%) raises execution
concerns. In addition to sectoral woes, BHEL stands to lose business to keen
competition (50% XII plan share vs. 55% in XI plan). Revise estimates of BHEL
(TP: 1,875 from Rs2,000) and BGR (TP:315 vs. Rs410) on slowdown in utility capex.
Bulk tender: New competitor queers the pitch, –ve even as price seems reasonable
Doosan is L1 in the 9X800 MW NTPC bulk tender (slated to get five) as L&T, BGR and Thermax miss
out. BHEL would get four units at L1 price. L&T and BGR were only 4% and 8% away from the
Doosan bid. BHEL kept its cards close (quoted price seemed out of range) on minimum assured
volumes. The entry of new competition is negative as (1) Doosan is a highly credible competitor and
post setting up capacity in India, is slated to become an even bigger contender, (2) entrants like
L&T/BGR may quote more aggressively as they attempt to fill up capacities (L&T) and build a business
case (BGR/Thermax). The latter two have already spent considerable sums on the BTG venture. The
turbine tender is to be decided today and would be split among three players as 4:3:2 units.
Price: Challenging given NTPC specs, independent benchmarks, commodity escalations
Rs14 bn per 800 MW (Rs17.5 mn per MW) seems reasonable but has to seen in light of (1) stiff
NTPC conditions (that reduce sourcing, manufacturing and design flexibility), (2) previous
independent benchmarks (Rs28mn/MW in Bara of JPA in Nov-09 and Rs33 mn/MW in Karchana
for L&T in Aug-10; we add a turbine price of Rs12.5 mn/MW [Bharat-Forge Alstom quote] for this
analysis even though that was in 660 MW unit tender), (3) commodity escalation since then as
well as factoring in a likely longer lead time of delivery in this tender.
Quantum of projects awarded may constrain supply, linkage coal dependence to affect execution
Our analysis of the XII Plan coal-based thermal projects suggests about 80 GW of power plants
have already been awarded (not including NTPC bulk tender). In addition, another 28 GW of
projects are designated as XI Plan projects. We have not included projects with some doubts such
as Krishnapatnam, Tilaiya, Kawai which may actually make progress. High dependence on linkage
coal (69% of projects) underscores fuel availability concerns (no linkage, uncertain supply). We
believe incremental ordering over next two years can be extremely low as ordering binge of past 3-
4 years adjusts itself in face of unraveling of assumptions on fuel availability, merchant price and
offtake issues. SEBs may shed load rather than buy expensive power and payment security. Order
inflows and execution remain at risk.
Lower estimates, retain REDUCE on BHEL (Rs1,800 vs Rs2,000 earlier) and SELL on BGR
We cut our estimates on BHEL to Rs126.6 and Rs137.4 (from Rs134.8 and Rs145.4) for FY2012E
and FY2013E, reflecting lower inflows. Retain REDUCE rating (TP: Rs1,800 from Rs2,000 earlier).
We reduce our estimates for BGR to Rs40 and Rs39 (from Rs46 and Rs44) for FY2012E and
FY2013E) on lower incremental equipment ordering. We retain our SELL (changed from REDUCE
as part of our changeover to an absolute rating system) with a target price of Rs315 (8X FY2013E)
versus Rs410 (10X FY2013E) earlier.
800 MW boiler bulk tender: Doosan emerges L1; negative in long-term even
though near-term price seems reasonable
Our interaction with industry participants suggests that Doosan has emerged as the L1
bidder in the NTPC bulk tender for 9X 800 MW tender of NTPC. This tender would be
divided between two players i.e. Doosan (5 units) and BHEL (4 units) and other contenders
such as L&T, BGR Energy and Thermax would not get any share form this tender. The tender
for the turbine units is to be decided today and would be split among three players as 4:3:2
units.
Doosan price of Rs14 bn per 800 MW unit (Rs17.5 mn/MW) seems reasonable; price a
temporary comfort as Doosan’s entry is a LT negative
Doosan bid at a price of about Rs14 bn per 800 MW boiler units, which implies about
Rs17.5 mn/MW. This is slightly higher versus supercritical tenders placed in the past - even
higher than recent turbine order placed by NTPC for the Mouda power project (at a
realization of about Rs12 mn/MW). The industry participants attribute it to two factors: (1)
NTPC conditions were stiff in terms of sourcing and manufacturing reducing flexibility to
reduce costs and (2) some auxiliaries were also in scope of the tender.
We believe that price being reasonable is only a temporary comfort; however, the entry of a
new player is a long-term negative as (1) Doosan is a highly credible competitor and having
set up capacity in pursuance of this tender, it would be more regular and aggressive
competitor in the Indian market, and (2) entrants like L&T and BGR would quote more
aggressively as they have not won in this tender and would still need to fill up capacities (in
L&T’s case) and build a business case (in case of BGR Energy). Both Thermax and BGR who
have not won in this tender have already spent significant amounts of money (as per
FY2011 annual report) in pursuing this business.
Price difference versus L2 (L&T) is 4% and L3 (BGR) is 8%; BHEL bid not revealed
considering minimum assured volume
L&T had placed the second highest bid (L2) for the tender with a price difference of 4%
against Doosan, while BGR Energy (L3 bidder) had a price difference of about 8% against
Doosan. Thermax was L4 with a price difference of about 25% against Doosan.
BHEL was L5 with a much larger price difference. BHEL seems to have bid with a view that it
does not need to compete on the price considering that it has been assured a minimum
volume of business from this tender. Hence for an incremental upside of one more unit (five
boilers against four), it need not to show its best hand, in terms of price, right away. BHEL
though would have to accept the tender at Doosan’s price.
Scope of the project does not differ significantly from standard NTPC boiler order
We note that the scope of the bulk tender boiler/ turbine orders does not vary significantly
from standard NTPC BTG orders. Below is a brief summary of the scope of the boiler
component of the 9X800 MW bulk tender:
Design, engineering, manufacture, fabrication, preassembly, testing of equipment at site,
complete services of construction of the equipment/system of Steam Generator and its
associated auxiliaries including all associated electrical, control & instrumentation and
structural works
Each unit shall include but not be limited to: complete steam generator set, auxiliary
steam piping, steam generator integral pipings, flash tanks, chemical dozing system, draft
fans, air preheaters, coal pulverizers and raw coal feeders, mill bunker building, TPs,
conveyor galleries and its supporting trestles, air fans, coal burners, mill reject handling
system, pulverized fuel piping, ducting and dampers, fuel oil system, passenger and
goods elevators, refractory’s and insulation, complete control and instrumentation system
for steam generator and auxiliaries, power cycle piping, equipment cooling water system
for steam generator and auxiliaries, plant & instrument air compressors, plant
performance analysis, diagnosis and optimization (PADO) System, auxiliary boiler, etc.
Phased manufacturing program
The exhibit below summarized the various milestones associated with the phased
manufacturing program, completion schedule and weightage factor for levying LDs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Industrials
India
Outlook clouded by new competition, ordering binge and fuel concerns. Bulk
tender sees a new credible contender (Doosan) and triggers more aggressive bids in
coming tenders as L&T, BGR, Thermax, (L2, L3 and L4) fight for business. The price per
unit may look good but it has to factor in stiff NTPC conditions, scope and commodity
escalation and longer lead time for delivery (higher inflation) in these tenders. High
quantum (106 GW) of projects already in the works along with fuel concerns may
constrain incremental orders. Dependence on linkage coal (69%) raises execution
concerns. In addition to sectoral woes, BHEL stands to lose business to keen
competition (50% XII plan share vs. 55% in XI plan). Revise estimates of BHEL
(TP: 1,875 from Rs2,000) and BGR (TP:315 vs. Rs410) on slowdown in utility capex.
Bulk tender: New competitor queers the pitch, –ve even as price seems reasonable
Doosan is L1 in the 9X800 MW NTPC bulk tender (slated to get five) as L&T, BGR and Thermax miss
out. BHEL would get four units at L1 price. L&T and BGR were only 4% and 8% away from the
Doosan bid. BHEL kept its cards close (quoted price seemed out of range) on minimum assured
volumes. The entry of new competition is negative as (1) Doosan is a highly credible competitor and
post setting up capacity in India, is slated to become an even bigger contender, (2) entrants like
L&T/BGR may quote more aggressively as they attempt to fill up capacities (L&T) and build a business
case (BGR/Thermax). The latter two have already spent considerable sums on the BTG venture. The
turbine tender is to be decided today and would be split among three players as 4:3:2 units.
Price: Challenging given NTPC specs, independent benchmarks, commodity escalations
Rs14 bn per 800 MW (Rs17.5 mn per MW) seems reasonable but has to seen in light of (1) stiff
NTPC conditions (that reduce sourcing, manufacturing and design flexibility), (2) previous
independent benchmarks (Rs28mn/MW in Bara of JPA in Nov-09 and Rs33 mn/MW in Karchana
for L&T in Aug-10; we add a turbine price of Rs12.5 mn/MW [Bharat-Forge Alstom quote] for this
analysis even though that was in 660 MW unit tender), (3) commodity escalation since then as
well as factoring in a likely longer lead time of delivery in this tender.
Quantum of projects awarded may constrain supply, linkage coal dependence to affect execution
Our analysis of the XII Plan coal-based thermal projects suggests about 80 GW of power plants
have already been awarded (not including NTPC bulk tender). In addition, another 28 GW of
projects are designated as XI Plan projects. We have not included projects with some doubts such
as Krishnapatnam, Tilaiya, Kawai which may actually make progress. High dependence on linkage
coal (69% of projects) underscores fuel availability concerns (no linkage, uncertain supply). We
believe incremental ordering over next two years can be extremely low as ordering binge of past 3-
4 years adjusts itself in face of unraveling of assumptions on fuel availability, merchant price and
offtake issues. SEBs may shed load rather than buy expensive power and payment security. Order
inflows and execution remain at risk.
Lower estimates, retain REDUCE on BHEL (Rs1,800 vs Rs2,000 earlier) and SELL on BGR
We cut our estimates on BHEL to Rs126.6 and Rs137.4 (from Rs134.8 and Rs145.4) for FY2012E
and FY2013E, reflecting lower inflows. Retain REDUCE rating (TP: Rs1,800 from Rs2,000 earlier).
We reduce our estimates for BGR to Rs40 and Rs39 (from Rs46 and Rs44) for FY2012E and
FY2013E) on lower incremental equipment ordering. We retain our SELL (changed from REDUCE
as part of our changeover to an absolute rating system) with a target price of Rs315 (8X FY2013E)
versus Rs410 (10X FY2013E) earlier.
800 MW boiler bulk tender: Doosan emerges L1; negative in long-term even
though near-term price seems reasonable
Our interaction with industry participants suggests that Doosan has emerged as the L1
bidder in the NTPC bulk tender for 9X 800 MW tender of NTPC. This tender would be
divided between two players i.e. Doosan (5 units) and BHEL (4 units) and other contenders
such as L&T, BGR Energy and Thermax would not get any share form this tender. The tender
for the turbine units is to be decided today and would be split among three players as 4:3:2
units.
Doosan price of Rs14 bn per 800 MW unit (Rs17.5 mn/MW) seems reasonable; price a
temporary comfort as Doosan’s entry is a LT negative
Doosan bid at a price of about Rs14 bn per 800 MW boiler units, which implies about
Rs17.5 mn/MW. This is slightly higher versus supercritical tenders placed in the past - even
higher than recent turbine order placed by NTPC for the Mouda power project (at a
realization of about Rs12 mn/MW). The industry participants attribute it to two factors: (1)
NTPC conditions were stiff in terms of sourcing and manufacturing reducing flexibility to
reduce costs and (2) some auxiliaries were also in scope of the tender.
We believe that price being reasonable is only a temporary comfort; however, the entry of a
new player is a long-term negative as (1) Doosan is a highly credible competitor and having
set up capacity in pursuance of this tender, it would be more regular and aggressive
competitor in the Indian market, and (2) entrants like L&T and BGR would quote more
aggressively as they have not won in this tender and would still need to fill up capacities (in
L&T’s case) and build a business case (in case of BGR Energy). Both Thermax and BGR who
have not won in this tender have already spent significant amounts of money (as per
FY2011 annual report) in pursuing this business.
Price difference versus L2 (L&T) is 4% and L3 (BGR) is 8%; BHEL bid not revealed
considering minimum assured volume
L&T had placed the second highest bid (L2) for the tender with a price difference of 4%
against Doosan, while BGR Energy (L3 bidder) had a price difference of about 8% against
Doosan. Thermax was L4 with a price difference of about 25% against Doosan.
BHEL was L5 with a much larger price difference. BHEL seems to have bid with a view that it
does not need to compete on the price considering that it has been assured a minimum
volume of business from this tender. Hence for an incremental upside of one more unit (five
boilers against four), it need not to show its best hand, in terms of price, right away. BHEL
though would have to accept the tender at Doosan’s price.
Scope of the project does not differ significantly from standard NTPC boiler order
We note that the scope of the bulk tender boiler/ turbine orders does not vary significantly
from standard NTPC BTG orders. Below is a brief summary of the scope of the boiler
component of the 9X800 MW bulk tender:
Design, engineering, manufacture, fabrication, preassembly, testing of equipment at site,
complete services of construction of the equipment/system of Steam Generator and its
associated auxiliaries including all associated electrical, control & instrumentation and
structural works
Each unit shall include but not be limited to: complete steam generator set, auxiliary
steam piping, steam generator integral pipings, flash tanks, chemical dozing system, draft
fans, air preheaters, coal pulverizers and raw coal feeders, mill bunker building, TPs,
conveyor galleries and its supporting trestles, air fans, coal burners, mill reject handling
system, pulverized fuel piping, ducting and dampers, fuel oil system, passenger and
goods elevators, refractory’s and insulation, complete control and instrumentation system
for steam generator and auxiliaries, power cycle piping, equipment cooling water system
for steam generator and auxiliaries, plant & instrument air compressors, plant
performance analysis, diagnosis and optimization (PADO) System, auxiliary boiler, etc.
Phased manufacturing program
The exhibit below summarized the various milestones associated with the phased
manufacturing program, completion schedule and weightage factor for levying LDs.
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