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Larsen & Toubro
Low Share in 800 MW Bulk
Order Negative for Inflows
The News: Over the last two days, NTPC has opened
the bidding for its 9X800 MW tender, which was
separately bid out for boilers and turbines. According to
the media, the nine units are spread across four plants -
two at Lara in Chhattisgarh, three at Kudgi in Karnataka,
and two each at Darillipalli and Gajamara in Orissa.
According to the terms of the tender (similar to the terms
in the 660 MW bulk tender), BHEL has a first right of
refusal (on matching the L1 price) on the L2 packages in
both boilers and turbines, with the L2 bidder being
moved down to L3, and L3 to L4 and so on.
Winning Bidders Surprised on Both Boilers and
Turbines: In boilers, we believe (based on media
reports and the call by BGR management) that Doosan
was the lowest bidder (L1) at Rs16.4 mn / MW and L&T
the second lowest bidder (L2) at Rs17.2 mn / MW. In the
turbine contract, BGR management confirmed that it is
L1, with a bid of Rs8.75 mn / MW, though there is some
confusion on whether L&T or JSW Toshiba was L2. We
are assuming that L&T is L2 and is will move to L3
making it likely to get 2X800 MW (as we believe NTPC
might be unwilling to source TGs at the same plant from
different suppliers).
Low Share Good in the Longer Term…: From a
longer-term perspective, the low share might be good for
margins, given our belief that there is likely to be a
winner’s curse attached to the bulk tender orders. In
addition, L&T, given its earlier wins (Exhibit 4) did not
need these orders to indigenize its production capability.
…But, More Importantly, Downside Risk Building
Up to Our Inflow Estimates: In our opinion, this was
L&T's best chance to register the marginal growth we
have built into their power segment inflows for F12e
(Exhibit 1). The downside risk to our 17% inflow growth
(vs. L&T guidance of a 15-20% YoY growth) for the
company in F12e goes up based on this result. Also,
L&T will still have to match the L1 (BGR’s) bid on the
turbines that it will manufacture.
Competitive Intensity Continues to Rise in Sector …:
Doosan has emerged as a strong contender underlining its
plans to become a domestic manufacturer, indicating that the
competitive intensity in the sector continues to rise in the BTG
(boiler turbine generator) suppliers market, which is struggling
with demand (given the various issue that generation
companies are facing led by fuel security). BGR management
also said that it had received at least one enquiry from a large
private sector player on whether it was prepared to match
these rates for a large contract that they (the IPP) would like to
award. Given BGR’s willingness to match it, the bid might
become a benchmark for other players in the sector too.
… Indicating Weakness in Medium Term Margins BGR
management in its conference call today indicated that it
expected around 15-16% EBITDA margins in the contract.
Given that the indigenization will be low to start off with (it is
BGR’s first order) and that BGR is significantly lower (around
20-25%) than earlier bids by in the sector (with incumbents
making a 20% odd EBITDA margin on those contracts), we
believe that this target might be difficult to achieve. BGR
management did indicate that this order signals the start of the
competition, and while in the early stages, most manufacturers
in the sector will be focused on survival; once that is assured,
the focus on margins will increase. We are of the same opinion,
and expect a shakeout over the next 3-5 years, given the
overcapacity build up in the system, after which EBITDA
margins should recover to our long-term estimate of 14-15%
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro
Low Share in 800 MW Bulk
Order Negative for Inflows
The News: Over the last two days, NTPC has opened
the bidding for its 9X800 MW tender, which was
separately bid out for boilers and turbines. According to
the media, the nine units are spread across four plants -
two at Lara in Chhattisgarh, three at Kudgi in Karnataka,
and two each at Darillipalli and Gajamara in Orissa.
According to the terms of the tender (similar to the terms
in the 660 MW bulk tender), BHEL has a first right of
refusal (on matching the L1 price) on the L2 packages in
both boilers and turbines, with the L2 bidder being
moved down to L3, and L3 to L4 and so on.
Winning Bidders Surprised on Both Boilers and
Turbines: In boilers, we believe (based on media
reports and the call by BGR management) that Doosan
was the lowest bidder (L1) at Rs16.4 mn / MW and L&T
the second lowest bidder (L2) at Rs17.2 mn / MW. In the
turbine contract, BGR management confirmed that it is
L1, with a bid of Rs8.75 mn / MW, though there is some
confusion on whether L&T or JSW Toshiba was L2. We
are assuming that L&T is L2 and is will move to L3
making it likely to get 2X800 MW (as we believe NTPC
might be unwilling to source TGs at the same plant from
different suppliers).
Low Share Good in the Longer Term…: From a
longer-term perspective, the low share might be good for
margins, given our belief that there is likely to be a
winner’s curse attached to the bulk tender orders. In
addition, L&T, given its earlier wins (Exhibit 4) did not
need these orders to indigenize its production capability.
…But, More Importantly, Downside Risk Building
Up to Our Inflow Estimates: In our opinion, this was
L&T's best chance to register the marginal growth we
have built into their power segment inflows for F12e
(Exhibit 1). The downside risk to our 17% inflow growth
(vs. L&T guidance of a 15-20% YoY growth) for the
company in F12e goes up based on this result. Also,
L&T will still have to match the L1 (BGR’s) bid on the
turbines that it will manufacture.
Competitive Intensity Continues to Rise in Sector …:
Doosan has emerged as a strong contender underlining its
plans to become a domestic manufacturer, indicating that the
competitive intensity in the sector continues to rise in the BTG
(boiler turbine generator) suppliers market, which is struggling
with demand (given the various issue that generation
companies are facing led by fuel security). BGR management
also said that it had received at least one enquiry from a large
private sector player on whether it was prepared to match
these rates for a large contract that they (the IPP) would like to
award. Given BGR’s willingness to match it, the bid might
become a benchmark for other players in the sector too.
… Indicating Weakness in Medium Term Margins BGR
management in its conference call today indicated that it
expected around 15-16% EBITDA margins in the contract.
Given that the indigenization will be low to start off with (it is
BGR’s first order) and that BGR is significantly lower (around
20-25%) than earlier bids by in the sector (with incumbents
making a 20% odd EBITDA margin on those contracts), we
believe that this target might be difficult to achieve. BGR
management did indicate that this order signals the start of the
competition, and while in the early stages, most manufacturers
in the sector will be focused on survival; once that is assured,
the focus on margins will increase. We are of the same opinion,
and expect a shakeout over the next 3-5 years, given the
overcapacity build up in the system, after which EBITDA
margins should recover to our long-term estimate of 14-15%
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