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Industrials
India
Accumulated ordering far above likely capacity addition requirement. The
Working Group on Power has estimated power capacity demand of 76 GW in the XII
plan (at 9% GDP), far below the accumulated ordering levels of 115 GW already
placed. This would imply sedate incremental ordering for next few years. The report
also projects relatively low CAGR of 6% and 8% in generation and transmission
spending in XIIth plan versus likely XIth plan spends. Generation and transmission are
indeed likely to meet 85% of the spend target of XIth plan though the distribution
segment has lagged (at 33% of envisaged levels). We note commissioning of 41 GW in
the XIth plan with another 22 GW under construction.
Govt.’s XII plan capacity projection (76 GW) far below accumulated ordering levels (~115 GW)
A recent report from the Working Group on Power on the likely generation capacity requirement
in the XII plan falls far below the equipment ordering already completed in the sector. The report
suggests likely capacity addition of about 76 GW in the XII plan period versus accumulated
equipment orders of about 115 GW already placed (of which at least 62 GW projects are already
under construction - including 10 GW of thermal project slippages from the XI plan). Also note
that the demand estimate was based on key assumption of 9% GDP growth rate (with 0.9X
demand elasticity) which may itself have a downside risk. This has the potential to keep
incremental ordering under pressure apart from other issues such as fuel, offtake risk etc. This also
reveals a surprisingly large gap between government estimates and conceptualization of private
entrepreneurs when they rushed to add capacity and place orders. This reports target is in line
with about 80 GW published in the Integrated Energy Policy in FY2006.
Report projects low CAGR in XIIth plan likely spending, particularly in generation and transmission
Report seem to project only 6% CAGR spending growth in generation and 8% in transmission in
the XIIth plan versus XIth plan. According to the report, the likely fund requirement for the XII
plan period is likely to be to the tune of Rs11.7 tn (Rs13.,7 bn including renewable and captive).
This is versus likely expenditure of about Rs7.1 tn in the XI plan. This implies a CAGR of only about
10.6% in the planned fund requirement.
Distribution segment spends have lagged (33% of envisaged); may become the next driver
Generation and transmission have kept pace with about 85% spending versus envisaged target,
however, distribution has lagged badly with only 33%. Such disproportionately low spending on
distribution partly feed the vicious loop of erratic supply, high AT&D losses and thus losses at final
step of value chain. This could well become an incremental source of opportunity if steps are taken
to improve this leg in the next stage of reform measures.
XI plan: 22 GW capacity still under construction, ~10 GW likely to slip to XII plan
CEA has revised the likely generation capacity addition in the XI plan from about 78-80 GW
originally to about 62-63 GW. Thermal capacity addition target has reduced from about 60-62
GW to 50-52 GW. Of the total envisaged capacity addition of 62 GW, about 41 GW of capacity
has been commissioned till mid-FY2012E and about 22 GW of capacity is still under construction,
scheduled to be completed by end-FY2012E. About 10 GW of thermal capacity under construction
has slipped into the XII plan period.
Government estimate of XII plan demand far below ordering levels
A recent report released by Working Group on Power (constituted by the Planning
Commission with Secretary, Ministry of Power as the Chairman of the group) has estimated
additional generation capacity requirement of only about 75.8 GW for the XII five-year plan
with 63 GW contribution from the thermal segment. We note that this is far below the level
of equipment ordering already completed for projects scheduled to be commissioned in the
XII plan period - we estimate that power projects to the tune of about 115 GW have already
placed main plant equipment orders.
Also note that the demand estimate was based on key assumption of 9% GDP growth rate
(with 0.9X demand elasticity) which may present an inherent downside risk.
XII plan demand estimate far below ordering levels
12th and 13th plan capacity addition requirement according to Ministry of Power (MW)
12th plan 13th plan
Thermal total 6 3,781 6 3,400
Coal-based 6 2,695
Gas-based 1 ,086
Hydro 9 ,204 1 2,000
Nuclear 2 ,800 1 8,000
Total 7 5,785 9 3,400
Key assumptions in demand estimation:
GDP growth rate (%) 9 9
Demand elasticity (X) 0.9 0.8
Source: Working Group on Power
Equipment order for 115 GW of projects already placed with about 62 GW of
projects already under construction
We note that about 62 GW of power projects have already started construction (including
about 10 GW of slippages from XI plan) which are scheduled to be commissioned in the XII
plan. Additionally, equipment orders for additional 47 GW have already been placed,
resulting in total equipment orders to the tune of about 115 GW (includes the 9X800 MW
and 11X660 MW bulk tender orders).
Demand likely to remain slow; does not bode well for power equipment
manufacturers, especially in rising domestic competition
We believe demand/ ordering activity in the sector is likely to remain slow as most of the
orders for XII plan are likely to have been already placed. Part of this has already been
reflected in FY2012E - only two major equipment orders placed in FY2012E so far. This does
not bode well for power equipment manufacturers, especially given the increasing domestic
supply capacity. We believe 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.
XII planned power sector spends also imply fairly low CAGR
According to the report, the likely fund requirement for the XII plan period is likely to be to
the tune of Rs11.7 tn (excluding renewable and captive). This is versus likely expenditure of
about Rs7.1 tn in the XI plan. This implies a CAGR of only about 10.6% in planned fund
requirement – the growth is rate even lower for generation segment at about 6% CAGR.
Sharp miss in distribution spends versus original target; may be a growth driver in
case of recovery
The report also suggests that only about 68-70% of the originally planned power sector
outlay is likely to be achieved in the XI plan - likely expenditure of Rs7.1 tn in the XI plan
period versus originally envisaged outlay of Rs10.3 bn. The miss versus original estimates
was led by the distribution segment - sharp miss in distribution expenditure at only about
33% (Rs1 tn) of the originally planned outlay of Rs3 tn. Generation and transmission are
likely to achieve about 85-88% of originally planned outlays. The distribution segment could
potentially drive investment growth in the next few years in case of recovery in the sector.
XI plan: 22 GW capacity still under construction, ~10 GW likely to slip to XII plan
CEA has revised the likely generation capacity addition in the XI plan from about 78-80 GW
originally to about 62-63 GW. The thermal capacity addition target has reduced to 50-52
GW from about 60-62 GW, implying about 10 GW in slippages into the XII plan period. Of
the total envisaged capacity addition, 41 GW of capacity has been commissioned till mid-
FY2012E and about 22 GW of capacity is still under construction, scheduled to be
completed by end-FY2012E.
Sector also wrought by structural issues such as coal linkages; may impact
execution
In addition to likely slow near-term demand, the sector is also fraught with other structural
issues such as a lack of availability of coal, leading to delays in execution of the power plants.
We remain cautious on the execution of projects for which coal linkage is still pending on
concerns of (1) pending coal linkage, (2) uncertainty of supply despite having LoA (letter of
assurance) and (3) lack of clarity on go-no go policy which would negatively impact utility
capex.
In the near-term, coal issue could potentially derail the infrastructure investment cycle as
power is about a third of the overall infrastructure spending and has strong externalities.
Also note that about 62% of the planned capacity addition in the XII plan period is
dependent on linkage coal.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Industrials
India
Accumulated ordering far above likely capacity addition requirement. The
Working Group on Power has estimated power capacity demand of 76 GW in the XII
plan (at 9% GDP), far below the accumulated ordering levels of 115 GW already
placed. This would imply sedate incremental ordering for next few years. The report
also projects relatively low CAGR of 6% and 8% in generation and transmission
spending in XIIth plan versus likely XIth plan spends. Generation and transmission are
indeed likely to meet 85% of the spend target of XIth plan though the distribution
segment has lagged (at 33% of envisaged levels). We note commissioning of 41 GW in
the XIth plan with another 22 GW under construction.
Govt.’s XII plan capacity projection (76 GW) far below accumulated ordering levels (~115 GW)
A recent report from the Working Group on Power on the likely generation capacity requirement
in the XII plan falls far below the equipment ordering already completed in the sector. The report
suggests likely capacity addition of about 76 GW in the XII plan period versus accumulated
equipment orders of about 115 GW already placed (of which at least 62 GW projects are already
under construction - including 10 GW of thermal project slippages from the XI plan). Also note
that the demand estimate was based on key assumption of 9% GDP growth rate (with 0.9X
demand elasticity) which may itself have a downside risk. This has the potential to keep
incremental ordering under pressure apart from other issues such as fuel, offtake risk etc. This also
reveals a surprisingly large gap between government estimates and conceptualization of private
entrepreneurs when they rushed to add capacity and place orders. This reports target is in line
with about 80 GW published in the Integrated Energy Policy in FY2006.
Report projects low CAGR in XIIth plan likely spending, particularly in generation and transmission
Report seem to project only 6% CAGR spending growth in generation and 8% in transmission in
the XIIth plan versus XIth plan. According to the report, the likely fund requirement for the XII
plan period is likely to be to the tune of Rs11.7 tn (Rs13.,7 bn including renewable and captive).
This is versus likely expenditure of about Rs7.1 tn in the XI plan. This implies a CAGR of only about
10.6% in the planned fund requirement.
Distribution segment spends have lagged (33% of envisaged); may become the next driver
Generation and transmission have kept pace with about 85% spending versus envisaged target,
however, distribution has lagged badly with only 33%. Such disproportionately low spending on
distribution partly feed the vicious loop of erratic supply, high AT&D losses and thus losses at final
step of value chain. This could well become an incremental source of opportunity if steps are taken
to improve this leg in the next stage of reform measures.
XI plan: 22 GW capacity still under construction, ~10 GW likely to slip to XII plan
CEA has revised the likely generation capacity addition in the XI plan from about 78-80 GW
originally to about 62-63 GW. Thermal capacity addition target has reduced from about 60-62
GW to 50-52 GW. Of the total envisaged capacity addition of 62 GW, about 41 GW of capacity
has been commissioned till mid-FY2012E and about 22 GW of capacity is still under construction,
scheduled to be completed by end-FY2012E. About 10 GW of thermal capacity under construction
has slipped into the XII plan period.
Government estimate of XII plan demand far below ordering levels
A recent report released by Working Group on Power (constituted by the Planning
Commission with Secretary, Ministry of Power as the Chairman of the group) has estimated
additional generation capacity requirement of only about 75.8 GW for the XII five-year plan
with 63 GW contribution from the thermal segment. We note that this is far below the level
of equipment ordering already completed for projects scheduled to be commissioned in the
XII plan period - we estimate that power projects to the tune of about 115 GW have already
placed main plant equipment orders.
Also note that the demand estimate was based on key assumption of 9% GDP growth rate
(with 0.9X demand elasticity) which may present an inherent downside risk.
XII plan demand estimate far below ordering levels
12th and 13th plan capacity addition requirement according to Ministry of Power (MW)
12th plan 13th plan
Thermal total 6 3,781 6 3,400
Coal-based 6 2,695
Gas-based 1 ,086
Hydro 9 ,204 1 2,000
Nuclear 2 ,800 1 8,000
Total 7 5,785 9 3,400
Key assumptions in demand estimation:
GDP growth rate (%) 9 9
Demand elasticity (X) 0.9 0.8
Source: Working Group on Power
Equipment order for 115 GW of projects already placed with about 62 GW of
projects already under construction
We note that about 62 GW of power projects have already started construction (including
about 10 GW of slippages from XI plan) which are scheduled to be commissioned in the XII
plan. Additionally, equipment orders for additional 47 GW have already been placed,
resulting in total equipment orders to the tune of about 115 GW (includes the 9X800 MW
and 11X660 MW bulk tender orders).
Demand likely to remain slow; does not bode well for power equipment
manufacturers, especially in rising domestic competition
We believe demand/ ordering activity in the sector is likely to remain slow as most of the
orders for XII plan are likely to have been already placed. Part of this has already been
reflected in FY2012E - only two major equipment orders placed in FY2012E so far. This does
not bode well for power equipment manufacturers, especially given the increasing domestic
supply capacity. We believe 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.
XII planned power sector spends also imply fairly low CAGR
According to the report, the likely fund requirement for the XII plan period is likely to be to
the tune of Rs11.7 tn (excluding renewable and captive). This is versus likely expenditure of
about Rs7.1 tn in the XI plan. This implies a CAGR of only about 10.6% in planned fund
requirement – the growth is rate even lower for generation segment at about 6% CAGR.
Sharp miss in distribution spends versus original target; may be a growth driver in
case of recovery
The report also suggests that only about 68-70% of the originally planned power sector
outlay is likely to be achieved in the XI plan - likely expenditure of Rs7.1 tn in the XI plan
period versus originally envisaged outlay of Rs10.3 bn. The miss versus original estimates
was led by the distribution segment - sharp miss in distribution expenditure at only about
33% (Rs1 tn) of the originally planned outlay of Rs3 tn. Generation and transmission are
likely to achieve about 85-88% of originally planned outlays. The distribution segment could
potentially drive investment growth in the next few years in case of recovery in the sector.
XI plan: 22 GW capacity still under construction, ~10 GW likely to slip to XII plan
CEA has revised the likely generation capacity addition in the XI plan from about 78-80 GW
originally to about 62-63 GW. The thermal capacity addition target has reduced to 50-52
GW from about 60-62 GW, implying about 10 GW in slippages into the XII plan period. Of
the total envisaged capacity addition, 41 GW of capacity has been commissioned till mid-
FY2012E and about 22 GW of capacity is still under construction, scheduled to be
completed by end-FY2012E.
Sector also wrought by structural issues such as coal linkages; may impact
execution
In addition to likely slow near-term demand, the sector is also fraught with other structural
issues such as a lack of availability of coal, leading to delays in execution of the power plants.
We remain cautious on the execution of projects for which coal linkage is still pending on
concerns of (1) pending coal linkage, (2) uncertainty of supply despite having LoA (letter of
assurance) and (3) lack of clarity on go-no go policy which would negatively impact utility
capex.
In the near-term, coal issue could potentially derail the infrastructure investment cycle as
power is about a third of the overall infrastructure spending and has strong externalities.
Also note that about 62% of the planned capacity addition in the XII plan period is
dependent on linkage coal.
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