Indian Capital Goods Power Grid orders: A slow start to 4Q  HSBC Research,

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Indian Capital Goods
Power Grid orders: A slow start to 4Q
 Power Grid orders showed lumpiness, slowing to INR8.4bn
in January (down 32% y-o-y); YTD orders are up 82% y-o-y
 Competition remained stable in most segments, except
substations, where we saw an increase in players
 Maintain preference for EPC players; reiterate OW on KPP
and KEC, UW on SIEM and ABB, and UW(V) on CRG
Slow start to 4Q: Power Grid orders came to INR8.4bn in January, down 32% y-o-y and 64%
m-o-m. The total number of awarded contracts rose to 16 versus 12 last year, underpinning
continued order momentum. Orders in the first 10 months of 2011 came to INR121bn, up 82%
y-o-y. We expect heavy ordering of INR80-100bn in February-March, given that historically,
Power Grid has awarded at least 50% of its yearly orders in 4Q. We also note that so far c43%
of orders have been awarded in the tower segment, while only 29% are in the transformer and
substation segment. Given that historically order distribution has been more equitable, we
believe that ordering in February-March could be slightly skewed towards substations and
equipment. As such, we expect Power Grid’s strong order inflow will continue, acting as a
catalyst for a sector re-rating. We believe this will benefit small-cap stocks, e.g. KPP and KEC,
which trade significantly below historical averages.
Competition intensifying in substations: Competition has clearly intensified in the substation
segment; there are now nine players in the 765kV space and 13 in the 400kV space.
Interestingly, competition is mostly from domestic players, with only three active foreign
players in the segment. As such, we believe the increase in players may put further pressure on
pricing. Competition in the transformer segment remains broadly stable and the companies
under our coverage retain 39% of orders in the 765kV space and 81% in the 400kV space.
Competition in the tower segment is also stable, with KPP, KEC and JYS winning 19% of
orders YTD versus c24% last year.
Order momentum to drive re-rating: Strength in Power Grid orders should raise confidence
in the transmission capex outlook, in our view. Also, competition suggests that pricing is
rationalising in the EPC segment, but may remain under pressure for substation vendors.
Hence, we continue to prefer EPC players. Reiterate OW on KPP and KEC, UW on SIEM and
ABB, and UW(V) on CRG.


Risks
We highlight key risks to our ratings and estimates below.
Downside risks
 Delays in the deliveries and/or project approvals
 Excessive pricing pressure
 Hedging losses related to currency fluctuations
Upside risks
 Continued strength in the short cycle orders
 Better-than-expected translation impact from INR depreciation
 Positive impact from recent reduction in the commodity prices
Valuation
Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below
the hurdle rate for India stocks of 11%. Under our research model, for stocks with a volatility indicator, the
Neutral band is 10ppts above and below the hurdle rate for Indian stocks of 11%. At the time we set our target
prices, they implied potential returns that were respectively above, within or below this ratings band. We rate
the stocks Overweight, Neutral or Underweight accordingly. Potential return equals the percentage difference
between the current share price and the target price, including the forecast dividend yield when indicated.