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Spark Capital : PGCIL order inflow analysis & KECI management interaction update




Spark Capital Advisors(India) Private Limited


10 Jan 2013





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PGCIL order inflow analysis – Order inflow drops in 3QFY13, TLT only silver lining Order inflow drops yoy in 3QFY13 – Ordering activity by Power Grid (PGCIL) which had witnessed a moderate growth in 1HFY13 turned subdued in 3Q and has led to a 6% yoy de-growth in orders (ex 800kV HVDC) in 9MFY13. Barring transmission line (TLT) segment, ordering across all major segments (substation, transformer, etc) has witnessed de-growth in FY13 so far. Healthy ordering in TLT continues coupled with lowered competition – TLT segment has bucked the trend and has witnessed 26% yoy growth in 9MFY13 including sizeable orders of Rs. 32bn in 3QFY13. Also, competition in this segment has continued to ease significantly with only 4-5 bidders participating presently (vs. 8-9 bidders a year ago). Core transmission players KECI & KPP have been able to capitalize on this and have increase their market share significantly Substation segment remains fragmented – Outlook in the substation segment remains uncertain for MNC players like ABB, Alstom and Siemens as competition from contractors has increased even in the 765kV orders. On the other hand, international players (Chinese and Korean) continue to win orders in the growing GIS market due to their access to technological capabilities and better pricing strategy Chinese players succeed in 765kV transformers – Chinese players have increased their presence in the 765kV transformer segment by securing sizeable orders during the quarter. This has compounded the pricing/margin pressure in the segment which has witnessed a ~50% de-growth yoy in 9MFY13 KECI Management Interaction Update, Maintain ‘Buy’ We recently had an interaction with the KECI management. Following are the key takeaways – Order book and inflow growth driven by PGCIL orders – KECI has a current order book of Rs. ~98bn and has won over Rs. 17bn worth of TLT orders or 29% market share from PGCIL in 9MFY13 up from Rs. 6bn (6% market share) in FY12. The high order inflow coupled with the fact that overall number of bidders in transmission lines orders have fallen drastically to under 5 per order augers well for both revenue growth and EBITDA margin going forward. Margins to improve gradually – While recently won PGCIL orders should help improve margins in FY14E, higher contribution (30% of revenue) of non transmission business should keep overall margins capped at ~8% in FY14E. But given the fact that new orders in the non transmission business are being won at better margins, overall margins are expected to gradually inch up over the next 2-3 years. Working capital under control – The management maintains that the comfortable order book position has given them the flexibility to cherry pick better margin and efficient working capital orders. Given its high international exposure (52% of revenue) and KECI’s timely execution, we expect the WC cycle to remain between 80-90 days in FY13E and FY14E. IT survey a non event – There was an IT survey conducted on the company premises last week in relation to treatment of certain costs related to past few years. The company has stated that it has satisfactorily provided most proofs and the disputed amount is likely to be negligible. We do not expect any large provisions / penalties to accrue due to this survey.

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