Analyst Research Report Snapshot

Title:

Spark Capital: PGCIL order inflow analysis - Ordering weakens further in 4Q, TLT contractors remain better placed than equipment players

Price:

$69.00

Provider:

Spark Capital Advisors(India) Private Limited

Date:

09 Apr 2013

Pages:

7

Type:

AcrobatPDF

Companies referenced:

ABB.NS CROM.NS KAPT.NS KECL.NS

Available for Immediate Download
Summary:

Ordering weakens further in 4Q, TLT contractors remain better placed than equipment players Ordering remains lackluster in 4QFY13 – Ordering activity by Power Grid (PGCIL) which showed signs of weakening in 9MFY13 contracted further thereby leading to a 38.6% yoy de-growth in orders (ex 800kV HVDC) in FY13. Ordering activity was subdued across all segments including transmission line towers (TLT) which had otherwise witnessed relatively better traction in 9MFY13. Decrease in bidding intensity in substation provides a relief – In-line with our expectation (our Oct’12 note), competition level in the sub-765kV substation orders has steadily decreased since the change in PGCIL’s criteria in which the scope of work for sub-765kV substation orders included transformer and reactors in the substation package vis-à-vis earlier instances when transformers were tendered separately. Owing to this, the decrease in number of bidders per substation contract (6.4 in 2Q to 4.2 in 4Q) is expected to benefit core equipment players (over contracting players) in the form of better pricing and margins due to higher in-house contribution. Chinese/Korean players continue to dominate GIS bids – Chinese/Korean players continued to increase their presence in the Gas Insulated Substation (GIS) segment with increased number of Chinese players bidding for GIS orders against lowered participation by MNC players (ATD and SIEM) who had dominated the segment earlier. Sustained shift towards GIS ordering by PGCIL and increased dominance by Chinese/Korean players remains a concern for domestic players due to the absence of technological and/or pricing superiority Pure play TLT contractors shine in FY13, competition bounces back in 4Q – Core TLT contracting players – KECI and KPP have secured ~50% of PGCIL’s TLT ordering in FY13. While TLT contracts have de-grown by 29.1% yoy in FY13 (excluding 800kV HVDC order) and competitive intensity has bounced back in 4Q (from 4.5 bidders per contract in 3Q to 8.3), given the fact that sizeable orders were secured in a benign competitive environment in 9MFY13, we expect margins for these players (KECI and KPP) to trend upwards in FY14E in spite of recent increase in bidding intensity Transformer and reactor ordering dwindle – Transformer and reactor orders have continued to fall sharply in 4Q with total order value contracting by 52.8% and 64.3% yoy in both segments respectively. While this can be attributed partially to the inclusion of transformer and reactors with substation package, sustained fall in ordering activity in these segments with increasing presence of Chinese players in the EHV segment (765kV) is expected to add competitive pressures among domestic players Likely spillover to FY14E, but overall market to remain subdued – While fall in FY13 orders, especially in 4Q, is a concern for players across all segments, considering the current PGCIL tenders, we expect some of the 4QFY13 bids to spill over to 1QFY14. Despite PGCIL’s target of ~Rs. 200bn per annum of ordering, we expect the overall T&D market to remain subdued going forward due to the lull seen in the power generation market over the past two years. Our take on coverage companies – We maintain our “Buy” rating on KECI and KPP, which are backed by strong order books, increasing international exposure and attractive valuations. We continue to remain negative on ABB and CRG as valuations continue to remain stretched for ABB and possibilities of margin r...

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