5 November 2011
Update
Capital Goods
Dongfang’s designs on India spell concerns about competition
Chinese company aims to set up BTG, spare-parts manufacturing facility
We recently interacted with the management of Dongfang Electric Machinery Company (DFEM). Key takeaways:
Concerns over rising competition in the Indian power equipment market on Chinese aspirations in India.
Dongfang plans to set up BTG, spare parts manufacturing facilities in India.
The management tried to allay fears about quality issues, which they said, originated due differences to in
operational practices at generating units.
We believe the recent proposal to levy import duty on power equipment will benefit local companies like
BHEL, but the industry will stay competitive given slowing demand and a spurt in manufacturing capacity.
DFEM considers manufacturing in India:
India
continues to be an important market for Dongfang Electric
Machinery Company (DFEM), which is involved in over
20GW of power projects in India. DFEM is considering the
possibility of setting up a power equipment (Boiler and
Turbine Generator) manufacturing plant in India. DFEM
has technology collaboration with Hitachi for boilers and
turbine generators (TG). Hitachi has an exclusive tie-up
with BGR Energy in India for super-critical boilers and TG.
This may prove to be an area of contention if DFEM wishes
to set up manufacturing in India. We are doubtful about
DFEM's intentions to set up a BTG plant in India, given its
30GW of manufacturing capacity in China, which would
be underutilized if another plant were to be set up in a
growing market like India. However, DFEM is certainly
looking to set up a manufacturing facility for spares to serve
Indian customers. We believe that with spares
manufacturing, DFEM will gain higher acceptance among
Indian private power developers.
Focus on equipment supply, not EPC:
DFEM is focusing
on equipment orders and not EPC contracts. This is due to
difficulty in getting work visas for workers. Generally, an
EPC contract involves mobilization of a large number of
workers. DFEM set up two power projects for West Bengal
State Electricity Board: Sagardighi (600MW) and Durgapur
(300MW), on an EPC basis. Both projects faced major
issues, resulting in escalation of serious disputes between
DFEM and the utility.
Confident about quality:
DFEM does not see quality
issues with its equipment. According to DFEM, problems
faced at various projects were largely due to operational
practices and with time, the issues were sorted out and
some of the plants in India are operating at nearly 100%
PLF. Chinese equipment has often been cited as consuming
higher auxiliary power. DFEM stated that in its case, this
was largely due to customers asking for higher rating
auxiliaries such as motors. Chinese equipment
manufacturers have played an important role in the Indian
power market.
Chinese presence well established in India:
Chinese
players are expanding their presence in overseas markets,
including India, given the stagnation in capacity addition in
China. Chinese companies added over 20GW of capacity
DFEM, Shanghai Electric Company and Harbin have a strong
Indian presence (MW)
16,468
14,160
9,480
3,570
3,300
Dong Fang
SEC
Harbin
SEPCO
SCMEC
Source: Company/MOSL
Dhirendra Tiwari
(Dhirendra.Tiwari@MotilalOswal.com) +91 22 3982 5127
Deepak Narnolia
(Deepak.Narnolia@MotilalOswal.com) +91 22 3982 5126

Capital Goods | Update
in India during the tenth and eleventh five-year plan periods
and are executing about 40GW of power projects (excluding
bulk orders of Reliance, Lanco and Abhijeet Group, which
are still to start construction). Chinese players enjoy certain
cost advantages like (1) cheap financing from Chinese banks
and (2) higher operating leverage compared with their Indian
competitors (each of the Chinese players operates at over
20GW annual capacity). Besides, some IPPs prefer Chinese
players due to their relatively lower delivery schedules,
resulting in lower project costs.
Several quality issues:
Plants running on Chinese
equipment face quality issues such as lower PLF, high
auxiliary consumption, low heat rate and maintenance
issues. For example, in case of equipment failure at the
Durgapur plant, the equipment was sent back to China for
repair, resulting in huge financial losses. Besides, it is alleged
that Chinese equipment is not customized to the Indian
environment (to handle Indian coal, for instance), which
results in frequent breakdowns. There is no concrete
evidence of this, but industry experts expressed concern
about the likelihood of frequent breakdowns of Chinese sets,
substantially increasing lifecycle costs of projects.
Recent proposal of duty on imports to help local
players:
Reportedly, at a recent meeting of government
ministries and agencies, there was broad consensus to
provide domestic manufacturers with a level playing field
compared with foreign suppliers. The government is
contemplating levying import duty of 5%, CVD of 10%
(equivalent to excise duty for domestic companies) and 4%
of SAD on mega power projects. Domestic players will
have a 6% advantage if implemented, over imports, which
we believe, is substantial, as Chinese companies have been
quoting 10-20% less than Indian manufacturers like BHEL.
Outlook uncertain as demand slows:
The Indian power
equipment market seems to be going through a challenging
phase with a double whammy of slow demand and increased
competition. Lack of coal linkages, volatile merchant power
prices and several other constraints like land availability
adversely impacted new project awards over the past one
year. We believe that while the situation will possibly improve
in the remaining part of the year, with an order pipeline of
over 20GW being awarded (led by PSUs like NTPC), the
outlook for the following years is uncertain. We remain
Neutral
on the sector.
Market shares during the Eleventh Plan
GE
2%
Alstom
2%
L&T
1%
Market shares during the Twelfth Plan
Technoprom
SCMEC 2%
2%
Dong Fang
11%
SEPCO
3%
Cethar
Vessls
1%
Siemens
Others
1%
2%
Siemens
2%
SCMEC
3%
SEPCO
SEC
2%
12%
Others
2%
BHEL
46%
BHEL
60%
Total Chinese
share: 31%
Dong Fang
14%
Harbin
10%
SEC
10%
Doosan
3%
L&T
9%
Total Chinese
share 36%
Source: Company/MOSL
5 November 2011
2

Capital Goods | Update
Projects awarded to Dongfang during the eleventh and twelfth plans: A tentative list
Agency
Lanco Infratech Ltd
Lanco Infratech Ltd
Lanco Infratech Ltd
Lanco Infratech Ltd
Lanco Infratech Ltd
RRUVNL
Gayatri Projects
TNEB
WBPDCL
WBPDCL
JSW
JSW
Athena
East Coast Energy
Sterlite Energy
Adani Power
Total
C: Commissioned; UC: Under construction
Project
Amarkantak
Amarkantak
Babandh
Udupi
Anpara
Kalisindh
Krishnapattam
Mettur
Sagardighi
Durgapur
Jalipa Lignite
Jalipa Lignite
Athena Chattisgarh
Bhavanapaddu
Balco
Mundra
MW
600
1,320
1,320
1,200
1,200
1,200
1,320
600
1,200
300
270
810
1,320
1,320
1,200
3,300
18,480
Source: Company/MOSL
Only Boiler
Only Boiler
Remarks
Status
C
UC
UC
C
UC
UC
UC
UC
C
C
C
UC
UC
UC
UC
UC
Only TG
Comparative valuation
Company
ABB#
BHEL
BGR Energy
Crompton
Cummins
L&T
Siemens##
Thermax
Neutral
Buy
Buy
Neutral
Buy
Buy
Neutral
Neutral
M-Cap
USD
2.9
16.2
0.6
1.8
2.1
17.2
5.8
1.1
CMP
(INR)
680
333
341
145
375
1,392
860
490
TP
(INR)
670
495
524
138
504
1,666
900
472
EPS (INR)
FY11 FY12E FY13E
3.0
23.1
44.7
14.3
21.3
69.7
29.0
32.0
12.0
27.8
49.0
8.0
22.8
78.8
36.0
36.3
22.3
33.0
52.4
11.2
28.0
90.0
45.1
39.3
P/E (x)
FY11 FY12E FY13E
228.0
14.4
7.6
10.1
17.6
20.0
29.7
15.3
19.0
56.6
12.0
7.0
18.1
16.5
17.7
23.9
13.5
14.5
30.5
10.1
6.5
12.9
13.4
15.5
19.1
12.5
11.7
EV/EBITDA (x)
FY11 FY12E FY13E
165.0
8.9
5.0
6.5
12.3
16.0
17.5
9.4
11.7
36.1
6.8
4.6
10.2
11.6
14.8
14.0
7.7
9.3
19.1
5.5
5.1
7.6
9.2
13.2
10.6
6.5
7.7
RoE (%)
FY11 FY12E FY13E
2.6
31.4
38.9
27.8
35.5
18.3
25.5
31.9
42.0
10.0
30.3
32.6
12.8
33.6
17.3
26.4
29.4
16.6
29.4
27.4
17.4
36.7
16.4
27.6
26.1
Havells
Buy
1.1
417
499
22.0
28.8
35.6
PER is based on FY12E; # Year end December, ## Year end September
37.9 33.7
Source: MOSL
5 November 2011
3

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