2 March 2012
Update
Capital Goods
NTPC bulk tender - Emergence of true competition in BTG space
New pricing regime emerging; margins on future bids to be lower than the history
BGR Energy Systems has emerged as the lowest bidder (L1) for the boiler package of NTPC's bulk tender 1 (11x660MW)
with a 15% lower quote than Doosan's bid for boiler package of bulk tender 2 (9x800MW).
NTPC's bulk tenders have brought to fore the emerging competition in power BTG space in India. Bidders, apart from BHEL,
have bagged 64% of the combined order value of bulk tender s 1 and 2. L&T is the key loser, even as BGR Energy ha s emerged
as a promising ne w player.
The bulk tenders have also set new pricing benchmarks, which are not predatory, but would generate lower margins than
in the past. We remain cautious on the power equipment space.
NTPC's bulk tenders - the USD8b mega order:
NTPC had
invited bids for bulk supply of boilers-turbine-
generators (BTG) in early 2010. Bulk tender 1
(11x660MW) was worth INR192b and bulk tender 2
(9x800MW) was worth INR1,902b. Both tenders are for
super-critical power plants to be set up across various
states. The price bidding for these tenders went through
number of litigations resulting in the award being
delayed. The litigations ended recently with the opening
of price bids for the boiler package pertaining to bulk
tender 1 following the Supreme Court's verdict in favor
of NTPC against the Ansaldo-Gammon India JV, which
had challenged its disqualification by NTPC.
NTPC's conditions favored companies having (or in
process of setting up) manufacturing bases in India:
To
support domestic players and bring supercritical
technology to the country, one of the pre-requisites to
bid for the bulk tenders was for that companies or JVs
should have an indigenous manufacturing base or must
have acquired land for setting up a manufacturing facility
at the time of bidding. While this eliminated Chinese
companies from the bidding process, several Indian
companies formed JVs with global players. South Korea's
Doosan is the only foreign company (apart from JVs)
which has bagged orders and is also setting up a
manufacturing facility in India. With NTPC and other state
utilities favoring domestic manufacturing, other players
like Dongfang are also considering setting up
manufacturing bases in India.
Who won, who lost?
BGR Energy, the Alstom-Bharat
Forge JV and Doosan are the key beneficiaries of NTPC's
bulk tenders, garnering 25%, 11% and 11%, respectively,
of the combined order value of around INR390b. BGR,
which won both the boiler and turbine generator (TG)
packages, bid aggressively. Its bids were lower by 15%
(for boilers) and 25% (for TGs). As a result, concerns have
emerged on the margins that it will make on these
orders, though the management seems confident of
generating EBITDA of 12-13% and net profit margin of 6-
7%. Although BHEL, which was assured of bagging a
minimum number of units got 36% share, the company
is a definitely loser as it would now have to match the L1
prices for all bids, which are lower by 7-12%. The L&T-
Mitsubishi Heavy Industries JV is the biggest loser as it
failed to win any bid. This raises questions about the
JV's cost-structure and its future as it would run out of
orders once its existing order-book (around 10GW) is
exhausted by FY14.
Bulk tenders bring to fore emerging competition in
power BTG space:
NTPC's bulk tenders have been a key
catalyst for the significant change in the Indian power
BTG manufacturing space. Domestic BTG manufacturing
capacity would increase to nearly 38GW per annum by
FY14 from just 10GW per annum in FY08. The prices
quoted by BGR Energy and Doosan, though not
predatory, are competitive and would generate lower
margins that those enjoyed in the past (particularly by
BHEL and lately by L&T). We believe NTPC's bulk tenders
have set new pricing benchmarks and expect similar
pricing in future bids.
Dhirendra Tiwari
(Dhirendra.Tiwari@MotilalOswal.com) +91 22 3982 5127
Deepak Narnolia
(Deepak.Narnolia@MotilalOswal.com) +91 22 3982 5126

Capital Goods | Update
NTPC's bulk tenders - mega orders for 14.4GW worth ~INR390b
Bulk tender 1 - TG package:
The price bids for bulk tender 1 TG package were
opened in early 2011. Bharat Forge-Alstom, BHEL and Toshiba-JSW were declared
L1 (INR12.5m/MW), L2 and L3, winning 5, 4 and 2 units, respectively. The TG package
was to be split among three bidders, with BHEL being considered L2, if it is not L1,
and would have to match L1 price to get orders.
Bulk tender 1 (boiler package):
In July 2011, NTPC invited price bids from BHEL,
L&T and BGR Energy for its bulk tender 1 (boiler package) and disqualified Ansaldo
on technical grounds. Subsequently, Ansaldo challenged the decision in Delhi
High Court which ruled in favor of Ansaldo. NTPC then appealed in the Supreme
Court which decided in favor of NTPC. Following the Supreme Court's decision,
the price bids were opened recently. BGR Energy was L1, beating BHEL (L2) and
L&T (L3). The company quoted a price (read-out price) of INR14m/MW (INR102b
for 11 sets of boilers), which is 15% lower than the price quoted by Doosan for the
boiler package of NTPC bulk tender 2 (9x800MW). The evaluated price quoted by
BGR was INR111b. According to the tender, the boiler package was to be split
between two bidders. While the L1 winner would get 3 projects (6 or 7 units of
660MW each), L2 would get the remaining two projects (4 or 5 units). BHEL will be
treated as L2 if it is not L1 and would have to match L1 price. Thus, BGR Energy (in
a JV with Hitachi) would get 6 or 7 units (INR 5.5b or INR6.5b) and BHEL would get
4 or 5 units (INR3.7b or INR4.6b).
Bulk tender 2 (boiler package):
In September 2011, NTPC opened the price bids
for the boiler package (bulk tender 2) of the 11x800MW tender. On the basis of
'read-out' prices, Doosan was L1 (INR16.4m/MW), followed by L&T-MHI (L2, 5%
higher)) and BHEL (L3, 6% higher). The BGR-Hitachi JV and Thermax quoted higher
prices. Doosan would get 5 units (4GW, INR66b), while BHEL would get 4 units
(3.2GW, INR53b) if it matches L1 price. The price quoted by Doosan was in-line
with BHEL's bids related to Bajaj Hindustan at INR29m/MW for a BTG package,
implying INR16m/MW for the boiler package.
Bulk tender 2 (TG package):
In the TG package, BGR Energy was L1 with a quoted
price of INR10m/MW, 2% lower than L&T and Toshiba and 10% lower than BHEL.
BGR Energy would get 4 units (INR30b), while BHEL (INR16b) and Toshiba (INR24b)
would get 2 units and 3 units, respectively. The prices quoted by BGR Energy were
over 20% lower than the TG bid for 11x660 MW bulk tender.
NTPC is yet to issue the letter of awards to successful bidders for bulk tender 2.
NTPC's bulk tender outcome
2 March 2012
2

Capital Goods | Update
Company-wise share (bulk tender 1 and 2)
Company
BHEL
BGR
Doosan
Alstom
Toshi ba
Total Order
INR m
138,440
96,680
65,600
41,250
40,500
382,470
% share
36
25
17
11
11
100
Bulk tender 1 - project details
Bid prices for bulk tender 1 projects (INRm/MW)
TG
Boiler
Bid prices for bulk tender 2 projects (INRm/MW)
TG
Boiler
17.8
16.4 17.3 17.4
11.5
10.0 10.4 10.5
21.3
17.0
13.0
14.0
14.0
15.8
16.0
Al s tom
BHEL
Tos hi ba
BGR
BHEL
L&T
Note: These are approximate 'read out' prices based on inputs from the industry
Domestic BTG manufacturing capacity to rise to 36GW per annum by FY14
Domestic companies are aggressively building BTG capacities in the company.
Apart from BHEL, all other new entrants are setting up supercritical BTG facilities.
After BHEL and L&T, BGR Energy is setting up an integrated BTG manufacturing
facility. While Thermax is setting up a boiler facility, the Bharat Forgel-Alstom and
JSW-Toshiba JVs are setting up TG manufacturing facilities.
Foreign players also trying make their presence strong. Doosan has already
established itself as a credible player in India after successfully executing a few
large projects, including supply of boilers for Tata Power's 4GW ultra-mega power
plant. The company is also L1 for NTPC's 9x800MW bulk tender. Doosan is setting
up a boiler manufacturing facility in the country and would remain a strong player
in the foreseeable future. China's Dongfang Electric Machinery Company (DFEM)
is considering the possibility of setting up a BTG manufacturing plant in India.
3
2 March 2012

Capital Goods | Update
Boiler manufacturing capacity (GW)
BHEL
BGR Hi tachi
Cethar
Gammo n
‐
Ans al do
L&T
‐
MHI
Th erma x
‐
Bab co x Wi l cox
Doos an
2
3
4
4
4
4
15
FY10
20
Turbine generator manufacturing capacity (GW)
BHEL
BGR Hi tachi
Ce thar
Gammon - Ansa l do
L&T - MHI
Thermax - Bab co x Wi l cox
Doo san
2
3
4
4
4
4
15
FY10
20
6
FY06
10
FY08
6
FY14
FY06
10
FY08
FY14
Note: These are approximate 'read out' prices based on inputs from the industry
Competition unlikely to ease over next 2-3 years
With the entry of several players, the Indian power equipment space is increasingly
becoming competitive. We expect competitive intensity to remain tough in the near
future on account of new manufacturing capacity coming up. However, coal shortages
have resulted in power producers delaying orders. The industry needs a significant
pickup in demand, at least 15-20 GW of orders per annum, to partly absorb the
upcoming manufacturing capacity.
We believe demand would not pick-up any time soon until the government takes
some speedy and concrete actions, particularly relating to coal blocks and land
acquisition. Under this scenario, we believe that BTG players would have no option
but to resort to aggressive pricing. This would have a negative impact on the
profitability of established players like BHEL. On the positive side, BHEL is expected
to maintain or increase its market share in the near-term because majority of order
awards from NTPC and PSUs flow to it, which puts it in a relatively advantageous
position.
BTG players market share during 11th plan …
Si e men s
SCMEC
2%
3%
Dong Fa ng
14%
SEPCO
2%
SEC
12%
L&T
1%
BHEL
58%
Others
8%
… and 12th plan
Technopro Cethar
m
Ves s l s
SCMEC
2%
1%
2%
Dong Fa ng
11%
SEPCO
3%
Harbi n
10% SEC
10%
Si emens
1%
Others
2%
BHEL
46%
Total Chinese:
31%
Doos an
3%
L&T
9%
Note: These are approximate 'read out' prices based on inputs from the industry
2 March 2012
4

Capital Goods | Update
Outlook uncertain as demand slows; Maintain Neutral on the sector
The Indian power equipment market is going through a challenging phase impacted
by the double whammy of slowing demand (from power producers) and increased
competition. Lack of coal linkages and volatile merchant power prices, coupled
with several other constraints like land availability have hit new project awards
over the past one year. We believe that while the situation would possibly improve
in FY13 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.
Despite the significant correction in stock prices during last year, we believe
BHEL's
valuations would remain under pressure due to the following de-rating catalysts:
(1) possible downside to our order intake assumptions in FY12/13 due to worsening
external environment in the power sector; (2) downside risk to FY13 earnings
estimate due to execution constraints and deteriorating working capital; and (3)
uncertainty around the company's proposed FPO (follow-on public offer).
Maintain
Neutral.
Though
BGR Energy
has been the biggest gainer of the NTPC bulk tender, the
profitability on these orders remains a question mark. We believe that success in
a few EPC orders could significantly boost the company's FY13-14 earnings outlook
and result in a re-rating of the stock. At present, we maintain
Neutral
on the
stock.
Thermax
continues to see poor order inflow and has failed win any BTG order so
far. We remain
Neutral
on the stock.
Comparative valuation
Rating
M-Cap
CMP
EPS (INR)
FY11 FY12E FY13E
8.7
25.5
29.3
7.1
19.8
75.6
22.9
34.4
28.9
17.0
25.8
26.0
10.6
24.3
83.5
30.6
34.5
35.8
272.6
12.9
7.8
9.9
22.1
18.3
32.3
16.5
24.3
P/E (x)
FY11 FY12E FY13E
93.4
11.7
12.0
20.1
23.8
16.9
35.4
15.4
18.5
47.8
11.6
13.5
13.4
19.3
15.3
26.5
15.3
14.9
198.7
7.9
5.1
6.4
15.7
14.7
19.3
10.2
14.5
EV/EBITDA (x)
FY11 FY12E FY13E
64.2
7.3
7.0
10.0
16.7
13.7
21.4
8.9
11.2
30.3
7.3
8.5
5.4
13.7
12.8
15.6
8.8
9.4
RoE (%)
FY11 FY12E FY13E
2.6
7.4 13.4
31.4
28.1 23.8
38.9
20.8 16.4
30.5
14.6 18.0
35.5
29.8 34.0
18.3
17.7 15.6
23.2
19.2 23.0
31.9
28.1 23.6
42.0
38.0 33.8
source: Bloomberg
USD INR/sh
ABB#
Neutral
3.5
813
3.0
BHEL
Neutral 14.8
299
23.1
BGR Energy Neutral
0.5
350
44.7
Crompton
Neutral
1.9
142
14.3
Cummins
Buy
2.6
471
21.3
L&T
Buy
15.5 1,278
69.7
Siemens## Neutral
5.4
810
25.1
Thermax
Neutral
1.2
529
32.0
Havells
Buy
1.4
534
22.0
# Year end December; ## Year end September
BHEL: P/E band
BGR Energy: P/E band
2 March 2012
5

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