Sector Update | 17 January 2013
Capital Goods
T&D Equipment: Industry structure under transformation
Demand environment to improve in FY14, but profitability eroded
Green energy corridors / intra-state transmission network / substation automation projects are likely to contribute
incrementally to order intake in FY14/FY15. Several of these projects will necessitate technology upgradation by Indian
companies.
The tough stance taken by governments globally against aggressive imports is likely to curb competitive intensity. We
believe that industry profitability will now be determined by rivalry amongst existing players, as the threat of imports /
new entrants has reduced.
After significant erosion in the last few years, industry profitability is stabilizing at lower levels. There are no signs of
improvement, yet.
We maintain Neutral on the T&D Equipment sector, and prefer Crompton Greaves over ABB / Siemens.
PWGR's order awards to plateau, but few green
shoots emerging
Power Grid (PWGR) ordering is likely to plateau, as most
of the 12th Plan (FY12-17) projects have already been
tendered out. However, there exist upside possibilities
from (i) green energy corridors (investment plan:
INR400b), (ii) intra-state transmission projects (as
strengthening of the sub-transmission network in the
states is an important part of the chain and several states
are forming JVs / MoUs with PWGR), and (iii) substation
automation (particularly post the blackouts in July 2012).
We expect project awards to accelerate in FY14/FY15.
Several of these projects will necessitate technology
upgradation by Indian companies.
15-19% in FY09 to 7-8%. This is a function of increased
competitive intensity, resulting in 25-30% decline in
transformer prices. With product prices bottoming out
and prices of raw material (CRGO electrical steel) easing,
margins are showing signs of stabilization. On the back
of PWGR ordering, the demand for MVA power
transformers is up ~2x from 2008 levels, while the
demand for distribution transformers continues to be
at 2008 levels. We believe that power products should
see improved demand environment, given that several
SEBs have raised tariffs over the past 18 months. The
financial restructuring proposals of SEBs will also lead
to improved liquidity.
PWGR ordering: Quarterly trend
Competition from imports to wane, but domestic
competition could intensify
In the recent months, governments across the globe
have taken a tough stance towards aggressive
equipment imports, imposing anti-dumping duties /
stringent conditions. Such actions, in our opinion, have
set a strong precedent. Several Chinese and Korean
players have announced plans to set up local
transformer manufacturing capacities in India - while
this provides a level playing field for domestic players,
it also increases domestic capacity and the incumbents
could retaliate through further capacity expansions
which could permanently alter the industry structure.
Source: PGWR
Profitability stabilizing after significant erosion;
still no signs of improvement
Profitability in power products has eroded over the last
3-4 years, with EBIT margins declining from a peak of
Our view:
Competitive intensity in the Indian T&D
equipment sector remains high. We believe that low
product prices would keep margins under pressure at
least in the near to medium term. We maintain
Neutral
on the T&D sector, with preference for Crompton
Greaves over Siemens / ABB.
Satyam Agarwal
(AgarwalS@MotilalOswal.com) +91 22 3982 5410
Deepak Narnolia
(Deepak.Narnolia@MotilalOswal.com) +91 22 3982 5126
Investors are advised to refer through disclosures made at the end of the Research Report.

Capital Goods
PWGR's order awards to plateau, but few green shoots emerging
Power Grid (PWGR) ordering is likely to plateau, as most of the 12th Plan (FY12-17)
projects have already been tendered out. However, there exist upside possibilities
from (i) green energy corridors (investment plan: INR400b), (ii) intra-state
transmission projects (as strengthening of the sub-transmission network in the states
is an important part of the chain and several states are forming JVs / MoUs with
PWGR), and (iii) substation automation (particularly post the blackouts in July 2012).
We expect project awards to accelerate in FY14/FY15. Several of these projects will
necessitate technology upgradation by Indian companies.
During YTDFY13 PWGR order awards flat YoY, excluding HVDC project
During 3QFY13, PWGR project awards stood at INR47b led by Transmission line towers with 70% share. YTD FY13
total order awards stands at INR139b, up 23% YoY and are boosted by the second HVDC order of INR25b. Excluding
the same, orders are flat YoY.
PWGR ordering: Month-wise trend
PWGR ordering: Quarterly trend
PWGR capex to plateau; project ordering to remain
impacted (INR b)
Power transformer demand showing declining trend
(MVA % YoY, TTM)
Source: PGWR /IEEMA
Green energy corridors could lead to upside surprises
Wind / solar power accounts for 17GW of installed capacity (9% share) and 3% of total
power generation.
The target is to increase wind / solar capacity to 57GW by FY07 (21% capacity share); if this
target is achieved, wind / solar power will account for 13% of total power generation.
This poses challenges, as integration of renewable power sources with the grid requires
meaningful technology and infrastructure upgradation.
Source: Report on Green Energy Corridors
2
17 January 2013

Capital Goods
Competition from imports likely to wane, but domestic competition could
intensify
In the recent months, governments across the globe have taken a tough stance towards
aggressive equipment imports, imposing anti-dumping duties / stringent conditions.
Such actions, in our opinion, have set a strong precedent. Several Chinese and Korean
players have announced plans to set up local transformer manufacturing capacities in
India - while this provides a level playing field for domestic players, it also increases
domestic capacity and the incumbents could retaliate through further capacity
expansions. Such actions could permanently alter the industry structure.
Governments globally are taking a tough stance against equipment imports
Chinese and Korean players remain active in India. They have been pricing aggressively,
despite the unfavorable currency movement - the CNY has appreciated ~45% vis-à-
vis the INR in the last five months. In the recent months, governments across the
globe have taken a tough stance towards aggressive equipment imports, imposing
anti-dumping duties / other stringent conditions:
The Indian government has imposed 21% customs duty on power project imports,
anti-dumping duty on insulators from China (35% in the first year), etc.
In May 2010, PWGR made changes to tender norms, requiring overseas equipment
suppliers to have local factories in India within three years or form JVs with local
companies.
Even globally, local governments have acted against imports. The US, for instance,
has imposed anti-dumping duty of 15-30% on Korean transformer manufacturers.
Indonesia has imposed 15% anti-dumping duty on Korean manufacturers.
Currency movement (INR v/s CNY) unfavorable for imports
Source: Bloomberg
17 January 2013
3

Capital Goods
Domestic competition could intensify, with overseas companies setting up local
capacities
Local manufacturing by Chinese / Korean players is likely to provide a level playing
field to the domestic players. Chinese players like Baoding and TBEA are already
setting up transformer factories in Gujarat. Hyosung has also approached the Andhra
Pradesh government for land to set up transformer capacities. This could, however,
result in large capacity build-up by overseas players in the domestic market. Also,
incumbent domestic players could retaliate by announcing fresh capacity expansions,
as existing plants will find it challenging to compete with large modern factories.
Overseas players remain aggressive, making in-roads into project business as well
YTD FY13, Chinese players have virtually dominated the 765kv segment, both in
the product and project businesses. The transmission line tower business is
witnessing easing of competitive intensity.
In 765kv transformers, 78% of the order awards have been bagged by Chinese
players (Hyosung: 34%, TBEA: 41%, Baoding: 6%). Crompton Greaves' market share
has dropped from ~35% in FY09 to 17% in FY12, and it has not won any orders in
YTD FY13. We understand that Crompton Greaves has not been aggressive in
bidding, as the Bhopal factory is already booked for ~1.5 years.
New North East Electric Company, one of the prominent players in GIS substations
in China, has bagged orders worth INR5b (75% of orders excluding HVDC order) in
1HFY13 for 765kv substations.
Competitive intensity in transmission line towers seems to be easing, as smaller
players are more focused on execution of existing orders. Kalpataru and KEC have
gained significant market share during the year (KEC: 34% and Kalpataru: 21%).
The combined market share of these two players has reached 50%+ in contrast to
an average of 16-22% over the last 4-5 years.
Chinese/Korean share in EHV transformer orders (%)
Chinese/Korean share in total transformer/reactor orders (%)
Chinese and Korean companies' share in EHV / total transformers remains near all-time high levels
Source: PWGR
17 January 2013
4

Capital Goods
Profitability stabilizing after significant erosion; still no signs of improvement
Profitability in power products has eroded over the last 3-4 years, with EBIT margins
declining from a peak of 15-19% in FY09 to 7-8%. This is a function of increased
competitive intensity, resulting in 25-30% decline in transformer prices. With product
prices bottoming out and prices of raw material (CRGO electrical steel) easing, margins
are showing signs of stabilization. On the back of PWGR ordering, the demand for
MVA power transformers is up ~2x from 2008 levels, while the demand for distribution
transformers continues to be at 2008 levels. We believe that power products should
see improved demand environment, given that several SEBs have raised tariffs over
the past 18 months. The financial restructuring proposals of SEBs will also lead to
improved liquidity.
Larger companies reporting revenue growth; smaller companies witnessing sharp
declines:
Smaller uncovered companies continue to show a declining trend in
revenues. In contrast, the larger companies are showing robust revenue growth,
driven by PWGR orders. Analysis of the 2QFY13 financials for 7 non-covered
companies indicates that TTM revenues are down 18% YoY (fifth consecutive
quarter showing decline). The segmental analysis for the companies under our
coverage shows revenue growth of 13% YoY in 2QFY13, up from 1-2% growth in
1QFY12. However, both ABB (Power Products) and Crompton (Power Segment)
reported significant moderation in revenue growth from 13% / 20% YoY in 1QFY13
to 3-4% YoY in 2QFY13.
Healthy ordering by PWGR v/s sluggish ordering by SEBs leading to the contrast:
The contrast in revenue growth of covered v/s uncovered companies can be
explained by the exposure of larger companies to higher rating transformers.
Healthy ordering by PWGR (largely 400kv / 765kv transformers) has been driving
revenues of larger companies; the sub-400kv segment continues to witness
volatile demand environment given the liquidity crunch at several SEBs.
Profitability remains under pressure:
Profitability has eroded over the last 3-4
years, with EBIT margins of both coverage and non-coverage companies declining
from a peak of 15-19% in FY09 to 7-8% currently. This has been a function of
increased competitive intensity, resulting in a 25-30% fall in transformer prices
and drop in sales leading to negative operating leverage. With prices showing
signs of bottoming out, particularly for higher rated transformers, coupled with
stabilizing raw material (CRGO electrical steel) prices, margins are showing signs
of stabilization, though at significantly lower levels.
Power products to see improved demand environment:
We believe that the power
products segment should witness improved demand environment, given that
several SEBs have raised tariffs in the last 18 months. Their debt restructuring
proposals will also lead to improved liquidity. Successive grid failures in the North
/ North East in July 2012 could also lead to some sense of urgency in terms of
correcting the cumulative under-investment in the sector. Coverage companies
exposed to power products include: ABB (27% of revenues), Crompton Greaves
(18%) and Siemens (15%).
17 January 2013
5

Capital Goods
Power product revenues show contrasting trends (TTM, % YoY), Power product margins have eroded, but showing signs with
coverage companies witnessing demand improvement
of stabilization (% EBIT margins, TTM)
Source: Company, MOSL
CRGO steel prices softening; positive for transformer companies Transmission Line profitability underpressure, sales growing
Source: Company, IEEMA
Our view:
Competitive intensity in the Indian T&D equipment sector remains high.
We believe that low product prices would keep margins under pressure at least in
the near to medium term. We maintain
Neutral
on the T&D sector, with preference
for Crompton Greaves over Siemens / ABB.
Comparative Valuations
M-Cap
CMP
EPS (INR)
P/E (x)
EV/EBITDA (x)
RoE (%)
(USD b) (INR) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E
ABB#
Neutral
2.8
686
8.6
13.2
22.2
79.4
51.8
31.0
43.4
30.4
18.9
7.0
10.1 10.1
BHEL
Neutral
10.6
225
25.8
18.5
11.8
8.7
12.2
19.2
5.3
7.0
9.3
22.9
14.5 14.5
BGR Energy Neutral
0.4
260
21.3
22.0
23.0
12.2
11.8
11.3
7.4
6.5
6.8
13.2
12.7 12.4
Crompton
Buy
1.4
117
3.0
8.9
13.7
39.5
13.1
8.5
13.9
8.0
5.4
5.2
14.7 20.1
Cummins
Buy
2.7
504
23.8
28.1
32.3
21.2
17.9
15.6
15.3
12.3
10.6
30.3
31.8 32.3
L&T
Buy
17.9 1,528
88.6
96.7 113.2
17.2
15.8
13.5
14.3
12.1
10.4
17.8
17.2 17.6
Siemens## Neutral
4.2
652
17.7
23.1
29.3
36.7
28.2
22.2
19.2
15.4
12.6
14.7
17.9 20.4
Thermax
Neutral
1.4
603
26.0
29.2
38.9
23.2
20.6
15.5
14.7
11.2
8.2
17.8
17.8 21.0
Havells
Buy
1.6
668
30.9
40.0
47.4
21.6
16.7
14.1
10.5
10.4
8.5
38.5
28.6 27.0
# Year end December; ## Year end September
Company
Rating
17 January 2013
6

Capital Goods
Gallery

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