Sector Update | 17 October 2017

Diesel Gensets

Please refer our report dated

18 August 2017

MHP and HHP segments driving growth

Competitive intensity high with resultant pricing pressure

We interacted with a few diesel genset manufacturers/OEMs to get a sense of the

demand environment, competitive intensity and resultant pricing pressures being

witnessed across ranges. Our key takeaways:

Expect 5-7% volume growth, led by MHP/HHP segments

n

Post a bottom in FY17, the diesel genset industry is likely to grow at 5-7% in the

medium-to-long term. The sector is in mature stage and is starting to see

consolidation with 4-5 players likely to remain over the next few years. The 5-7%

volume growth in 1HFY18 will be sustained as economic growth starts improving.

n

Historically, it was power cuts that drove diesel genset volumes; now, it is new

infrastructure creation/capex that is driving growth for diesel gensets.

n

Growth in the LHP segment is subdued. Earlier, volumes in this segment used to

grow by 15-20% on high power cuts. With power cuts lower now, volume

growth has tapered down. The LHP segment (ex Telecom) should see 4-5%

volume growth over the next 3-5 years. Solar power and increasing reliance on

batteries for backup power are also impacting demand for LHP diesel gensets.

n

Over the medium term, demand should grow at a CAGR of 10% in the MHP

(375-750kva) segment and 12-15% in the HHP segment.

New capacity creation/capex is the key driver for growth

n

As was the case earlier, demand for HHP diesel gensets (>750kva) continues to

be dependent on new capex. Key end markets driving HHP demand are

Data

centers, Infrastructure(Metro), Industrial/ Manufacturing, IT/ITES

n

Demand for LHP sets is likely to be subdued on a fall in telecom towers being

installed. Telecom towers will see a drop from next year (30000-40000 units

currently) as capex by Reliance JIO tapers off

n

Demand from real estate is weak but a revival is expected in the next one year.

Currently, both commercial and residential are declining but expect commercial

to start reviving soon

Competitive intensity high – LHP players shift focus to MHP/HHP segment

n

The industry is getting into a mature phase and going through consolidation –

only 4-5 players will remain in the market, with the small players going out.

n

Earlier, Cummins India (KKC) enjoyed a monopoly in the HHP segment. Recently,

Perkins and KOEL have also entered the HHP ranges. KKC has been forced to cut

prices in the MHP/HHP segments with increased competition.

n

Entering into the HHP segment is not easy. Building the technology is difficult

and the Indian market is too small to justify the investment. KKC has been in this

segment for long and its products are much more reliable. Its competitive

advantage is supported by volumes, distribution, and service.

n

Margins/pricing will remain under pressure, with more players trying to enter

the MHP/HHP segment. In the medium to long term, manufacturers will need to

have a presence across LHP/MHP/HHP ranges to be competitive.

8 August 2016

1

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Ankur Sharma – Research Analyst

(Ankur.VSharma@MotilalOswal.com); +91 22 3982 5449

Amit Shah – Research Analyst

(Amit.Shah@MotilalOswal.com); +91 22 3029 5126

Capital Goods

Cummins well prepared to maintain market leadership

KKC has, over the years, developed (a) strong product portfolio with superior

technology to meet domestic demand, (b) wide distribution network to provide

superior after sales service to customers, and (c) cost-effective products to maintain

leadership in a fiercely competitive market. Given strong infrastructure push, initial

signs of pick-up in the power genset segment, and expected revival in the export

segment from 2HFY18, we maintain our

Buy

rating on the stock, with a target price

of INR1,170 (32x June 2019E EPS; in line with 5-year average). The stock trades at

34x FY17 EPS of INR26.5, 32x FY18E EPS of INR27.7, and 25x FY19E EPS of 35.

Exhibit 1: Diesel gensets – recovery from FY17

17%

DG Industry sales (INRm)

22%

-9%

-23%

-6%

-1%

YoY (%)

11% 13% 12% 13%

Exhibit 2: KVA-wise volumes (95% volumes generated in the

(15-375kva segment)

15-75kva

175,000

140,000

105,000

70,000

35,000

0

75-375kva

375-750kva

750kva and above

5%

Source: MOSL, Company

Source: MOSL, Company

Exhibit 3: Market share of industries in the 375-750kv

segment

Exhibit 4: Market share of industries in the 750-2000kv

segment

15.9%

4.0%

31.2%

Large Industries

Hospitality

Healthcare

IT/ITES

Others

9.2%

0.8%

IT/ITES

Large Industries

56.1%

Real Estate

Others

18.7%

30.2%

33.9%

Source: MOSL, Company

Source: MOSL, Company

Exhibit 5: Cummins has been able to retain its market leadership, given wide product

portfolio, strong after sales service, and wide distribution network

Cummins Power Gen sales

30%

31%

30%

34%

34%

Market share(%)

36%

39%

32%

33%

38%

21%

26%

Source: MOSL, Company

17 October 2017

2

Capital Goods

NOTES

17 October 2017

3

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October 2017

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