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Jan 18, 2013, 05.54 PM IST | Source: Moneycontrol.com

Capital Goods: Prefer Crompton over Siemens, ABB, says MOST

Motilal Oswal has come out with its report on capital goods sector. According to the research firm, competitive intensity in the Indian T&D equipment sector remains high. The low product prices would keep margins under pressure at least in the near to medium term. Prefer Crompton Greaves over Siemens, ABB, says MOST.

Motilal Oswal has come out with its report on capital goods sector. According to the research firm, competitive intensity in the Indian T&D equipment sector remains high. The low product prices would keep margins under pressure at least in the near to medium term. Prefer Crompton Greaves over Siemens , ABB , says MOST.

Capital Goods: 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.

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.

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.

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.

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

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