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Last Updated : Jan 17, 2018 04:37 PM IST | Source:

Budget 2018: Order book to grow, profitability to also improve

CRISIL expects that Budget 2019 will continue the focus on allocations to power T&D, UDAY schemes, railways and other transportation areas, as well as renewable energy, which are central to the capital goods segment.

Crisil Research
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CRISIL Research expects revenue growth to be driven by segments like power T&D, transportation and renewables while the conventional BTG segment faces subdued demand due to a slowdown in the conventional power segment.

As a consequence, while order book accretion has been slow for weakly diversified players like BHEL, overall, players with presence in other areas have seen good growth.

Consequently, order book is expected to improve gradually in medium-to-long term, led by large investments in power transmission and distribution (T&D) segment.

• Higher investments by central transmission utility, Power Grid Corporation of India Limited (PGCIL), in augmenting interstate transmission lines (from 75 GW in fiscal 2017 to 118 GW by fiscal 2022) are expected to drive additions.

• Further, Cabinet Committee on Economic Affairs (CCEA) has approved Rs 440 billion for Deen Dayal Upadhyay Scheme (DDUGJY), of which the Centre will contribute Rs 354 billion; the scheme will also subsume the Rajiv Gandhi Yojana (RGGVY) budget of Rs 392 billion. DDUGJY aims to improve rural electrification and separation of feeders and thus power delivery.

• CCEA has also approved outlay of Rs 440 billion for the Integrated Power Development Scheme (IPDS), with budgetary support of Rs 227 billion. IPDS, aimed at strengthening and metering of urban T&D systems, has subsumed R-APDRP (budget: Rs 326 billion).

• Higher investments in renewable energy segment, railways and metro projects will also support order inflows. Additionally, the government is going full speed on the Rs. 1.6 trillion electricity access scheme – Saubhagya, with stringent targets to be fulfilled by December 2018.

• Demand from the boiler, turbine and generator (BTG) segment will, however, remain low due to weak power demand and stretched financials of power generation players.

• Competition from Chinese players remains intense in the BTG and T&D equipment segments. In 9M FY’18, share of Chinese/Korean players in PGCIL substation orders was at 36 percent, similar to their 37 percent share in fiscal 2017. Further, nearly 33 percent (36.3 GW) of BTG orders placed over the 12th Plan Period – April 2012-March 2017 – were also bagged by Chinese equipment suppliers, despite imposition of customs duty; they have won 18 percent (2.2 GW) of all BTG orders in YTD fiscal 2018 (till November 2017). Price competitiveness remains a key advantage for such players and with a few already having set up or planning to set up units in India, competition may intensify with increased access to domestic market and treatment as domestic produce instead of imports.

  • Operating margins improved 370 bps to 6.4 percent in fiscal 2017 over fiscal 2016, with several players undertaking cost-rationalisation measures (localisation of sourcing, high-margin order execution, changing product mix, etc). Margins in the first half of fiscal 2018, at 4.2 percent, were similar to those in first half of fiscal 2017 (4.37 percent).

Capital goods firms have been focusing on fast order execution, especially short-cycle orders from segments like railways, solar and industrial products. However, working capital cycles remain high for the segment, especially due to high debtor days originating from weak customer profile in the power generation segment which is witnessing a slowdown. Going forward, margins are expected to rise due to execution of orders in other segments such as substation, transformers, solar, railways, and T&D as well as continued efforts towards indigenisation.

Budget expectations

CRISIL expects that Budget 2019 will continue the focus on allocations to power T&D, UDAY schemes, railways and other transportation areas, as well as renewable energy, which are central to the capital goods segment. Duty changes, such as input duty exemptions, are also desired by the industry.


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First Published on Jan 17, 2018 03:41 pm
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