Nov 09, 2017 06:45 PM IST | Source:

India power transmission: Are investors missing the wood for the trees?

PGCIL is facing challenges because of the new rules which call for competitive bidding. Earlier, the government used to hand projects on a platter to PGCIL. The change in rules is hurting PGCIL.

Jitendra Kumar Gupta @jitendra1929
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In FY17, Power Grid (PGCIL) awarded projects worth around Rs 30,000 crore, compared to Rs 16,000 crore of projects the year before. The PGCIL management has clarified that this spurt is an aberration which usually happens in the last year of the Five Year Plan as state-owned firms try to meet targets.

The management has cautioned about further moderation in project awarding over the next two years.

PGCIL is facing challenges because of the new rules which call for competitive bidding. Earlier, the government used to hand projects on a platter to PGCIL. The change in rules is hurting PGCIL.

It is worrying to think of a scenario where the annual awarding of projects by PGCIL drops to say FY15 or FY16 levels. That could imply about Rs 12000-15000 crore reduction in projects awarded over the next two years. So what does this mean for power equipment companies which get a good chunk of their orders from PGCIL?

Short-term jitters

While investors have already started fretting, the good part is that these are short-term hiccups and the market is overlooking the long term opportunities in the sector.

"There is a shift underway; instead of PGCIL, the orders are coming from state utilities, private players, railways and renewal energy space," said management of GE T&D (formerly Alstom T&D India) on an investors’ call.

GE T&D, which is the leading player in the power transmission and distribution space, saw a 41 percent drop in its order inflows to Rs 730 crore during the September quarter. The orders that it got were mostly from from private sector companies like Amara Raja Power, ABB, CPCL and few others. GE T&D is not alone; others like KEC International too reported a 54 percent drop in order inflows to Rs 1,110 crore during the quarter gone by.

Shift from interstate to intra-state

While private capex is one avenue, the companies are waiting for the opportunities from state governments lining up intra-state transmission projects. A large part of the Rs 2.6 lakh crore to be invested in transmission sector during the FY17-22 (estimated to be 50 percent or Rs 1.3 lakh crore or about Rs 26000 crore annually) has been earmarked for intra-state transmission capacity. Government’s focus is now on providing last mile connectivity and electrifying villages.

The other important segment that is coming up for the bidding is railway electrification. This year the government intends to electrify close to 4000 route km (Rkm) of its railway lines, which is a quantum jump as against the electrification of 2500 Rkm last year. It is estimated that close to 66 percent of the current railway network of 70,000 km is yet to be electrified. The Railway Ministry is estimated to spend around Rs 35,000 crore to meet its target of electrifying its entire network by 2022.

During the analyst call, Vimal Kejriwal, MD and CEO of KEC International, said there was some slowdown in orders because of the GST and deferment of railway projects, but the company is hopeful of pickup in activity. KEC International, which has about 25 percent market share in railway electrification, received orders worth Rs 140 crore in the first half of FY18. It has submitted bids of close to Rs 7000 crore and is hoping to get orders worth Rs 2000 crore in FY18.

Strong revenue visibility

When one adds up the investment amount as mentioned to be spent in other markets or non-PGCIL customers, there is enough and more for private power equipment players. Even if there is some slowdown anticipated, the other important point is that the companies in the T&D sector are sitting on good revenue visibility because of the strong outstanding order position. Companies like KEC International, Kalpataru Power, GE T&D and others are all sitting on orders worth about two times their revenues in FY17.

Shifting to more risky clients

One pitfall of this shift in business towards the non-PGCIL clients, is that if companies rely too much on the state-run utilities and projects, they might face working capital issue and increased pressure on the balance sheet because of the poor financial health of most states.

For more research articles, visit our Moneycontrol Research Page.
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