Prefer Crompton Greaves, Kalpataru Power: P Lilladher

Prabhudas Lilladher's report on capital goods space

"We analyzed Power Grid (PWG) ordering for Q1FY14. The key trends are as follows: 1) Ordering for Q1FY14 was down 46 percent YoY at Rs32.8bn 2) Equipment ordering remained weak in Q1FY14; bundling of transformer with sub-station order could have led to weakness 3) We learn that PWG is likely to become stringent about the domestic manufacturing clause and hence, could see some moderation in the Chinese market share in the Equipment market 4) TL & Sub-station dominated ordering 5) Crompton Greaves dominated transformer/reactor ordering 6) KEC International and Kalpataru Power dominate TL segment with ~90 percent market share in Q1FY14 7) Large part of sub-station ordering was GIS-based 8) Foreign players commanded high market share in sub-station ordering. Crompton Greaves and Kalpataru Power Transmission are preferred picks in the transmission & distribution (T&D) space."

"PWG ordering for Q1FY14 remained subdued. Ordering for Q1FY14 stood at Rs32.8bn (down 46 percent YoY). The trend in ordering is more evenly spread through the year against an earlier trend of Q4 being the quarter in which most of the awarding is done. Transmission EPC continued to dominate ordering in Q1FY14 with 38 percent share In the overall ordering, Substation (33 percent) and Equipment ordering remained weak with a market share of 2 percent in Q1FY14 (Exhibit 1). We expect the FY14 ordering for PWG in the range of Rs160-170bn (0-6 percent growth YoY)."

"Transmission orders continue to command high share in the overall ordering in PWG (32 percent in Q1FY14). The trend of consolidation which was visible in FY13 continued even in Q1FY14, with players like KEC/KPP gaining significant market share (Exhibit 3). KEC/KPP had 90 percent market share in the overall ordering in Q1FY14. Our interaction with the industry players indicate that the domestic market has seen consolidation as currently only four other players have general qualification (no restriction of number of projects that can be bid upon) along with PWG, while various restrictions have been imposed upon a lot of players who have not performed in the past. We believe that the competitive intensity decreased due to the fact that PWG stopped opening bids of a lot of players who were not performing in terms of execution. Also, people who had taken orders at low margins are draining financially and hence, refraining from ordering. We believe this trend of increasing market share and lower competition would augur well for margins of players like KEC and Kalpataru, going ahead."

"Transformer/Reactor orders continued to be weak, with total orders in Q1FY14 standing at Rs2.7bn, bundling of transformer order with sub-station orders in Q1FY14 also could have led to lower standalone equipment ordering. While Chinese players dominated transformer market, with market share of 40-45 percent in FY13 (Exhibit 7), we learn that with PWG becoming stringent about the domestic manufacturing clause, we could see some moderation in the Chinese market share in transformer ordering. Crompton dominated the ordering in Q1FY14 with 97 percent market share. Commentary for industry players suggest that prices have stabilized at lower levels and not falling further; however, we are yet to see any uptick in prices."

"Substation orders contributed 33 percent to PWG’s Q1FY14 overall ordering. However, for FY13, contribution stood at 35 percent largely due to a single huge HVDC orders worth Rs25bn. We note substation ordering is largely dominated by GIS substation. The dominance of foreign players in substation market, especially GIS substation, is very high. In Q1FY14, foreign players commanded market share of 67 percent. We saw entry of new player Pinggao Corp - a Chinese company in Indian markets. Hyuosung continued to bid only in GIS substation market and win orders. With markets moving towards higher KV and GIS, we expect larger players to start gaining market share after fragmentation seen over last year," says Prabhudas Lilladher research report.

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