Driven by strong demand for power generation and transmission & distribution (T&D) equipment coupled with the “power for all by 2012” programme by central government, the outlook for the country’s power equipment industry in 2010 will be stable, Fitch Ratings stated.
With more international players increasing their focus on the fast-growing Indian market, the competition has intensified. This could potentially put pressure on margins over the medium term, with new players bidding aggressively in order to gain market share.
Competition could also heat up due to the capacity expansion undertaken by domestic T&D players. Fitch expects that this could put pressure on margins for T&D equipment makers and moderate the positive factors arising from demand growth. Working capital pressures could also arise, especially for those companies with substantial sales to state power utilities (SPUs).
Apart from this, margin pressures could also arise due to higher raw material prices (primarily steel and copper), although the impact is partly offset as a portion of the price is passed on to customers via price escalation clauses in the customer contracts. The power transformer segment in the higher technology space will face heightened competition and capex. It is believed that higher margins should prove merely a temporary phase as raw material expenses could increase in the first half of 2010.
According to Fitch, the distribution transformer segment will see growth but will face over-capacity and fluctuations in raw material prices which will lead to contraction in margins. It is expected that revenue growth for the power generation equipment sector will remain strong due to the government-backed programmes that supports investment in power generation. This can also lead to fresh capex plans to cope with the demand. However, working capital will also rise due to the revenue growth and longer order cycles – leading in turn to higher debt, although leverage would be moderated by the growth in revenues.
The Ebitda margins could come under pressure from any fluctuations in raw material prices, intensified international competition and long delivery schedules. Any continuation of the current low import duties on power generation equipment could also have an adverse impact on margins. The government-backed programme has helped the major power generator equipment manufacturing firms to build a strong order-book position.
Given the strong demand expectations, firms have undergone significant capex and are still in an expansion phase. Bhel has ventured into the super-critical turbine space and expects substantial business from this segment in the medium term. Despite stiff competition from both domestic and global companies, Bhel has retained its market leadership position with a 54% share of the available orders.
Many players have announced substantial increases in capacities, which increased pressure on margins due to a slight overcapacity in the distribution transformer space over the past year. Raw material prices, especially for steel and copper, are critical for companies in the sector, and account for around 65-75% of total sales.