Genset demand remains strong even as prices go up by 20-40% on technological shifts; Here are key monitorables for coming quarters

With summer months round the corner, genset players indicated that demand is fairly strong across key segments and the companies in the sector are ready for the emission shift as well. According to a report by Motilal Oswal Financial Services Ltd, inventory levels for Central Pollution Control Board (CPCB) II based gensets will start coming down from April 2024 onward as production for CPCB 2 based gensets has already stopped. The report also stated that taking into account the technological shift, the genset players said that the price is up by 20-40 per cent across nodes and they expect it to be passed on to consumers fully from July 2024 onwards. 

Earlier, the Central Pollution Control Board in collaboration with the Ministry of Environment and Forest had laid down fresh emission regulations for diesel genset and the standards applied to all the sets assembled, manufactured and imported to India. Per the new guidelines, the emission of oxides of nitrogen and hydrocarbons in a diesel generator with up to 8 kW power should not exceed 7.5 g/kWh and the emission of carbon monoxide should not exceed 3.5 g/kWh and the particulate matter should be under 0.30 g/kWh. Further, for generators between 8 kW and 19 KW power, the emission limits of oxides of nitrogen and hydrocarbons have been decreased. 

Demand remained strong

Motilal Oswal Financial Services’ channel checks with genset industry players indicated that domestic demand momentum remains strong across low-to-mid kVA ranges, driven by strong activity across manufacturing, hospitality, residential and commercial construction. The demand momentum, it added, is also contributed by pre-buying in the low-to-mid kVA range ahead of the norm implementation, particularly from residential and commercial segments. Low-to-mid kVA range forms nearly 70-75 per cent of the overall genset market. High Horsepower (HHP) range forms the remaining market, and data centres are a key growth driver for HHP genset, which is growing at a faster rate than low-to-mid range gensets.

Currently, the report stated, nearly 80 per cent of the genset sales are coming from CPCB II products and the remaining from CPCB IV+, particularly from NCR. However, the inventory levels for CPCB II will start coming down from April 2024 onwards as the production will then shift to CPCB IV+. Most government contracts are already mandating the usage of gensets based on latest norms. Furthermore, the report also said that the government contract-based demand may see minor disruption during the election months. 

Prices up due to technological shift

“We see only a limited possibility of a pricing war for CPCB IV+ products as the main motive of all players is to cover the costs first, which are up by nearly 20-40 per cent owing to the technological shift. Hence, the buffer to take a hit in margins is limited,” said Motilal Oswal Financial Services. It further added that volume market shares of KOEL, Cummins, and Mahindra Powerol have increased in the past few years, thereby negating the possibility of aggressive competition to gain market share. These three players form nearly 70 per cent of volumes in the market. Also, strong demand may continue to support higher pricing unlike the last transition when demand was weak, the report stated. 

A strong distribution network to go a long way

The report said that new players or foreign players may not have as strong a distribution network as Cummins and KOEL have, and hence it will be an advantage for these players despite higher product prices. Aftermarket demand for CPCB IV+ will start kicking in over the next 6-9 months after the launch, it added. 

Export markets bottomed out 

With demand slowdown in key export markets such as the US, Europe, Latin America and the Middle East, Cummins’ exports were impacted and the company is trying to grow exports via fit-for-market products and the penetration of CPCB IV+ products. KOEL is targeting to grow its exports in MHP and HHP range and is setting up GOEMs in key regions. The export markets in less than 125 kVA range are highly commoditized, with a larger share of Chinese imports and thus, both these companies are focusing on higher ranges for exports, said Motilal Oswal Financial Services report. 

Key monitorables 

Going forward, genset market will remain mixed over the next few months owing to several events such as election impact, transition to new norms, and expected private capex recovery in select sectors. The key factors to watch out for in coming quarters are, 1) the impact of election-related disruption in genset demand during May-Jun’24; 2) the implementation of CPCB IV+ norms in July 2024 and demand shift from higher nodes of CPCB IV+ (700-750 kVA) to cheaper nodes of CPCB II in higher kVA categories such as 800-1000 kVA; and 3) price stabilization in the next one year as operating leverage kicks in.