Not very bright

Even if the proposed duty on imported power equipment is levied, there is little upside for domestic players.

Domestic power equipment manufacturers such as Bharat Heavy Electricals (BHEL) and Larsen & Toubro (L&T) (which currently account for a major chunk of existing equipment capacity) are facing rough weather as cheaper Chinese and Korean manufacturers make inroads in India. To ensure a level-playing field for domestic players, the government recently circulated a draft Cabinet note proposing a 14 per cent import duty on power equipments for thermal projects above 1,000 Mw. The new duty structure, if approved by the Cabinet, is likely to be rolled out from April 2012 and will exempt all orders placed before the import duty notification. At present, projects with less than 1,000 Mw attract a five per cent import duty, while the rest enjoy duty-free imports.

However, there is a strong probability the Cabinet may not approve the proposal, given the grim power generation scenario. With the rupee depreciation, imports have become expensive. Equipment forms 50 per cent of the total cost of a power generation project, and the duty will increase the cost of equipment further, making power more expensive.
 

OVERSUPPLY WORRIES
	BHEL	L&T
Net sales	44,195	47,128
Y-o-Y change (% )	24.6	21.8
Operating profit	8,412	5,482
Y-o-Y change (% )	34.9	14.6
Adjusted net profit	6,429	3,898
Y-o-Y change (%)	34.2	12.1
Note: Data for trailing four quarters ending September 2011 (Rs crore) Source: Capitaline

Even if the proposal is approved, it is unlikely to benefit the power equipment players substantially. A significant part of the equipment orders for capacity addition in the 12th Plan are already placed and 50 per cent have been captured by Chinese vendors, against 30 per cent in the current Plan.

Despite questions raised about the quality of Chinese equipments, private players such as Reliance Power, Adani Power, Lanco and JSW Energy have placed huge orders with companies like Shandong Electric, Shanghai Electric and Doosan.

Chinese equipment is better in pricing and delivery compared with Indian players like Bhel. It is 20 per cent cheaper than domestic equipment, partly due to lower interest rates in China and an undervalued currency. Also, Chinese firms deliver in three years, unlike Bhel's delivery in four.

The other issue is there are not enough orders in the pipeline for domestic equipment players. Amit Mahawar, analyst, Edelweiss Securities, sees huge over-capacity and a limited order pipeline over the next three years. "We expect the overall potential of the domestic boiler-turbine-generator market to radically reduce over the next two years, given the limited pending pipeline and increasing coal issues," he adds.

In the medium term, the domestic equipment making capacity is expected to exceed demand. Anjan Ghosh, head, corporate ratings, ICRA, believes the annual demand for coal(thermal)-based capacity till FY 2022 is estimated at 15,000 Mw, against the estimated capacity of 35,000 Mw that will come up by FY 2014. By then, analysts expect the power deficit to ease, given the huge supply coming from new projects being set up by NTPC and Tata Power, which will lower the incremental demand for equipment.

Analysts continue to remain negative about the fundamentals of the power equipment sector and concerns about order visibility remain. The entry of Doosan (a Korean firm) in the Indian market and its success in bagging orders for five boilers in NTPC's second phase of bulk tender (nine units of 800 Mw each) has added to domestic players' woes.

Despite Bhel trading at its all-time low valuation of nine times FY13 estimated earnings, analysts are negative on the stock. Says Arun Kumar Singh, analyst, HSBC, "Growth in order inflow for FY12 is a challenge. The long-term outlook for inflow remains uncertain, given the fuel pressure and competition from both domestic and global peers."

Larsen & Toubro, which is among the new private sector entrants in the equipment business, is also not favoured mainly due to the drastic revision in FY12 order inflow growth guidance (for overall business) from 10-15 per cent in the beginning of the fiscal to five per cent in the September quarter, and the broad economic downturn affecting its diverse presence across the infrastructure sector.