| The upturn in the power equipment business is well known and it has helped large players in the business to report sharply improved performance in the last quarter "� Bhel reported a 452 per cent y-o-y growth in its net profit to Rs 127.87 crore while ABB India's net has grown 42.5 per cent y-o-y to Rs 43.6 crore. |
| In addition, the upsurge in the capex cycle in the power industry has translated into sharply improved outstanding order-books for the most of the leading equipment suppliers at the end of the June quarter "� Bhel's order-book grew 9.3 per cent y-o-y to Rs 30, 600 crore, while ABB's expanded 43 per cent to Rs 1,857.5 crore. |
| Meanwhile, Siemens India's order value was Rs 3,446.3 crore, an increase of 79 per cent on a y-o-y basis. |
| Growth opportunities in this industry have not gone unnoticed by the Street and both domestic mutual funds and foreign institutional investors have been hiking their stake in leading equipment players. |
| As a result, stocks in this segment have outperformed the Sensex over the past four months "� in the case of Bhel there has been a growth of 34 per cent as compared to a 20 per cent growth in the broader market. Similarly, Siemens India has also appreciated 36 per cent over the past four months. |
| What's driving power equipment companies? The government has an ambitious goal: 'power for all by 2012'. This would require enhancing the country's power capacity from the current 114, 000 mw to around 200, 000 mw by 2012. Capacity additions to the extent of 41, 000 mw have been earmarked for the tenth plan (2002-2007 ). Of this, over 50 per cent is either commissioned or in the final stages of commissioning. |
| And with the current demand for power surging, thanks to the well-documented upturn in the industrial sector, power companies are in the midst of an unprecedented surge in the capex cycle. |
| As a result, segments and companies that supply to the power sector such as power equipment companies are now witnessing a substantial improvement in their operating environment. |
| Another growth trigger for the power sector has been the Electricity Act 2003, which envisages the unbundling of generation, transmission and distribution functions and the gradual phasing out of cross-subsidies. |
| Taking into account the dominant position of the leading equipment suppliers, analysts expect these companies to garner a lion's share of the growth opportunities. |
| But then, there are some obstacles, too. Raw material costs especially steel and allied inputs have been eating into the margins of equipment suppliers. In the case of Bhel, raw material costs rose 27.68 per cent to Rs 2,569.32 crore in FY05, even as a percentage of net sales, it rose 101 basis points to 51.72 per cent. |
| These concerns have not been mitigated even in the June quarter, as the PSU company saw a 94.38 per cent increase in raw material costs to Rs 1,073.94 crore. Also, as a percentage of net sales, raw material costs rose 745 basis points to 50.74 per cent. |
| However, steel prices have reduced in the last few months and it has helped players like ABB to see their raw material costs rise just 28.64 per cent on a y-o-y basis in the June quarter as compared to a growth of 40 per cent in the earlier quarter. |
| Going forward, it is anticipated that other equipment companies would also be able to manage input costs better. Here is how the leading players have fared. |
| Bhel Bhel had grown its net profit by 452 per cent to Rs 127.87 crore in the June quarter, riding on the back 11.5 times growth in the segment profit of the industry business to Rs 44.03 crore. Net sales grew 65.8 per cent in the last quarter. |
| To offset rising material costs, the company has focused on productivity gains and kept a tight check on staff costs "� staff costs as a percentage of net sales fell 997 basis points to 19.44 per cent in the last quarter. |
| As a result, operating profit rose 484 per cent to Rs 159.24 crore in the last quarter and operating profit margin expanded 540 basis points to 7.53 per cent. The stock has gained 28 per cent over the last three months and it currently trades at about 20 times estimated FY 06 earnings. |
| Siemens India Siemens reported a drop in growth rate last quarter compared to the previous two quarters. Operating income grew 33.6 per cent to Rs 612.6 crore in the June quarter, which is the third quarter for the company. |
| In comparison, operating income had increased 56.7 per cent in the first six months of the fiscal. Even profit growth fell to 18.1 per cent at the pre-tax level, compared to a 62.4 per cent in the six-month period ended March 2005. |
| Operating margin fell by 216 basis points last quarter, again in contrast with the 170 basis points gain reported in the first six months. The drop in margin was not on account of rising raw material costs. |
| These expenses actually fell by 250 basis points as a percentage of operating income. Steel prices have been easing over the last few months and it appears to have helped the company manage this cost better. |
| Margin fell because of a 430 basis points jump in 'other' costs, which is surprising because these expenses had been reduced by over 300 basis points in the first half of the company's financial year. As a result, operating profit grew merely 7.7 per cent to Rs 54.97 crore last quarter |
| ABB India ABB grew its net profit by 42.5 per cent on a y-o-y basis to Rs 43.6 crore in the June quarter which was slower than the 62.62 per cent y-o-y growth recorded in the March quarter. |
| Net sales growth has slowed from 37.64 per cent on a y-o-y basis in the March quarter to 27.3 per cent in the June quarter. |
| However, reduced steel prices have helped the company to manage its raw material costs better in the June quarter "� raw material costs rose just 28.64 per cent on a y-o-y basis to 476.74 crore in the June quarter compared to a growth of 40 per cent in the earlier quarter. |
| Nevertheless, operating profit margins grew merely 67 basis points on a y-o-y basis in the June quarter to 9.16 per cent. Growth momentum for the company is also expected from an expanding share in the parent's outsourcing pie. The stock currently trades at about 33 times estimated CY05 earnings. |
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