Transmission and distribution bright spot

Even as prospects for power generation remain weak, T&D segment offers hope for investors

The power transmission and distribution (T&D) sector is one of the major beneficiaries of the Railway and Union Budgets this year. The Railway Budget provisioned for 2,000-km electrification of lines and the finance minister allocated Rs 8,000 crore for full electrification of villages by 2018. All these bode well for companies in the T&D space, such as KEC International, Kalpataru Power, ABB India, Alstom T&D, and Power Grid Corporation.

In fact, the power sector is seeing substantial changes since the start of the year, which will accrue gains for the next couple of years. Seven states have signed up for the Ujwal Discom Assurance Yojana (UDAY), a financial turnaround package for state power distribution companies (discoms). The estimated net benefit, including savings on interest costs and technical and commercial losses, is at Rs 76,400 crore. The amount saved would help discoms strengthen their networks and expand to less-developed regions.

  So far, 5,537 villages have been electrified in FY16, nearly 80 per cent of the government's target for this financial year. As of January, 75 per cent of the planned transmission lines or 107,440 km during FY13-17 had been built.

CARE Research expects orders of Rs 14,794 crore from T&D companies to materialise in FY17. Then, there is Power Grid’s annual capital expenditure plan of Rs 25,000 crore. The bigger boost will accrue when orders from state electricity boards start flowing in due to UDAY. All these point to the progress so far and the opportunity. A report by Elara Capital indicates order flows, Rs 2,560 crore in January, almost nine times more than a year ago, for T&D companies are at their peak; year-to-date order flow, too, is up 29 per cent year-on-year at Rs 17,160 crore, with Kalpataru, KEC and Siemens being major beneficiaries.

As for earnings, apart from Power Grid, which saw a 22 per cent and 31 per cent year-on-year growth in revenues and profits, respectively, KEC and Kalpataru posted a relatively weak set of results in the third quarter of FY16.

Delay in conversion of new projects to revenues, exposure to international markets such as West Asia and Brazil, and a fall in prices of copper, trimmed their earnings in the December quarter. However, with future prospects improving, the road ahead is reassuring for the companies, with analysts expecting them to post strong earnings growth in FY17 and FY18.