Margin concerns for boiler-turbine-generator makers

The outcome of NTPC’s Phase-II bulk tender (nine units of 800 Mw each) confirmed analysts’ fears of rising competitive pressures in the boiler-turbine-generator (BTG) industry. Between boiler (B) and turbine-generator (TG), competition was higher in the latter because there were fewer players in the boiler space (Doosan Heavy Industries, Thermax and Bhrat Heavy Electricals LTd (BHEL).

The second lowest bid (L2) in the TG portion of the order was very close to the lowest bid (L1) of about Rs 1 crore per Mw, where BGR Energy emerged as the winner for five TG units; L&T got orders for two, while BHEL won orders for two TG units and four boilers. The event also indicated that competition has intensified given the average price per mw quoted for TG in phase-2 being 30 per cent lower than the average bid quoted in phase-1 (11 units of 660 Mw each).

In this backdrop and slowing economic growth, analysts continue to be bearish on the space. Though BGR Energy is relatively better placed in terms of the orders in the pipeline, its impact on financial performance is a concern. Entry of South Korea-based Doosan is a bigger threat to BHEL (whose power equipment business accounts for over 60 per cent of revenues) than Larsen and Toubro (L&T) thanks to the latter’s diversified business model. However, L&T’s order inflow growth guidance needs to be monitored given the macro headwinds.
 

HOW THEY STACK UP
Standalone FY12  estimates (Rs  crore)	L&T	BHEL	BGR Energy
Net sales	53,017	47,325	5,190
% chg	20.7	11.4	9.3
Operating profit	7,084	986	595
% chg	26.5	10.0	11.0
Net profit	4,297	6,679	333
% chg	16.9	23.4	3.1
EPS (Rs )	71.0	136.0	46.5
% chg	16.9	23.0	3.1
P/E (x)	18.3*

12.2 7.6 % change is over FY11; * Consolidated; Source: Analyst reports

RISING COMPETITION
The L1 position of Doosan in the boiler segment of the bulk tender has sent out warning signals, say analysts. Venkatesh Balsubramanium, analyst, Citigroup Global Markets wrote in a recent report: “Doosan has issued a warning to other domestic boiler manufacturers or Chinese players, given they will now have manufacturing capacity (3,000 Mw) in India and will be relatively better off on royalty and technology costs.” Agrees Shilpa Krishnan of J P Morgan: “We would count Doosan as a significant domestic competitor for BHEL and L&T.” Doosan has previously won orders from Tata Power (4,000 Mw UMPP), NTPC (1,980 Mw) and GMR (1,320 Mw).

On the other hand, the power equipment market has slowed down significantly over the last 6-9 months due to execution challenges faced by the power generation sector, including fuel risk (price and availability) and concerns over the financial health of state electricity boards (SEBs) as well as changes in foreign government policies (like the one by Indonesia over benchmarking of coal prices for export).

With a majority of BTG orders for the 12th plan (2012-2017) already placed, analysts expect paucity of large order inflows except for NTPC’s bulk tender (phase I) and Rajasthan SEB (Rs 12,000 crore project).

In the medium-term, the industry is also expected to witness overcapacity thanks to the entry of new players, including Chinese companies. Says Anjan Ghosh, analyst, Icra: “The annual BTG equipment demand for coal-based capacity until FY22 is estimated at 15,000 Mw, against the estimated capacity available of 35,000 Mw.”

Meanwhile, rising competition is likely to lead to erosion in margins, believe analysts. Edelweiss Securities’ analysts say: “We continue to remain concerned about BTG industry’s profitability and expect pricing pressures with new players adopting aggressive entry strategies.” In the NTPC’s bulk tender phase-II, Doosan’s boiler bid was almost 10 per cent lower than bids of all Indian players.

OUTLOOK
Even if BGR has emerged has L1 in TG part of the bulk tender of NTPC, which has boosted its order book by more than 50 per cent, analysts worry about its impact on margins. The management has guided for 10 per cent operating profit margin on the TG order, which is 150-200 basis points below its current margin of 11.5-12 per cent.

Analysts remain negative on BHEL as competitive pressures continue to loom large, its high margin of 19 per cent looks unsustainable and the company is widely expected to slip on its order inflow growth guidance of just 10 per cent. Abhineet Anand, analyst, Antique Stock Broking, says: “BHEL will have to shed its margins (high at 19 per cent currently compared with global players) to get new orders.”

Both, BHEL and BGR need to boost their order book to maintain a decent growth momentum in the medium-term and thus the outcome of NTPC’s bulk tender phase-I and Rajasthan State Electricity Board order are critical events for the companies.

Despite being the second lowest bidder in both portions of the tender, L&T did not get a boiler order and managed to receive orders for only two TG units worth Rs 1,600 crore. Analysts say the company will have to bid more aggressively in upcoming orders amid a slowing market to keep its order book (power segment) ticking. They are now concerned about L&T’s order inflow guidance of 15 per cent, since it is the largest and most diversified infrastructure player, reflecting momentum of the economy.