Order inflows improving for foreign power T&D

But steep valuation is a deterrent for stocks such as ABB, Alstom T&D, and Siemens

Companies in the power transmission and distribution (T&D) equipment space have witnessed a 23 per cent year-on-year growth in demand during April 2015-February 2016. While the share of multinational companies (MNCs) in the segment has seen minor contraction, from 75 per cent last year to 72 per cent this year, analysts say with improved traction of bids from Power Grid Corporation and return to normalcy of Alstom T&D India’s operations, things could change for the better in the March 2016 quarter.

Among MNCs, Siemens is the biggest beneficiary so far, with year-to-date order inflow of Rs 1,300 crore, up 26 per cent year-on-year, in the T&D segment during April 2015-February 2016. ABB India is likely to follow. But, given that recovery from the Chennai floods is underway for Alstom T&D, order inflow is down 78 per cent year-on-year. Alstom T&D, however, faces competition from Chinese and Korean firms in switchgear and high technology products.

Macro indicators, too, paint a positive picture. Elara Capital’s report says 76 per cent of Central Electricity Authority’s planned transmission line addition (107,440 km during FY13-17) was achieved till February. Also, transmission utilities have completed 38,771 km of targeted 400-kilovolt (kV) network (38,000 km). Completion of projects ahead of targets leaves room for higher allocation in the next Plan period, which analysts believe could see an increase of nine-10 per cent.

Analysts expect incremental growth from high-value pockets such as 765 kV and high-voltage direct current (HVDC), an area where these MNC subsidiaries are better positioned. That apart, the Street is optimistic about the accelerated benefit from railway spending. Analysts at Motilal Oswal Securities say given the focus on rail network decongestion, expansion, and safety (with estimated spending of Rs 5.19 lakh crore during FY16-20), Siemens, Alstom, and ABB should benefit.

But, the stocks of ABB, Alstom, and Siemens have rallied 12-33 per cent since March and trade at 30-54 times the CY/FY17 price-earning ratio — ABB at 37 times and Siemens at 40 times. So, despite the outlook turning positive for these companies, a majority of analysts polled on Bloomberg recommend selling these stocks. However, the previous two financial years have not been too rewarding for these companies. Given the low base effect and if the pace of order flows remains stable and the impact of this is realised on their earnings growth, the valuations could turn attractive.