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T&D Sector
JM Financial 12 January 2009 Institutional Securities Private Limited Page 2
Contents
T&D Sector - Transformer demand to jump ~2x 3
FY09 - a breather; demand intact 4
PGCIL target double capacity addition 5
State Transcos back in green 7
Capacity surplus, may not be in higher voltage 8
Distribution reforms - key to growth 10
Industry comps 12
ABB India (Hold; Target Price Rs525) 15
Technological leader in electric power 16
Valuation 20
Risks 22
Financials 24
Company background 26
Financial Tables 29
Areva T&D India (Buy; Target Price Rs250) 31
T&D firing up growth 32
Valuation 38
Risks 40
Financials 41
Company background 45
Financial Tables 47
Crompton Greaves (Hold; Target Price Rs160) 49
Financial Tables 52
Transformer demand to jump ~2x
PGCIL sets FY10 MOU target at double transformation capacity
addition: Power Grid Corporation of India (PGCIL) and Ministry of Power
(MoP) have targeted nearly double transformation capacity addition (9,000
MVA) in FY10 over FY09 (5,655 MVA) in draft performance MOU for PGCIL.
It has historically overshot the ‘Very Good’ target by 15-16%, being a notch
above the excellent target. Having achieved <50% in 220/765 kV and
<75% in 400 kV segments for April-October 2008 period, we believe that
some part may slip in FY10. This, apart from the planned ~2x capacity
addition would enhance the transformer sector growth visibility mainly in
the 765/400/220 kV segment, witnessed by seven transformers/ substation
tenders in 765 kV segment and 5-6 800 kV HVDC package for NE corridor.
Sector growth to jump on moderated base: The sector delivered a topline
CAGR of 49% over FY04–07 in an increasing demand environment (last
three years of the 10th FYP) due to an up tick in power and industrial
investments. Growth moderated to 20% for FY08-09 as no new capacity
was commissioned. We expect growth to pick-up to 25% over FY09–12
based on: a) bulk of the opportunity depends on investment from PSE in the
power sector which is somewhat insulated to ongoing credit crisis, as state
utility health has also improved (see Exhibit 8); b) fresh capacity addition
(15-20 GW p.a.) and uptick (~2x) in PGCIL targets; c) distribution reforms
such as APDRP-II would be key to financing the state sector projects as
grants are given by the central government on achievement of the targets.
Initiating ABB with a Hold; 12-month target price of Rs525: ABB is
leveraged to the domestic investment cycle especially the T&D space with
94% of revenues from India. With the systems business reaching an
inflection point of becoming business as usual, we expect earnings CAGR at
25% for CY07-10E in the power segment. While Automation business as
proxy of industrial investments will continue to drag (5% CAGR). Hence, we
do not see any major triggers for re-rating for ABB in short-term and
estimate its earnings CAGR at 15%. We have valued ABB at 15x in line with
its global peers, but with a premium to its domestic peers.
Initiating Areva with a Buy; 12-month target price of Rs250: Areva
has consistently increased market share in India. Access to superior
technology has allowed it to increase profitability also. However, higher
working capital and leverage (0.5x for CY08E) will continue to be an
overhang. We value Areva with 10% discount to ABB valuations at 14x
CY10E EPS of Rs17.8 due to lower balance sheet strength. Considering
management bandwidth with turnaround capabilities and aggressive
approach towards improvement of working capital (though we model
deterioration), we recommend a Buy.
Maintain Hold on Crompton with Dec 2009 target price of Rs160: We
have introduced FY11 estimates and marginally tweaked our FY09-10E
lower, considering gloomy outlook in its IB. We expect sustained muted
earnings with 14.0% CAGR over FY08-11E. We roll-over our target price to
Dec 2008 at Rs160 at 10x exit multiple. Maintain Hold.
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