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Electrical equipment firms head for growth on plan spending

Electrical equipment firms head for growth on plan spending
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First Published: Mon, Jun 07 2010. 02 17 PM IST
Updated: Mon, Jun 07 2010. 02 17 PM IST
Mumbai: Indian electrical equipment makers are set to return to the 15%-plus growth path this year and next on capex spending by state firms, although more competition will lead to pricing pressures, officials say.
The sector grew a record 22% in FY07 before slipping to as low as 2.73% in FY09 amid an economic slowdown and recovering to 11.25% in FY10, data from the Electrical and Electronics Manufacturers’ Association (IEEMA) showed.
The growth is typically seen in the last two-three years of each five-year plan cycle and a key factor, analysts and officials say, is the sudden spurt in orders from state utilities which try to spend their allocation in the plan.
“Now that we are in the second half of the 11th five year plan, lot of projects would be in the process of completion, so obviously...momentum will continue,” said Rajesh Jain, chairman of transformer maker Emco Ltd and past IEEMA president.
The last five-year plan ended in 2007, the year of record growth, and the current plan ends in 2012.
The industry may grow 15% this year and could surpass the record 22% growth in the next financial year, S P More, director general of IEEMA, which represents makers of high-voltage transformers and sub-stations as well as low-voltage cables and switchgears, said.
Power Grid Corp, the state-run firm that transmits about 45% of country’s power, plans to spend about Rs15,000 crore in capex in FY11 and FY12 each, boosting overall order inflows for the players, analysts said.
Margins
However, with stiff competition, including players from South Korea and China, margins may be squeezed, they added.
“As the high voltage segment is taking off and the fact that there are more mouths to feed now..., individual company growth rate will differ,” a Mumbai-based analyst with a foreign brokerage said, predicting a 20% growth rate for the industry going forward.
Firms like Crompton Greaves, ABB Ltd, Areva T&D India, Siemens will fight out with overseas firms like TBEA Co and Hyosung to corner more and more orders in FY11.
But, product prices are already falling, highlighting the pressure on firms. High voltage transmission equipment prices have already declined by 20-25% from 2008 levels while distribution equipment prices have corrected 25-30%, BNP Paribas said in a note.
“We see no recovery in T&D prices over the near term. Also, given the entry of several new players in substation EPC (engineering, procurement, construction) business, we believe margins can remain at 6-9%” versus an average of 9-11%, BNP Paribas analyst Lakshminarayana Ganti said in a note.
Industry insiders support analysts’ view that there will be margin pressure going ahead.
“Next 12 months, I feel there will be some dip in EBIDTA margins,” Emco’s Jain said.
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First Published: Mon, Jun 07 2010. 02 17 PM IST