Opportunities in India's T&D sector

Sun shining on T&D sector

Jitendra Kumar Gupta / Mumbai May 28, 2010, 0:52 IST

India’s largest player in the transmission and distribution (T&D) sector, Power Grid Corporation (PGCIL), has plans to spend Rs 1,00,000 crore over the next seven years, doubling its network to 1,57,000 km as compared to 77,000 km currently. Companies catering to the needs of the T&D segment can expect new orders being awarded by PGCIL as new investments gather traction and compensate for the delays in projects seen during 2009.

For every rupee invested in setting up new power generation capacity, an equal investment is required in the T&D space to ensure that the power generated reaches the end consumer. India has an ambitious plan to build about 62,000 Mw of new power generation capacity by 2012 and another 1,00,000 Mw by 2017, which could require investments of at least Rs 8,00,000 crore.

Even at a ratio of 60-65 per cent, this will require another Rs 5,00,000 crore of investments in India’s already under-invested T&D sector. No wonder the sector is expected to grow over 20 per cent annually during the next five years. “T&D is a very attractive space within the power sector. The country currently has a transmission capacity of 20,000 Mw (in 2009), which will be further augmented to 37,150 Mw by 2012. This is achievable and will attract about Rs 1,20,000 crore to Rs 1,30,000 crore of investments in transmission alone by 2013-14,” says Sudhir Nair, head of Crisil Research.

In the context of this emerging opportunity, which are the companies that stand to gain?

Transmission opportunity
Power Grid itself will be a key beneficiary of investments in the T&D sector. For the Eleventh Five Year plan, PGCIL has targeted an investment of Rs 55,000 crore, including expansion of inter-regional grid capacity to 37,000 Mw, as compared to 14,000 Mw in the Tenth Five Year plan. Once the infrastructure is built, the company will get regulated returns and consistent cash flows by transmitting power on its network. Thus, it is considered to be a good long-term play.

But, before that, higher capex (capital expenditure) will also mean benefits accruing to companies like KEC International, Kalpataru Power and Transmission and Jyoti Structures, which undertake engineering, procurement and construction (EPC) work for T&D projects. Here, Jyoti Structures will be a key beneficiary, followed by Kalpataru Power, which are well diversified and have good revenue visibility. On the other hand, KEC will also benefit as it generates about half of its revenue from the domestic market. Further gains would accrue, depending on the pace of recovery in international markets. Apart from the potential to bag orders from PGCIL, these companies will also benefit from the projects announced by the state electricity boards, other government agencies and private power generation companies, which is in fact an emerging opportunity.

ELECTRIFYING PROSPECTS
Companies	Order bk to Sales	Earnings^ CAGR (%)	2010-11 Estimated		Price (Rs)
			P/E (x)	P/BV (x)
ABB*	1.4	42.0	30.3	6.1	848
Areva*	1.4	40.0	42.4	6.0	267
Crompton Greaves	0.3	19.0	18.4	4.7	236
KEC International	1.4	17.0	11.3	3.5	485
Jyoti Structures	2.0	21.0	10.3	2.0	138
Kalpataru Power	1.6	30.0	16.1	NA	1,000
Emco	1.5	18.0	8.2	0.8	75
Power Grid	NA	26.8	17.4	2.4	101
Siemens#	0.8	31.8	25.4	5.8	701
* year end is December, # year end is September ^ over two years Source: Analysts estimates

High-capacity corridors
Power Grid also plans to develop nine high-capacity transmission corridors, which will evacuate power from independent power projects (IPPs). These projects will require an investment of about Rs 64,000 crore over the next few years. Apart from EPC players, companies like Crompton Greaves, ABB, Siemens and Areva T&D, which manufacture high-capacity equipment, stand to benefit.

Gains in distribution
Besides transmission equipment, the above four companies will also benefit on account of increase in demand for distribution equipment like transformers, switch gears, capacitors and power substations. Investments in the distribution segment are expected to grow at a faster pace of 35-40 per cent over the next two-three years. While Crompton Greaves, the largest player in the domestic transformer space, stands to gain, analysts remain cautious over its large exposure (revenues) to European markets.

Among second-tier companies, EMCO and Voltamp Transformers should benefit. Apar Industries is another company that holds good prospects, given its presence in transformer oil, wherein the opportunity is considered to be large.

On the other hand, ICSA’s earnings are expected to grow at about 30 per cent annually over the next two years. The company erects substations and transmission lines as well as embedded solutions (electronic meters, etc), which helps power companies to minimise and monitor distribution and commercial losses.