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November 2010
Executive summary - Capacity additions and high growth in GDP to boost power demand - Investments of Rs 9.3 trillion expected during the next 5 years - Power generation equipment BTG capacity to exceed demand - BoP a Rs 1.6 trillion opportunity - BoP players shifting from component-based model to turnkey model 1.0 Review and outlook - Economic growth, capacity additions to fuel power demand - Industrial sector to lead demand growth - Demand growth across regions not expected to be uniform - Generation capacities of 82 GW expected to be added over - the next 5 years - Capacity additions to lead to supply growth of 9.1 per cent CAGR - Country-wide deficit to reduce to 4.8 per cent by 2014-15 - Peak load deficit also expected to decline by 2014-15 - Investments to the tune of Rs 9.3 trillion expected over the next 5 years 2.0 Generation equipment - BTG capacity to exceed demand - Private players prefer EPC route to procure equipment - BTG - staring at an overcapacity situation 3.0 BoP Huge opportunity amidst stiff competition - BoP - a Rs 1.6 trillion opportunity - BoP - a highly scattered segment with severe competition
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Charts
1.0 Review and outlook 01 Region-wise demand-supply 2.0 Generation equipment - BTG capacity to exceed demand 01 NTPC awards each of the components separately 02 Private utilities prefer EPC route 3.0 01 02 03 04 05 BoP Huge opportunity amidst stiff competition BoP: Opportunity in major components Coal handling capacity required by a 1,000 MW plant Ash handling capacity required by a 500 MW plant Water requirement for a 1,000 MW plant Players present in various components of BoP and their market shares
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A-i
continued
Figures
1.0 01 02 03 04 05 06 07 08 09 Review and outlook Consumer-wise share of demand Region-wise demand growth Sector-wise capacity additions Fuel-wise capacity additions Region-wise capacity additions Power supply and capacity additions Power deficit scenario Peak load - Expected demand-supply scenario Investments in the generation segment - Sector-wise
2.0 Generation equipment - BTG capacity to exceed demand 01 Sector-wise share in coal-based capacity additions 3.0 01 02 03 04 05 06 07 08 09 10 BoP Huge opportunity amidst stiff competition BoP industry size CHP players - Du Pont decomposition CHP players - Cash conversion cycle Performance of the CHP industry Water treatment players - Du Pont decomposition (2008-09) Water treatment players - Cash conversion cycle (2008-09) Performance of the water treatment industry (excluding cooling tower) Turnkey players - Du Pont decomposition Turnkey players - Cash conversion cycle Performance of the turnkey segment
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Tables
1.0 01 02 03 2.0 01 02 03 3.0 01 02 03 Review and outlook Major projects expected to be commissioned over the next 5 years Capacity additions forecast Investments in the power sector Generation equipment - BTG capacity to exceed demand Break-up of a coal based power plant cost Private players preference for Chinese equipments Capacity additions lined up in the BTG segment BoP Huge opportunity amidst stiff competition Financials of CHP companies Financials of water treatment and cooling tower companies Financials of turnkey players
A-ii
Executive summary
CRISIL Research expects Indias power deficit to decline to around 5 per cent by 2014-15, following the addition of 82 GW of power generation capacities over the next 5 years. The sizeable capacity additions have encouraged several private players to enter the boiler, turbine, generator (BTG) segment. However, with the domestic BTG capacity expected to cross 30 GW by 2013, an overcapacity scenario is likely. On the balance of plant (BoP) front, CRISIL Research expects Rs 1.6 trillion of projects to be executed by 2014-15. Severe competition in the segment and player preference for awarding projects on turnkey basis is driving component manufacturers to execute the entire BoP project.
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A-2
1.0
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24
25
24
24
22
19
P: Projected
Source: CRISIL Research
6.7%
122
Northern
Western
Southern
Eastern
North-eastern
P- Projected Note Figures in per cent represent CAGR growth from 2009-10 to 2014-15.
Source: CEA, CRISIL Research
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Industries and domestic consumption to drive demand growth in the northern region
Power demand in the northern region is expected to grow by 8.0 per cent CAGR from 2009-10 to 2014-15 as compared to a CAGR of 7.7 per cent during the last 5 years. Demand in 2010-11 is expected to rise by only 5.6 per cent as the region has received abundant rainfall and the weather conditions have been good. This is after taking into account the incremental demand during the Commonwealth Games. However, from 2011-12 to 201415 demand growth is expected to grow by 8.7 per cent CAGR. Delhi, Uttar Pradesh and Rajasthan will be the primary demand centres.
Industrial and domestic segments to account for bulk of the demand mix in the eastern region
West Bengal and Orissa are expected to drive demand growth in the eastern region, with demand from the industrial and domestic segments expected to continue to account for 90 per cent of the demand mix. The demand pattern in the north-eastern region, which accounts for around 1 per cent of Indias total power demand, is expected to remain unchanged.
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As per CRISIL Research, an average of 16 GW would be added annually over the next 5 years vis--vis 6-7 GW of capacities per year over the last 5 years. This is due to:
Entry and announcements by private sector players of huge capacity additions. More than 90 per cent of the 82 GW scheduled to be commissioned over the next 5 years have received environmental and forest clearances, acquired land, achieved financial closures and placed equipment orders. Almost 80 per cent of the projects have signed power purchase agreements (PPAs) with various state utilities or will sell power on merchant basis. Others are expected to enter into PPAs as more utilities invite bids for procurement of power.
Central
State
Private
P- Projected Note Numbers at the top are totals for the 5-year period.
Source: CRISIL Research
Coal will continue to dominate incremental capacity additions over the next 5 years, accounting for 80 per cent of the total capacities being added (66 GW). Further, more than 90 per cent of the capacities scheduled to be commissioned by private players would be coal-based.
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The western region is expected to lead in capacity additions on the back of commissioning of the two UMPPs and the 4.6 GW power plant being set up by Adani Power. Hence, of the 82 GW of capacities likely to be added, the western region is expected to account for 33 GW, whereas the northern and southern regions are likely to add 17 GW and 16 GW, respectively.
Figure 5: Region-wise capacity additions
12.0 (GW) 17.0 33.2 10.2 10.0 8.5 8.0 7.3 16.0 13.3 2.6
4.0
2.9
2.6
2.0
0.0 2010-11 P 2011-12 P 2012-13 P 2013-14 P 2014-15 P 2010-11 P 2011-12 P 2012-13 P 2013-14 P 2014-15 P 2010-11 P 2011-12 P 2012-13 P 2013-14 P 2014-15 P 2010-11 P 2011-12 P 2012-13 P 2013-14 P 2014-15 P 2010-11 P
Northern
Western
Southern
Eastern
North-eastern
P- Projected Note Numbers at the top are totals for the 5-year period.
Source: CRISIL Research
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Capacity additions in the northern region will increase in 2010-11 to meet demand for the Commonwealth Games. In 2011-12, the regions capacity will rise further as delayed projects get commissioned. On the other hand, in the southern and western regions, higher capacities will be added in 2013-14 and 2014-15. Also, while capacities in the northern region are expected to be a mix of thermal (mainly coal) and hydel, in the southern region capacities would mainly be coal and gas-based. The Kundankulam nuclear power plant in Tamil Nadu is also expected to be commissioned during this period. Coal is expected to be the primary fuel for new capacities in the western and eastern regions, whereas hydel capacities will comprise bulk of the upcoming generation capacity in the north-eastern region.
Table 1: Major projects expected to be commissioned over the next 5 years Company Project Fuel State Central sector
NPCIL NTPC NTPC NTPC SJVNL NHPC Kundankulam Sipat STPP Jhajjar Power Plant Simhadri Stage 2 Rampur hydro-electric project Uri-II Nuclear Coal Coal Coal Hydro Hydro Tamil Nadu Chhattisgarh Haryana Andhra Pradesh Himachal Pradesh Jammu & Kashmir 2,000 1,980 1,500 1,000 414 240
Capacity (MW)
State sector
AP Power Dev. Co. Pragati Power Mahagenco GSPC Pipavav Power UPRUVNL Karim Nagar Pragati- III Bhusawal TPS Expansion Pipavav Power Project Parichha TPS Extn - Stg 2 U5 Gas Gas Coal Gas Coal Andhra Pradesh Delhi Maharashtra Gujarat Uttar Pradesh 2,100 1,500 1,000 700 500
Private sector
Adani Power Tata Power Reliance Power Ltd Indiabulls Power Lanco Infratech Sterlite Energy Ltd. Jaiprakash Associates GVK JSW Energy Essar Power Source: CRISIL Research Mundra SEZ power plant Mundra UMPP Sasan UMPP Nashik TPP Anpara -C Jharsuguda Karcham Wangtoo Goindwal Sahib Power Project Ratnagiri Salaya Phase I and II Coal Coal Coal Coal Coal Coal Hydro Coal Coal Coal Gujarat Gujarat Madhya Pradesh Maharashtra Uttar Pradesh Orissa Himachal Pradesh Punjab Maharashtra Gujarat 3,960 4,000 3,960 1,350 1,200 2,400 1,000 540 1,200 2,520
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20
10
P- Projected
Source: CRISIL Research
1200
10
1000
800
600
400
200
0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Supply 2010-11 P 2011-12 P 2012-13 P 2013-14 P 2014-15 P
Demand
Deficit (RHS)
P- Projected
Source: CRISIL Research
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Since the western and northern regions form the main demand centers in the country while the eastern region has most of the installed capacities, the region-wise demand-supply scenario differs significantly. As per CRISIL Researchs region-wise analysis, the eastern region is expected to turn surplus over the next 5 years, whereas the western and northern regions would continue to be plagued by deficit scenarios. The southern region is expected to inch towards a balanced situation during the same period.
Chart 1: Region-wise demand-supply
P- Projected
Source: CRISIL Research
commissioned. Hence, post 2011-12, the demand-supply situation is expected to remain stable, with the deficit hovering in the 6-7 per cent range. Uttar Pradesh and Punjab are the main states where demand is expected to significantly outstrip supply. However, Delhi is likely to witness a surplus situation.
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160,000
9.6
120,000
9.0
80,000
6.0
40,000
3.0
0 2009-10 2010-11 P 2011-12 P 2012-13 P Supply 2013-14 P 2014-15 P Demand Deficit (RHS)
0.0
P- Projected
Source: CRISIL Research
Investments to the tune of Rs 9.3 trillion expected over the next 5 years
In addition to the 82 GW of capacities to be added over the next 5 years, CRISIL Research expects captive capacity additions of 13 GW during the same period. The capacity additions are expected to be spearheaded by the private sector, with a share of 46 GW, followed by the central players.
Table 2: Capacity additions forecast
MW Central State Private Total Captive Total (including captive) 2010-11 P 3,690 3,112 4,285 11,087 2,362 13,449 2011-12 P 5,736 2,800 6,397 14,933 2,722 17,655 2012-13 P 5,262 3,510 7,620 16,392 2,351 18,743 2013-14 P 3,021 3,103 12,675 18,799 2,673 21,472 2014-15 P 3,705 2,648 14,545 20,898 2,865 23,763 Total 21,414 15,173 45,522 82,109 12,973 95,082
This sizeable capacity addition is expected to translate to an investment potential of Rs 9.3 trillion over the next 5 years, with generation (both utilities and captives) contributing a major chunk at Rs 5.8 trillion (63 per cent). The remaining Rs 3.4 trillion would be invested in transmission and distribution (T&D). Though investments in T&D are lower than investments in generation, the figure is significantly higher than the previous outlays. This is primarily due to the governments focus on reducing T&D losses. Investments in T&D is expected to grow by 16 per cent CAGR over the next 5 years vis--vis a compounded growth of 15 per cent in generation during the same period, leading to considerable opportunities in the T&D equipment space over the next few years.
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Private sector to account for more than 55 per cent of investments in the generation segment
CRISIL Research estimates private sector investments to grow at a CAGR of 23 per cent as compared to the overall investment growth of 15 per cent CAGR over the next 5 years. Consequently, the share of private sector investments is expected to increase from 42 per cent in 2009-10 to 60 per cent in 2014-15. During the same period, CRISIL Research expects total investments in the generation segment (utilities) to be around Rs 5.1 trillion, with the private sector accounting for about 57 per cent. These investments would be mainly through the setting up of capacities through UMPPs, and Case I and Case II routes. On the captive generation side, we expect investments of around Rs 0.75 trillion.
Figure 9: Investments in the generation segment - Sector-wise
(Rs billion) 900 800 700 600 500 400 300 200 100 0 2009-10 E 2010-11 P Central 2011-12 P State 2012-13 P 2013-14 P Private 2014-15 P
P- Projected
Source: CRISIL Research
Investments in T&D would continue to be driven by central and state sectors, as private sector participation, though increasing, remains limited in the segment.
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2.0
CRISIL Research expects 82 GW of capacities to be added over the next 5 years, which is an average of 16 GW per year. Even beyond the forecast period, 15-20 GW of power capacities are likely to be added annually. These capacity additions are expected to drive demand for power generation equipments. However, with a number of private players setting up boiler, turbine, generator (BTG) capacities across the country, BTG manufacturing capacity is expected to cross 30 GW by 2013, thus leading to an overcapacity situation. Given the huge power capacity additions lined up, CRISIL Research has analysed the power generation equipment market in India. Power generation equipments are divided in two broad categories:
BTG Balance of plant (BoP), which includes coal-handling plant (CHP), ash-handling plant (AHP), water treatment systems, cooling tower, fuel oil handling system, etc.
While BTG accounts for about 50 per cent of the entire cost of setting up a power plant, BoP accounts for about 40 per cent. The remaining 10 per cent is towards other costs like interest during construction (IDC), land cost, etc.
Table 1: Break-up of a coal based power plant cost
Component Boiler Turbine-generator per cent 25% 25% Constitutes for the BTG portion of the plant Accounts for 50 per cent of the total cost
Coal Handling plant Ash Handling plant Water treatment & Cooling Tower Civil works Others*
10-12% 5-6% Constitutes for the BoP portion of the plant 5-6% 10-12% 6-7% Accounts for 40 per cent of the total cost
Others
10%
100%
*Other costs in BoP include cost of electric fittings, chimney, fuel oil system, fire protection etc.
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Central 22
Private 63
While central utilities prefer to order each component of a power plant separately, private players favour engineering, procurement, construction (EPC) or turnkey contracts. State utilities follow both routes, though having a preference towards the EPC/BoP route.
Chart 1: NTPC awards each of the components separately
Coal Handling Plant
BTG
Others
Water works
Cooling tower
Difference in experience and expertise of National Thermal Power Corporation (NTPC) and private sector players causes them to take different routes for awarding of equipment contracts. Given its scale and experience, NTPC has departments assigned for each of the components such as BTG, CHP, AHP, water treatments etc. NTPC typically saves 5-10 per cent on its BoP equipment costs as it awards them directly rather than going via the EPC/BoP route. On the other hand, since most private sector players are relatively new entrants in the sector, and lack the technical expertise, they prefer a turnkey player like Larsen & Toubro (L&T), BGR Energy and Tecpro Systems.
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CRISIL RESEARCH POWER ANNUAL REVIEW
BTG
OR
BTG EPC / BoP contractor (L&T, BGR, Tecpro etc) Coal Handling plant Ash Handling plant Cooling tower & water treatment Others
Source: CRISIL Research
Going forward, as a huge chunk of capacity additions are expected to come from private sector players, most equipment contracts will be awarded on turnkey basis. In addition, some state utilities have also shown preference towards the EPC route over component-wise awarding.
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Looking at the in surge of Chinese equipments and healthy demand from generation companies, domestic players like L&T, JSW Energy, Bharat Forge and BGR Energy are adding substantial BTG capacities. Since these players do not have technological expertise of the segment, they have formed joint ventures (JVs) with foreign players. After a shift in generation capacity additions from the central and state sectors to the private sector, CRISIL Research expects the incremental BTG share to move from BHEL to domestic private players. The recent NTPC bulk tender for supply of 11 units of 660 MW, where the Bharat Forge-Alstom JV emerged lowest bidder to supply turbines and generators supports this view.
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By 2013, BTG capacity in the country is likely to exceed 30 GW while capacity additions in the power sector are likely to range at 15-20 GW per year. Moreover, Reliance Power has recently awarded a BTG contract worth Rs around 450 billion to Shanghai Electric for executing 30 GW of power capacities. This clearly highlights the continued preference of private players to install Chinese equipment. Given these two factors, CRISIL Research expects an overcapacity scenario in the domestic BTG market from 2013. All future capacity additions are expected to come in the super-critical category, as most players are expected to add capacities using this technology. Over the next 5 years, of the 65.6 GW capacity additions, 50-55 per cent is likely to come from super-critical technology. However, awarding for these projects is almost completed. Beyond the 5 years, the share of super-critical technology is likely to rise to 70-75 per cent of coal-based capacity additions. Even as the share of super-critical technology increases, CRISIL Research expects super-critical equipment to witness an overcapacity scenario, due to the preference of private players for Chinese equipment. Hence, margins will be under pressure going forward.
Levy of import duty on Chinese equipment. A regulation or rule stating that a minimum per cent of equipment procured by generation players must be indigenous. A notification requiring Chinese players to set up manufacturing base in India, thus ensuring a level playing field.
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3.0
Balance of plant (BoP) covers all components of a power plant except BTG such as CHP, AHP, water treatment systems, cooling tower, civil works, fuel handling system and chimney, amongst others. These components account for about 40 per cent of the entire cost of setting up a power plant.
P: Projected
Source: CRISIL Research
Growth of the BoP segment is expected primarily from coal-based capacity additions of 65.6 GW slated to be set up over the forecast period. For a gas-based plant, the BoP order size would be 50-60 per cent of a similar capacity coal-based plant. CHP, AHP and civil works account for 65-70 per cent of investments in the BoP segment; CHP and AHP combine provide the biggest opportunity in the BoP segment at about Rs 650 billion. Civil works, though a sizeable component (Rs 405 billion), is also split between other components. Hence, one player may not be awarded the entire civil works contract. Further, demineralisation (DM) plant and pre-treatment (PT) plant form the major components of a water treatment system. The size of a water treatment system is expected to be around Rs 110 billion while that of cooling tower at around Rs 130 billion. Other components include the chimney, fuel oil system, electric and control systems and fire protection system.
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PLF: Plant load factor; UHV: Useful heat value; tph: Tonnes per hour
Source: CEA, CRISIL Research
A CHP typically works for only 14 hours a day with the rest of the time required for maintenance of the plant. Hence, for a typical 1,000 MW power plant having two units of 500 MW, the CHP capacity required is 1,600 tonnes per hour (tph), as the CHP has to make coal available which is sufficient for the entire days operations. [This is assuming a 100 per cent plant load factor (PLF), calorific value of coal at 3,150 Kcal/kg and a station heat rate of 2,425 Kcal/kWh.] After a detailed analysis of various projects, CRISIL Research believes that the 65.6 GW of coal-based capacity additions will require about 111 CHPs to be executed over the next 5 years. (One CHP can cater to one or more units of a power plant, depending on the units capacity.)
rise is termed as bottom ash. The ash is high in the case of power plants using domestic coal as Indian coal has high ash content (around 40 per cent). It is generally disposed in an ash pond till arrangements are made for 100 per cent utilisation of the ash. Ash generated can be utilised in brick manufacturing, in roads, cement etc. The gestation period for an AHP is 12-18 months.
PLF: Plant load factor; UHV: Useful heat value; tph: Tonnes per hour
Source: CEA, CRISIL Research
An AHP works on a continuous basis as ash is generated constantly during the working of a power plant. Unlike in CHP, one AHP can cater only to one unit of a power plant, as each unit has a different boiler necessitating different systems for collection of the ash. After a detailed project analysis, CRISIL Research believes that the 65.6 GW of coal-based capacity additions will require about 153 AHPs to be executed over the next 5 years. A typical 500 MW power unit requires an AHP with a capacity of around 300 tph. This is assuming a 100 per cent PLF, calorific value of coal at 3,150 Kcal/kg, station heat rate of 2,425 Kcal/kWh and an ash content of 46 per cent (taken for the lowest grade coal as per CEA specifications).
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The water requirement of a power plant is high at around 3,000 litres per hour per MW. As per this benchmark, 65.6 GW of coal-based capacity additions would require around 1.72 trillion litres of water per year. Of the total water required, 85 per cent is required for the cooling tower make-up, i.e. to make up for the evaporated water. The remaining 15 per cent is required for DM plant, potable water, reservoir evaporation, etc.
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Chart 5: Players present in various components of BoP and their market shares
BoP Rs 1,620 bn
Water treatment & CT 18-30 mths (Rs 240 bn) Cooling Tower Paharpur CT (55-60%) Gammon Infra. (20-25%) Water treatment Driplex (25-30%) Thermax (15-20%) Doshion (15-20%) Va Tech (10-15%)
Turnkey players
L&T (18-20%) Tecpro(18-20%) TRF (15-18%) McNally Bharat (10-15%) Elecon (8-10%) Thyssenkrupp (8-10%)
Indure (35-40%) Macawber Beekay (25-30%) DCIPS (10-15%) Tecpro (8-10%) McNally Bharat (5-8%)
Existing BGR L&T Tata Projects BHEL Reliance Infra New entrants Tecpro Mc Nally Bharat TRF
Private players prefer to award equipment contracts on a turnkey basis whereas central utilities award components separately. With more than 60 per cent of the total coal-based capacity additions expected to come from private sector players, component players are shifting from executing the low value-high margin BoP components to high value-low margin turnkey projects. This shift is also due to high competition in the BoP segment. While the net margins for players in the turnkey segment are typically 5-7 per cent, those of component suppliers are higher at 8-10 per cent. Hence, margins for the BoP industry are likely to decline going forward, and stabilise at 5-8 per cent. Since players are present in different components, CRISIL Research has divided them into component-wise categories* to analyse their financials:
Companies present in CHP Companies present in water treatment Companies present in turnkey business
The typical payment terms are: 10 per cent advance 10 per cent on design 70 per cent during execution 10 per cent after a minimum of 6 months post the commissioning of the plant. This amount is also known as payment for meeting the performance guarantee test. In several instances, payment of this amount gets excessively delayed.
*We have not looked at AHP separately, as the main companies in this segment are unlisted and their financial details are not available.
CRISIL RESEARCH POWER ANNUAL REVIEW
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CHP companies - TRF, Tecpro fare better on margins and cash conversion
Within the CHP space, the financials of Elecon, TRF, Tecpro and McNally Bharat have been analysed. This segment is characterised by high working capital requirement. Current assets usually comprise 85-90 per cent of the total assets. Since the industry is not capital intensive, companies have low gearing. Most of their debt is in the form of trade credit. Two major factors that can affect a companys performance are: (i) ratio of in-house manufacturing to sourcing, and (ii) mix of BoP orders to component orders. A company having a higher ratio of in-house manufacturing will enjoy high margins. In terms of orders, equipment orders comprise for the high margin business, but the value of these orders is low. Conversely, a BoP order will have low margins, but higher value.
Table 1: Financials of CHP companies
Elecon 2009-10 Sales Sales growth (3 year CAGR) Operating margins Operating profit growth (3 Year CAGR) Net margins Net profit growth (3 Year CAGR) Order book Order book to sales In house Mfg. (% of contract value) ROE ROCE Debt Equity ratio Cash conversion n.a.: Not available Source: CRISIL Research, Prowess Rs Million Per cent Per cent Per cent Per cent Per cent Rs Million Times Per cent Per cent Per cent Times Days 11,300 10.4 15.7 9.2 5.9 4.0 15,001 1.3 n.a 22.3 15.8 1.6 192 Mcnally Bharat 2009-10 14,862 42.2 7.4 44.2 2.3 24.5 42,000 2.8 60 16.5 19.0 0.9 83 2009-10 6,593 22.8 14.0 37.0 7.2 32.3 18,000 2.7 40 31.2 27.2 0.9 44 TRF Tecpro Systems 2009-10 14,758 83.0 15.9 80.1 7.5 71.5 24,000 1.6 40 42.8 24.5 0.2 59
TRF and Tecpro fare better on net margins and cash conversion cycle while Elecons margins are slightly lower. McNally has very low margins of 2.3 per cent. This is because the equipment business (high margin business) is under a subsidiary company, and McNally Bharat is mainly carrying out projects on a turnkey basis.
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22.3
16.5
31.2
42.8
(times) 7 6 5 4 3 2 1 0 Elecon (Days) -400 -300 -200 -100 0 100 200 300 -167 -173 147 Mcnally Bharat -244 -11 172 T R F Ltd -208 -61 225
59
44
83
192
Inventory days
Debtors days
Creditors days
Note: Numbers on the top are RoE. Source: CRISIL Research, Prowess
Note: Numbers to the extreme right conversion days. Source: CRISIL Research, Prowess
are
cash
The growth rate and order book-to-sales ratio is good for the CHP industry. Tecpro has grown at the fastest rate over the last 3 years as it has entered the turnkey space. Its return on equity (RoE) is about 42 per cent, the best in its category. Tecpro and TRF have the best RoE within this industry as they are able to maintain high margins. In addition, these companies also have the most efficient cash conversion cycle. On account of its robust revenue growth and an order book-to-sales ratio of 1.6 times, Tecpro is poised to continue to grow at the highest rate within this industry. While core competency of Tecpro lies in being able to execute turnkey projects, TRF and McNally derive a substantial part of their revenues from the sale of equipment.
Figure 4: Performance of the CHP industry
(Rs billion) 50 40 32.9 30 20 10 0 2006-07 Sales 2007-08 2008-09 2009-10 Net margins (RHS) 19.5 23.9 47.5 (per cent) 16 14 12 10 8 6 4 2 0
The CHP industry has clocked revenues of 35 per cent CAGR over the last 3 years. On account of increasing competition there has been some margin pressure on the industry with net margins declining from 7.8 per cent in 2007-08 to 5.6 per cent in 2009-10.
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Companies in the water treatment segment have grown at a healthy rate over the last 3-4 years, with their order books having sufficient revenue visibility. For Thermax, even though the performance is muted as compared to its peers, this is mainly because a substantial part of its revenue comes from other businesses. The cash conversion for Driplex is high at 38 days mainly because most of its orders are from BHEL and NTPC, which often delay payments. In cooling towers, Paharpur has been able to maintain its market leadership as it has the technology and capability to produce most of the equipments required for a cooling tower in-house. This allows the company to bid at lower price points, enabling considerable inflow of orders. Moreover, it has a good track record in executing cooling towers units.
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27.8
10.0
14.1
26.4
(times) 5 4 Thermax 3 2 1 Driplex 0 (Days) -300 -200 Inventory days -100 0 Debtors days 100 200 Creditors days 300 -110 -16 88 Va Tech -224 -4 256 -87 -75 131 Paharpur -140 -84 98
126
31
-28
38
Notes 1) Numbers on the top are RoE. 2) Thermaxs RoE is for 2009-10. Source: CRISIL Research, Prowess
Notes 1) Numbers to the extreme right are cash conversion days. 2) Thermaxs RoE is for 2009-10. Source: CRISIL Research, Prowess
The water treatment industry registered revenue growth 16 per cent CAGR over the last 3 years. In 2009-10, net margins declined to 5 per cent from 8 per cent. This was mainly because margins of Thermax halved during the year. Excluding Thermax, the industry was able to maintain margins.
Figure 7: Performance of the water treatment industry (excluding cooling tower)
(Rs billion) 50 40 30 20 10 0 2006-07 Sales 2007-08 2008-09 2009-10 Net margins (RHS) 37.1 39.6 40.9 (per cent) 16 14 12 10 8 6 4 2 0
26.1
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Both analysed players in this segment have recorded high growth rates over the last 3-4 years. This is in line with CRISIL Researchs view of capacity additions being driven by private players who prefer to award projects on a turnkey basis. CRISIL Research believes that the turnkey category will continue to register the highest growth rate in the BoP industry. BGR Energy was an early entrant in the turnkey segment and has managed to grow at a CAGR of 58 per cent. Since projects in this segment are high value and involve coordination with other players, project management skill is the most important criteria for success. Both the companies have been able to achieve growth without sacrificing margins and while maintaining healthy cash conversion cycle. In addition to these, players like L&T and TPL also have good project management skills.
Figure 8: Turnkey players - Du Pont decomposition
(per cent) 10 8 6 4 2 0 Tecpro Systems Net margins (LHS) BGR Energy Assets/Equity (RHS)
42.8
31.8
53
59
Inventory days
Debtors days
Creditors days
Note: Numbers on the top are RoE. Source: CRISIL Research, Prowess
Note: Numbers to the extreme right conversion days. Source: CRISIL Research, Prowess
are
cash
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Tecpro is a relatively new entrant in this segment, but has won a large number of orders. It has a higher proportion of in-house manufacturing which benefits the company. In addition, the bidding strategy has been aggressive and targets volume-based growth. More players like McNally Bharat and TRF are planning to enter this segment. With increasing competition and aggressive bidding, players are expected to continue to target volume-based growth, and consequently margins will be under pressure. A key differentiator here could be the capability to manufacture components in-house which is leading players to enter technological tie-ups with foreign companies.
Figure 10: Performance of the turnkey segment
(Rs billion) 50 40 30 20.2 10.3 45.5 (per cent) 16 14 12 26.6 10 8 6 4 2 0 2006-07 Sales 2007-08 2008-09 2009-10 Net margins (RHS) 0
20 10
The turnkey segment has witnessed high revenue CAGR of 64 per cent between 2006-07 and 2009-10. This growth has been driven by both players - Tecpro and BGR. Players have been able to maintain operating and net margins despite the rising competition. Operating margins have ranged at 12-14 per cent over the last 4 years while net margins have been at 6-7 per cent.
A-31