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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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Continued

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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

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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

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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.

Capacity additions and high growth in GDP to boost power demand


CRISIL Research expects 82 GW of power capacities to be added between 2009-10 and 2014-15 as compared to a mere 33 GW added during the previous 5 years. This translates to a supply increase of 9.1 per cent CAGR over the next 5 years. During the same period, GDP growth is likely to average 8.0-8.5 per cent. This growth together with the increased supply of power is expected to boost power demand at a compounded rate of 7.8 per cent during 2009-10 to 2014-15 vis--vis the previous 5-year CAGR of 7.0 per cent. High growth in supply is expected to reduce the power deficit to around 5 per cent by 2014-15 from 10.1 per cent in 2009-10. As per CRISIL Researchs region-wise analysis, the southern region is likely to inch closer to a balanced scenario whereas the eastern region is expected to have a surplus situation. However, the western and northern regions are likely to continue to reel under high deficits.

Investments of Rs 9.3 trillion expected during the next 5 years


The sizeable capacity additions [inclusive of generation (utilities and captives) and concomitant transmission and distribution] over the next 5 years will require an investment outlay Rs 9.3 trillion, according to CRISIL Research. Of this, the generation segment would constitute a lions share at Rs 5.8 trillion, mainly driven by private sector players.

Power generation equipment BTG capacity to exceed demand


CRISIL Research expects the huge generation capacity additions to spur players like Larsen & Toubro, JSW Energy, Bharat Forge, BGR Energy, amongst others, to install boiler, turbine, generator (BTG) capacities of more than 15 GW in joint venture with foreign players; currently, Bharat Heavy Electricals Ltd is the only domestic player in the BTG segment with an operational capacity of 15 GW. Hence, by 2013, the BTG capacity in the country is likely to exceed 30 GW while capacity additions in the power sector would be 15-20 GW per year, thus, leading to an overcapacity situation. [Power generation equipment are divided in two broad categories: (i) BTG and (ii) balance of plant (BoP), with the BTG segment accounting for around 50 per cent of the total cost involved in setting up a power plant.]

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BoP a Rs 1.6 trillion opportunity


BoP, which accounts for 40 per cent of the cost of a power plant, is further divided into components such as coal handling plant (CHP), ash handling plant (AHP), water treatment systems, cooling tower, civil works etc. Over the next 5 years, of the total investment expected in the sector, CRISIL Research expects Rs 1.6 trillion in the BoP segment. In addition, a further Rs 0.7-trillion-worth of BoP orders would be placed for capacity additions beyond the forecast period. CHP, AHP and civil works will account for 65-70 per cent of investments in the BoP segment.

BoP players shifting from component-based model to turnkey model


Competition in the BoP segment is severe with 7-8 suppliers for each component. Also, private players prefer to award equipment contracts on a turnkey basis unlike central utilities which award components separately; CRISIL Research expects more than 60 per cent of the total coal-based capacity additions to come from private sector players. Due to these factors, players are shifting from executing the low value-high margin BoP components to high value-low margin turnkey projects. While 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.

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Review and outlook

Economic growth, capacity additions to fuel power demand


Power demand is likely to grow by 7.8 per cent CAGR between 2009-10 and 2014-15. The robust demand is on account of Indias GDP growing at a fast pace as well as rapid augmentation of power generation in the country translating to increased and improved availability of power. While Indias GDP, according to CRISIL Research, will continue to be in the 8.0-8.5 per cent range over the next 5 years, 82 GW of power capacities are expected to be added during the same period as compared to only 33 GW added over the previous 5-year period. During 2004-05 and 2009-10, electricity demand rose at a compounded rate of 7.0 per cent. However, the growth in demand was restrained by limited capacity additions, resulting in frequent load shedding throughout the country.

Industrial sector to lead demand growth


CRISIL Research expects the industrial sectors share in the total electricity demand mix to increase to around 49 per cent by 2014-15 from 45 per cent in 2004-05, on account of significant growth in industrial activity. Electricity demand from the real estate sector is expected to record steady growth due to new residential developments. Growth in commercial complexes, malls and other super marts are expected to keep the commercial sectors share in overall demand steady. However, the share of agriculture is likely to decline sharply, to 19 per cent in 2014-15 from 24 per cent in 2004-05. Domestic demand is expected to increase at a compounded rate of 7.8 per cent over the next 5 years as against 7.5 per cent (approximately) recorded in the previous years. This growth is likely on account of an increase in household power consumption as income levels rise and increased sales of consumer durables. However, as the overall demand growth is also expected to be high, the share of the domestic category in the overall demand mix is likely to remain stable. Between 2004-05 and 2008-09, the per capita consumption of power rose from 612 units to around 733 units. Growth in demand was the result of industrial players adding huge capacities (as well as plants running at high operating rates), residential demand increasing steadily on the back of sizeable real estate development, and increasing consumption from households. Conversely, the share of the agricultural sector declined during the same period.

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Figure 1: Consumer-wise share of demand


(per cent) 60 50 40 30 20 10 0 Domestic 2004-05 Commercial 2009-10 Agriculture 2014-15 P Industry 7 8 8 45 46 49

24

25

24

24

22

19

P: Projected
Source: CRISIL Research

Demand growth across regions not expected to be uniform


CRISIL Research expects domestic power demand to grow at a compounded rate of 7.8 per cent from 2009-10 to 2014-15, which is higher than the 7.0 per cent CAGR recorded over the previous 5 years. However, growth is not expected to be uniform across regions. While demand in the southern region is expected to grow at a CAGR of 8.2 per cent, the eastern region is likely to register a lower 6.7 per cent growth rate.
Figure 2: Region-wise demand growth
(bn units) 400 350 300 250 200 150 100 50 0 9 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 2009-10 2009-10 2009-10 2009-10 2009-10 88 8.0% 374 7.8% 8.2% 254 259 221 376 327

6.7%

122

4.0% 2011-12 P 2012-13 P 2013-14 P

11 2014-15 P CRISIL RESEARCH POWER ANNUAL REVIEW

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.

Increasing industrialisation to drive demand growth in the western region


CRISIL Research expects demand in the western region to grow by 7.8 per cent CAGR from 2009-10 to 2014-15 vis--vis 4.8 per cent CAGR during the previous 5 years. The demand mix for electricity in the western region is mainly industrial, domestic and agricultural. We expect steady growth in demand from the industrial and domestic sectors, whereas the agricultural sectors share in total demand is likely to decline. Gujarat and Maharashtra are expected to be the main demand drivers.

Rising power availability to boost demand in the southern region


The southern region is expected to move towards a balanced situation over the medium term from a deficit of 6-7 per cent. Rising village electrification coupled with high growth in generation capacity additions is expected to translate to a demand growth of 8.2 per cent CAGR between 2009-10 and 2014-15 in the southern region as against a CAGR of 8.4 per cent in the previous corresponding period. Andhra Pradesh and Tamil Nadu are expected to be the drivers of this growth in demand.

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.

Generation capacities of 82 GW expected to be added over the next 5 years


Capacity additions are expected to fall short of the targets set by the government. In the first 3 years of the Eleventh Plan (2007-08 to 2011-12), 22 GW of capacities have been added as against the target of 62 GW during the Plan period. After a detailed project-by-project status check, CRISIL Research expects capacity additions of 48 GW to be commissioned during the Eleventh Plan. Between 2010-11 and 2014-15 (which includes CRISIL Researchs capacity estimates for the remaining 2 years of the Eleventh Plan), capacities of 82 GW are expected to be added, wherein about 90 per cent is likely to be thermal, with the remainder hydro and nuclear-based. The capacities include the Mundra and Sasan ultra mega power plants (UMPPs), which are scheduled to be commissioned by 2014-15. Apart from these, projects via the Case I* and Case II* bidding routes as well as memorandum of understanding (MoU)-based projects are expected to become commercially operational over the next 5 years.
* Case I - The bidding process for procurement of power where location, technology and fuel is not specified by the procurer. * Case II - The bidding process is for location-specific projects where the procurer assist the bidder in securing land, necessary clearances, fuel, etc.
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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.

Capacity additions to be driven by private players; coal to be primary fuel


The private sector is expected to account for 55 per cent (45.5 GW) of these capacity additions, followed by the central and state sectors at 26 per cent and 19 per cent, respectively.
Figure 3: Sector-wise capacity additions
(GW) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 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 3.7 5.7 5.3 3.0 3.7 3.1 2.8 3.5 3.1 2.6 7.6 6.4 4.3 12.7 21.4 15.2 45.5 14.5

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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Figure 4: Fuel-wise capacity additions


(GW) 45 40 35 30 25 20 15 10 5 0 Coal Gas Hydel Central Nucle Coal Gas Hydel Coal Gas Private Hydel State 0.7 14.3 9.8 4.2 4.7 2.2 0.7 1.8 2.2 41.6

Note Coal includes coal and lignite.


Source: CRISIL Research

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

6.0 4.0 3.4 3.1 2.7 2.0 3.8

5.2 3.9 3.9 2.7 2.8 2.8 2.2 3.5

4.0

2.9

2.6

2.0

2.0 1.1 1.1 0.1 0.3 2011-12 P 2012-13 P 2013-14 P 2014-15 P

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

Capacity additions to lead to supply growth of 9.1 per cent CAGR


The 82 GW of capacity additions will translate to supply of power in the country growing at a CAGR of 9.1 per cent over the next 5 years.

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Figure 6: Power supply and capacity additions


(bn units) 1400 1200 1000 800 600 400 200 0 2009-10 2010-11P 2011-12P Supply 2012-13P 2013-14P 2014-15P Capacity additions (RHS) 5 11.1 9.6 14.9 18.8 16.4 15 (GW) 25 20.9

20

10

P- Projected
Source: CRISIL Research

Country-wide deficit to reduce to 4.8 per cent by 2014-15


Power deficit in the country expanded from 7.3 per cent in 2004-05 to 11.1 per cent in 2008-09. However, the trend reversed in 2009-10, with supply outpacing demand. This was mainly on account of 9.6 GW of capacities commissioned along with commencement of gas supplies from the Krishna-Godavari (KG) basin. CRISIL Research expects this trend to continue over the next 5 years. From 2010-11, the capacity additions [especially during the Twelfth Plan (2012-13 onwards)] are expected to bring down the base deficit to 4.8 per cent by end 2014-15.
Figure 7: Power deficit scenario
(bn units) 1400 9.6 8.3 7.3 9.9 11.1 10.1 9.6 8.6 7.4 6.1 4.8 6 8 (per cent) 12

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

Northern region power deficit to decline significantly


Power deficit in the northern region is expected to decline significantly, especially over the next 2 years, as 7.5 GW of capacities are scheduled to be added in this region. In addition, a number of plants from other regions will supply power to the North (specifically Delhi) as they have been set up to supply power for Commonwealth Games in 2010. Also, in 2011-12, some of the plants scheduled to come on-stream in 2010-11 would be
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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.

Western region deficit to reduce from 2012-13


We expect the deficit in the western region to reduce significantly from 14 per cent to 7 per cent by end 2014-15 on account of significant capacity additions. The capacity additions in the western region are expected to be around 33 GW with most of the capacities being added from 2012-13. Hence, the deficit is likely to start contracting from 2012-13. Maharashtra and Madhya Pradesh are the main states where demand is expected to considerably outstrip supply by 2013-14 despite the huge capacity additions. Gujarat, on the other hand, is likely to have a surplus situation.

Southern region to move to a balanced demand-supply situation


The southern region is expected to add around 16 GW of power capacities over the next 5 years. As in the case of the western region, the additions in this region would also be bundled in the last 2-3 years of the 5-year period. Hence, the deficit is expected to decline significantly only in 2013-14 and 2014-15. This would result in a nearly balanced demand-supply situation in the southern region. State-wise, demand in Tamil Nadu and Karnataka is likely to exceed supply, although not considerably. Andhra Pradesh is expected to witness a balanced situation.

Eastern region to become a surplus region


The demand-supply scenario in the eastern region is likely to improve significantly, from a deficit of 4-5 per cent to a surplus situation by the end of 2014-15. This would be mainly on account of a stable demand scenario and capacity additions of 13 GW. States such as Orissa and West Bengal are expected to add large capacities, which will turn the region into a surplus region by the end of 2013-14. Meanwhile, Bihar and Jharkhand would continue to reel under deficits.

North-eastern region deficit gap to be maintained


We expect around 2.6 GW of power capacities to be added in the north-eastern region, which will maintain the demand-supply deficit at around 10 per cent.

Peak load deficit also expected to decline by 2014-15


On the peak load front, the deficit increased from 11.7 per cent in 2004-05 to 16.6 per cent in 2007-08, declining thereafter to 12.7 per cent in 2009-10. Over the next 5 years, CRISIL Research expects the peak deficit to reduce further to 8-9 per cent, as more peak load capacities (hydel and gas-based) are added to the system. This is critical as most of the capacity additions would be coal-based. CRISIL Research expects capacity additions in the range of 14-15 GW over the next 5 years from gas and hydelbased capacities (expected to add about 7 GW each). Capacity additions from gas-based projects in lieu with access to KG basin gas and hydel capacity additions mainly from central and private players are expected to ease peaking deficit to an extent.
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Figure 8: Peak load - Expected demand-supply scenario


(MW) 200,000 12.7 10.7 10.2 (per cent) 15.0

160,000

9.6

12.0 9.0 8.5

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

P- Projected Source: CRISIL Research

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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Table 3: Investments in the power sector


Rs billion Generation-Utilities Generation-Captives Total T&D Total Investments T&D/Generation-Utilities 2009-10 E 647.7 100.2 431.0 1,178.9 67% 2010-11 P 767.4 112.2 499.5 1,379.1 65% 2011-12 P 884.5 124.9 579.4 1,588.8 66% 2012-13 P 993.6 145.4 672.7 1,811.7 68% 2013-14 P 1,131.2 169.3 781.6 2,082.1 69% 2014-15 P 1,290.8 197.1 908.8 2,396.7 70% Total (2010-11 to 2014-15) 5,067.4 749.0 3,442.0 9,258.5

E- Estimate, P- Projected Source: CRISIL Research

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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Generation equipment - BTG capacity to exceed demand

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%

This includes Interest during construction (IDC), land costs etc.

Power plant Source: CRISIL Research

100%

*Other costs in BoP include cost of electric fittings, chimney, fuel oil system, fire protection etc.

Private players prefer EPC route to procure equipment


The demand for BTG and BoP equipment is primarily driven by coal-based power plants, as these plants need a boiler, CHP and AHP to operate, which account for a substantial portion of the total cost of a plant. Going forward, of the total 82 GW of capacity additions, 65.6 GW are expected from coal-based capacities. Of this, more than 60 per cent would be from private sector players while the rest would be accounted for by central and state utilities.

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Figure 1: Sector-wise share in coal-based capacity additions


(per cent) State 15

Central 22

Private 63

Source: CRISIL Research

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

Central utilties Eg. NTPC

Ash Handling Plant

Water works

Cooling tower

Source: CRISIL Research

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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Chart 2: Private utilities prefer EPC route


Coal Handling plant BoP contractor (L&T, BGR, Tecpro etc) Ash Handling plant Cooling tower & water treatment Others

Private sector players

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

Private sector players

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.

BTG - staring at an overcapacity situation


Currently, Bharat Heavy Electricals Ltd (BHEL) is the only domestic player in the BTG segment with an operational capacity of 15 GW. L&T has recently started executing some orders in the BTG segment, with its capacity expected to be completely operational by December 2010. Up to 2009, BHEL was the only player in the domestic market with an operational capacity of 10 GW. From 2007 to 2010, several private sector players such as Adani Power, JSW Energy, Lanco Infratech and Sterlite Energy laid out plans to set up large power generation capacities. Since BHEL was already facing delays in executing its existing orders, these players had to look out for an alternative route. Chinese players like Shanghai Electric, Harbin and Dong Fang emerged as primary choices, as these companies had experience and scale to execute super critical power plants. In addition, Chinese equipment is on an average 15-20 per cent cheaper than Indian equipment on account of the currency advantage and import duty exemptions available in India for mega power plants and UMPPs.

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Table 2: Private players preference for Chinese equipments


Player Lanco Infratech Project Anpara Babandh Amarkantak Sterlite Energy Jharsuguda Talvandi Sabo GMR Energy Reliance Power Kamalanga Sasan UMPP Krishnapatnam UMPP Rosa Phase Adani Power Mundra Tiroda JSW Energy Raj WestPower Ltd Ratnagiri Torangallu Extension Essar Power Mahan Salaya Tori Power plant Total (Chinese players) Note: The above list is indicative and not exhaustive Source: CRISIL Research Size (MW) 1,200 2,640 1,320 2,400 1,980 1,050 3,960 3,960 1,200 4,620 3,300 1,080 1,200 600 1,200 2,520 1,200 35,430 Contract Harbin Power Harbin Power Harbin Power SEPCO SEPCO SEPCO Shanghai Electric Shanghai Electric Shanghai Electric SEPCO, SCMEC SCMEC Dongfang Electric Shanghai Electric Shanghai Electric Harbin Power Harbin Power Harbin Power

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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Table 3: Capacity additions lined up in the BTG segment


Current capacity (GW) JV Player BHEL L&T - Mitsubishi BGR Energy - Hitachi JSW - Toshiba Bharat Forge - Alstom Thermax - Babcock & Wilcox GB Engineering - Ansaldo(Gammon) Total Total capacity Source: CRISIL Research 51:49 51:49 25:75 49:51 51:49 15:85 structure 15 0 0 0 0 0 0 15 Boiler capacity 5 4 4 0 0 3 2 18 33 Capacity additions (GW) TurbineGenerator capacity 5 4 4 3 5 0 0 21 36 By 2013 Commissioning December-12 December-10 2013 2012-13 December-12 December-12 NA

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.

Import duty, indigenous procurement of equipment can shield domestic industry


Domestic players have been lobbying for a levy of 15-20 per cent import/customs duty on Chinese equipment since the last 1 year on the grounds that domestic players have to pay excise duty on their production whereas Chinese equipments are exempt from import duty. Moreover, Chinese manufacturers also enjoy the advantage of a depreciated currency. These two factors lead to Chinese equipment being cheaper by 15-20 per cent. The government has rejected the import duty demand on the grounds that there is not enough domestic capacity, and hence players should be free to choose equipment suppliers to speed up execution. However, with substantial BTG capacity additions lined up, CRISIL Research believes that following options can partly shield the domestic industry:

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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BoP Huge opportunity amidst stiff competition

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.

BoP - a Rs 1.6 trillion opportunity


Over the next 5 years (2010-11 to 2014-15), of the total investment expected in the power sector, CRISIL Research estimates the BoP segment to account for Rs 1.6 trillion; this translates to a CAGR of almost 15 per cent. In addition, a further Rs 0.7-trillion-worth of BoP orders are likely to be placed for capacity additions beyond the forecast period.
Figure 1: BoP industry size
(Rs billion) 450 400 350 300 250 200 150 100 50 2009-10E 2010-11P 2011-12P 2012-13P 2013-14P 2014-15P 246 207 283 318 362 413

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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Chart 1: BoP: Opportunity in major components


BoP (~ Rs 1,620 bn)

Coal handling plant (Rs 405 bn)

Ash handling plant (Rs 245 bn)

Water treatment and Cooling Tower (Rs 240 bn)

Civil works (Rs 405 bn)

Others (Rs 325 bn)

Source: CRISIL Research

Coal handling plant


CHP handles coal from the unloading stage to transporting it to the boiler and storing it in bunkers. It also processes raw coal to make it suitable for boiler operation, i.e. covers receipt of coal from coal mines, weighing of coal, crushing it to the required size and transferring the coal to various coal mill bunkers. Major equipment used in a CHP are wagon tipplers, stacker-reclaimers, conveyor belts, coal crushers and dust extraction systems. The construction period for a CHP is 18-30 months.
Chart 2: Coal handling capacity required by a 1,000 MW plant

Power plant capacity 1,000 MW (500x2) @ 100% PLF

Heat rate = 2,425 Kcal/kWh UHV = 3,150 Kcal/kg

CHP capacity required = 1,600 TPH (no. of CHPs to be added = 111)

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.)

Ash handling plant


AHP refers to the system of collecting fly ash and bottom ash generated when coal is burned. Fly ash is one of the residues generated in combustion, and comprises fine particles that rise with the flue gases. Ash which does not
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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.

Fly ash and bottom ash


Fly ash is captured and removed from flue gas by electrostatic precipitators. The fly ash is periodically removed from collection hoppers below the precipitators. Typically, the fly ash is transported to storage silos for subsequent transport by trucks or railroad cars. At the bottom of the boiler there is a hopper for collection of bottom ash. This hopper is filled with water to quench the ash and clinkers falling from the furnace. Bottom ash and crushed clinkers are conveyed to silos or ash pond. Ash ponds are structures for the disposal of fly ash. Wet disposal of fly ash into ash ponds is the most common fly ash disposal method.
Chart 3: Ash handling capacity required by a 500 MW plant

Power plant capacity 500 MW (500x1) @ 100% PLF

UHV = 3,150 Kcal/kg Ash content = 46%

AHP capacity required ~300 TPH (No. of AHPs to be added = 153)

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).

Water treatment system and cooling tower


The water treatment system mainly consists of systems to transport water from the source to the plant, PT plant and DM plant. PT plant produces clarified water to meet the requirement of clarified water applications of the power plant, viz cooling tower make-up, service water and input water for producing potable and DM water. DM plant is meant to supply demineralised water to the plant. The gestation period for water systems is 12-18 months. Cooling towers are heat removal devices that transfer process waste heat to the atmosphere. Cooling towers evaporate water to remove process heat and cool the water. The construction period of a cooling tower is 18-24 months.
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Chart 4: Water requirement for a 1,000 MW plant

Power plant capacity 1,000 MW (500x2)

3,000 m /hour (3 mn litres) of water is required

65.6 GW requires 1.72 trillion litres or 1.72 billion m per year


3

Source: CEA, CRISIL Research

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.

BoP - a highly scattered segment with severe competition


Competition in the BoP segment is severe with 7-8 suppliers for each component. Since each of these components have their own set of suppliers, CRISIL Research has looked at the major components individually. CHP and water treatment are the categories facing high competition with the market divided amongst the top 4-5 players. In the case of AHP, Indure and Macawber Beekey are the leading suppliers with a combined market share of around 65 per cent. For cooling towers, Paharpur Cooling Towers is the market leader, having a share of about 60 per cent. In the turnkey (total BoP) business, BGR Energy and L&T are the market leaders. Other prominent players in this segment are Tata Projects Ltd (TPL), BHEL, Reliance Infrastructure and Lanco Infratech. These players are fairly experienced in handling turnkey projects. Reliance Infrastructure and Lanco Infratech mostly execute in-house (group company) projects. Players such as Tecpro, TRF and McNally Bharat used to execute only CHPs and AHPs, but to gain scale have recently entered the turnkey segment.

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Chart 5: Players present in various components of BoP and their market shares
BoP Rs 1,620 bn

Coal handling plant 18-30 mths (Rs 405 bn)

Ash handling plant 12-18 mths (Rs 245 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

Note: Numbers in brackets indicate market share of players


Source: CRISIL Research

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.
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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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Figure 2: CHP players - Du Pont decomposition


(per cent) 8 7 6 5 4 3 2 1 0 Elecon Mcnally Bharat TRF Tecpro Systems Assets/Equity (RHS)

Figure 3: CHP players - Cash conversion cycle


Tecpro -227 -94 262

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

Net margins (LHS)

Total Asset turnover (RHS)

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

Operating margins (RHS)

Source: CRISIL Research, Prowess

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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Driplex is leader in water treatment, Paharpur in cooling towers


Within the water space CRISIL Research has covered Driplex, Va Tech and Thermax in water treatment and Paharpur in cooling towers. In terms of revenues, though Driplex is the lowest, most of its revenues come from the power sector. Va Tech is also a major player in areas such as municipal water treatment and sewage treatment while a substantial portion of Thermaxs revenues are from the boiler and environment segments. Though Gammon Infrastructures market share in the cooling towers segment is 20-25 per cent, in terms of the companys overall revenues, it accounts for a very small share. Hence, the company has not been considered for the purpose of this analysis.
Table 2: Financials of water treatment and cooling tower companies
Driplex 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 Inhouse 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 2,378 31.0 11.3 32.5 6.1 31.0 5,700 2.4 n.a 25.4 26.5 0.6 38 Va Tech 2009-10 7,077 39.6 12.4 72.7 6.6 87.8 21,634 3.1 n.a 27.0 44.8 0.1 28 Thermax 2009-10 31,422 11.8 11.8 8.4 4.5 9.9 53,810 1.7 n.a 14.1 37.3 31 Paharpur 2009-10 9,326 15.7 20.3 29.7 16.7 25.6 60,000 6.4 90 24.2 30.2 0.1 126

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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Figure 5: Water treatment players - Du Pont decomposition (2008-09)


(per cent) 20 16 12 8 4 0 Driplex Net margins (LHS) Va Tech Thermax Paharpur Assets/Equity (RHS)

Figure 6: Water treatment players - Cash conversion cycle (2008-09)

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

Total Asset turnover (RHS)

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

Operating margins (RHS)

Source: CRISIL Research, Prowess

Turnkey - BGR well-established, competition intensifying


Within the turnkey industry, CRISIL Research has covered only two players - BGR Energy and Tecpro. This is because other key players such as L&T and BHEL have a major portion of their revenues coming from other business divisions.

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Table 3: Financials of turnkey players


Tecpro 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 Inhouse 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 14,597 83.0 15.9 80.1 7.5 71.5 24,000 1.6 60 42.8 24.5 0.2 59 BGR 2009-10 30,762 57.6 13.0 60.4 6.5 71.7 105,000 3.4 40 31.8 19.9 1.4 53

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)

Figure 9: Turnkey players - Cash conversion cycle

42.8

31.8

(times) 5 4 3 2 1 0 Tecpro -227 -94 262 BGR -235 -2 184

53

59

(Days) -400 -300 -200 -100 0 100 200 300

Total Asset turnover (RHS)

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

Operating margins (RHS)

Source: CRISIL Research, Prowess

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.

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