Power sector problems hit T&D players

Companies that generate power are not the only ones hurt by environmental hurdles, fuel problems and the poor health of State electricity boards. Companies that ensure last-mile power connectivity to your home – power transmission and distribution (T&D) firms, too, have been hit by these setbacks.

In the six months ended September 2011, 12 leading listed T&D players (excluding diversified ones) saw a combined 25 per cent drop in their profits even as sales grew 12 per cent.

Power T&D players are today plagued by poor capacity utilisation, falling profit margins and stretched working capital. Stock markets have beaten down these companies by anywhere between 26-65 per cent so far in 2011.

Heavy investment, idling capacity

Expecting to generate big business from the upcoming power capacities, a number of transformer, sub-station and tower makers invested heavily in capacity building after 2007. With new generation capacities now stalled, they have been idling a good part of their capacity.

Mid-sized power equipment maker Emco doubled its transformer capacities in 2008, but used a little less than 50 per cent of its capacity in FY-11. A small player like Indotech Transformers utilised just a third of its installed transformer capacity last fiscal.

Anaemic orders flows from private clients and delayed orders from the Power Grid Corporation cut down demand.

Competition pains

Even as demand dried up, the entry of more players compounded the problem. Excess capacity has been aggravated by strong competition from overseas manufacturers particularly China and Korea, a factor highlighted by Emco in its 2011 annual report. The impact is continued to be felt in the current year as well. Emco's sales for six months ended September 2011 remained lower than year ago sales.

Margin compression

As domestic players bid aggressively to compete, profit margins have taken a hit. Operating profit margins for the transmission players slipped to 6.9 per cent for the six months ending September 2011 from 9 per cent a year ago.

Bigger players in the transformer/substation segment were no exception to this trend. Players such as Siemens and Crompton Greaves, who have earlier enjoyed 15-18 per cent in their T&D operating margins, have seen this dwindle to 8-9 per cent.

Power engineering, procurement and construction players such as KEC International and Kalpataru Power on the other hand, saw less of a margin dip, thanks to their overseas operations and less intense competition in this segment.

Net profit margins too saw a sharp compression from 5.3 per cent to 3.4 per cent, owing to higher interest costs. With delayed payments from clients, especially SEBs, many players have been forced to resort to short-term credit thus increasing interest costs.

Pick-up visible

This said, the silver lining in the last three months is the pick-up in orders from Power Grid Corporation. Orders awarded by this state-run firm jumped 170 per cent between April and October 2011, compared to a year ago, to Rs 7,900 crore.

A sample check (September and October 2011) of contracts from PGCIL suggests that while the Chinese players are not out of the race, they have put in fewer bids. Their absence in the transformer space is also conspicuous.

A 14-per cent depreciation of the rupee against the yuan between September and now could be one reason for less enthusiastic participation. However, setting up of shop by Chinese transformer player TBEA in India suggests that competition is here to stay. Higher order flow from PGCIL and SEBs could be the only way out for the domestic T&D players to ensure volume-driven growth.