Power gear: Orders pick up, but competition hits players

A stream of new orders in the March quarter, after a hiatus in the first half of FY-12, must ideally spell good news for companies in the power transmission and distribution space.

But things are not looking too bright for established players such as ABB, Siemens, Crompton Greaves or KEC International.

Most of these players have lost market share in FY-12 either to Chinese players or new domestic entrants. In a sector where the profit margin is largely linked to volumes, it may be tough for domestic players to return to the high double-digit operating profit margins of a few years ago.

Order flow back

PowerGrid Corporation of India (PGCIL) increased its pace of awarding transmission and distribution (T&D) orders in the March 2012 quarter. The public sector company placed orders worth Rs 10,791 crore to private players in this period. That is 50 per cent of the total orders of Rs 22,000 crore placed in FY-12.

This meant orders for companies that make power equipment such as transformers, sub-stations, conductors and transmission and distribution lines. Companies such as ABB, Siemens, Crompton Greaves, and Transformers and Rectifiers did receive orders, though not in the same proportion as last year.

Chinese back with a bang

In the transformer space, it appeared that the Chinese were less aggressive for a good part of FY-12. But they more than made up for their absence in the last quarter, bagging close to 40 per cent of the transformer orders awarded by PGCIL. Interestingly, the Chinese went for the kill in the high-end (also higher-margin) 765-KV transformer space.

According to data from MF Global India Research, Crompton Greaves dominated this segment in FY-11 winning a third of the order value.

In FY-12, though, TBEA Shenyang walked away with 27 per cent of the orders in the 765-KV segment, leaving Crompton Greaves with just 12 per cent. TBEA did not win any orders in FY-11. It is now setting up a plant in Gujarat and is likely to scout for orders to utilise the local capacity.

Overall, in the transformer space (across various transformer capacities), Crompton Greaves was the top loser. Siemens saw its share falling from 12 per cent to three per cent, while ABB's share dropped from seven per cent to three per cent.

Alstom T&D was the only one to buck this trend with an increase in market share. And it managed this by ramping up its 765 KV orders, close on the heels of TBEA.

More players

If the Chinese grabbed transformer orders, in the sub-station space, it was intensified competition from local players that reduced the market share of the experienced companies. ABB bore the brunt of this.

While ABB won a whopping four-fifth of the orders in this space in FY-11, its share dwindled to just six per cent in FY-12. New local players disrupted the market share game in this segment. PGCIL, in early 2011, brought in a new norm, where orders for substations and circuit-breakers could be placed separately (it was earlier done as a package).

The split in orders led to a much smaller order size for players such as ABB and Siemens.

This also aided entry of new players such as Sterling & Wilson, especially in the 400-KV space. The new norm also helped less entrenched plays such as L&T, Jyothi Structures and Techno Electric gain more orders in FY-12.

The dwindling market share poses the risk of lower profit margins for T&D players. The aggressive competition also means that these players will have to compromise on margins to win orders.

Crompton Greaves, one of the worst hit in the transformer space, has seen its standalone operating margins dwindle from close to 20 per cent two years ago to around 10 per cent in the December 2011 quarter.