No sales growth and continued overcapacity in T & D makers in 2QFY14, says Nomura in its research note
An analysis of the domestic power business of Crompton Greaves, ABB India and other small listed transformer makers suggests that 2QFY14 witnessed a modest margin uptick, says Nomura in its research note on T & D (transmission and distribution) makers in the electrical equipment sector. The margin uptick in most companies is largely driven by cost-efficiency programs and other restructuring efforts rather than actual pricing improvement or economies of scale. For example, ABB India had run into several loss-making projects in its power business, from which it is now coming out from and hence the margin recovery. Among smaller transformer companies, a margin uptick is witnessed only in the case of TRIL, which is primarily led by strong sales growth. However, on a collective basis, 1HFY14 margins for smaller transformer companies are still weaker y-y (year-on-year).
Nomura hastens to point out that the margin uptick in the sector is backed by hardly any revenue growth, which is critical for any sector to sustain a reasonably long period of healthy margins.
The other trend that Nomura points out is that capacity continues to rise for the system as a whole –Chinese companies TBEA and Baoding have already set up manufacturing presence in the country, Toshiba has now entered through its stake purchase in Vijay Electricals, while other existing players, too, keep adding new capacity – the latest being Crompton Greaves, which plans to double capacity over the next two-three years. As such, Nomura does not expect the domestic transformer market pricing scenario to turn favourable any time soon.
For investors, there is some hope as Nomura’s research note says, “Decades of under-investment, followed by a march towards building sufficient power for the nation, have created significant opportunities, although structural constraints and rising competition suggest the need to be selective.” Overall, Crompton Greaves is Nomura’s favourite share in the market other than ABB India.
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