Capital Goods - Thematic Report - Imminent Capex Visibility in T&D Space to Aid Key Segmental Players - Reliance Securities

The Indian Capital Goods sector has relatively underperformed vs. BSE Sensex in last 2 years on the back of continuous slowdown in order-inflows, declining margins, execution delay and diminishing return ratios. We are cautious on the Indian Electrical BTG segment amid concerns over weak order inflow from power generation marked by lower margins, while we are positive on power T&D space on continued higher capex.Looking ahead, we believe that implementation of UDAY scheme for DISCOMs is likely to result in better cash flows which will add further momentum to new investments in state T&D networks, while PGCIL's ongoing capex would fuel demand for equipment in T&D space.

- Huge Investment Underway in Power T&D Space: Increased focus on power generation during 2005-15 has resulted in relatively less investment in T&D sector, which requires ~Rs5.6trn investment in next five years, as the 13th Five Year Plan (2017-2022) envisages 93GW of generation capacity addition, 130,000ckm of transmission capacity addition, and 300,000MVA of substation capacity addition. Integrating solar power to the National Grid and Green Energy Corridors-II project - planned by Power Grid Corporation of India (PGCIL) - for grid integration of renewable energy by FY22 augur well for the sector.

- T&D Segment Expected to Sustain Order Growth Momentum: We bear a strong outlook for domestic and global T&D markets in next 3-4 years driven by investments in grid interconnection, transmission projects for new generation capacities and replacement demand. The global markets - including Africa, Middle East & the US - are also expected to witness strong growth, going forward driven by interconnection projects and replacement demand.

- Fresh Ordering in BTG Still a Long Way barring Renewable Energy: Domestic thermal BTG capacity is estimated to increase to 45GW per annum by FY17E-end, implying overcapacity compared to demand estimate of 12-14GW per annum in FY16-19E. Indian power sector will witness a significant rise in capacity addition to 88GW during 12th Five Year Plan. We believe that the pricing pressure is likely to continue, as 70% order for 13th Five Year Plan has already been placed. We believe that ordering from the sector will not see any meaningful recovery until key critical issues - low Plant Load Factor (PLF), lower system demand, poor financials of SEBs - are resolved.

Coverage & Recommendations

In Power T&D, Electrical Equipment & Renewable Power space, we have identified stocks based on different qualitative and quantitative parameters, which in our opinion are better placed to grab the imminent opportunities. We initiate coverage on ABB & Techno Electric & Engineering (in T&D Equipment space), Skipper & Kalpataru Power (in Transmission Tower & EPC space), Power Mech Projects (in Generation ETC & O&M space) and INOX Wind (in Renewable Power space) with BUY recommendation.

Source : Equity Bulls

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