The Chinese are running away with transformer orders

Chinese aggression appears to be wreaking havoc on established players in the local transformer market. Heavyweights such as Bharat Heavy Electricals (Bhel), Crompton Greaves and local subsidiaries of ABB and Siemens are seeing their order books shrink.

Chinese player TBEA Shenyang, for one, was the biggest beneficiary of high-grade 765 kV transformer orders from Power grid Corporation of India (PGCIL) last fiscal.

High-grade transformers are those with power ratings of 765 kV and above. They are needed to support 765 kV transmission lines, which evacuate power from super critical power plants with generation capacity of 660 mw and above.

With the government giving increasing thrust to single-location, high-capacity power plants, 765 kV transformers appear to be the way forward and the skew has started showing in the product mix of most major companies.

Indeed, according to analysts Ankur Sharma and Jishar Thoombath from international brokerage MF Global, transformer orders saw the sharpest jump in contracts awarded by PGCIL, India’s biggest transmission company, in FY12, with orders up 154% year on year. Significantly, 765 kV transformers made up 90% of the total contract.

And here, Chinese firms seem to have an edge over local players.
“Almost 46% of 765 kV transformer orders from PGCIL have been bagged by the Chinese equipment manufacturers, with most of the orders being won in February-March, 2012. The Chinese have been able to gain market share in the 765 kV space at the expense of the Koreans (3% in FY12 versus 30% share in FY11) and Crompton Greaves,” they said in a report dated April 9.

In fact, TBEA Shenyang, which captured 27% of the 765 kV orders last fiscal, had not won a single order the previous fiscal.
Not surprisingly, the market share of Crompton was down to 12% from 29%, that of ABB to 3% from 11% and of Hyundai E&C to 2% from 12%, Sharma and Thoombath noted.

TBEA’s aggressive march has led to even the Indian subsidiaries of MNCs such as Siemens and ABB losing market share —- from 12% to 3% and from 7% to 4%, respectively last fiscal, compared with FY11.

The edge Chinese players enjoy is primarily on account of cost, say experts — large scale of manufacturing, low operational costs, low power and funding costs, etc.

So much so, transformer prices have crashed 25-30% in the last 18 months due to competition from Chinese players. “The situation is so grim that a few Indian companies are manufacturing by keeping just 2-2.5% margin while a few are working on decimal-point margins, which is not good for them in the long run.”

And the fare may be about to get worse, going by Daiwa Capital Market’s Capital Goods analyst Saurabh Mehta. Competition from Chinese and Korean players will remain high as they are intent on setting up local manufacturing facilities in India to meet PGCIL’s local manufacturing qualification requirement. It will give rise to greater pricing pressure, leading to declines in Ebitda margins and lower return on equity of capital goods companies, Mehta noted in a report dated April 13.

Rabindranath Nayak, lead analyst, power and capital goods, SBI Cap Securities, said China has seen an oversupply situation in transformers and started dumping these products in the Indian market at prices lower than even their manufacturing costs.

Besides, their delivery is faster, said Nayak.
“The situation for Indian companies is not going to improve until and unless PGCIL change its procurement policy,” he added.
For all that, however, Chinese aggression is not limited to transformers. Recently, the Power Construction Corporation of China bagged an engineering, procurement and construction (EPC) contract from IL&FS for constructing a 4X660 mw plant in Tamil Nadu.

“In the past, many Chinese companies have got EPC contracts for captive power plants, so the recent EPC contract is not a very significant development. But still, it adds pressure to Indian EPC players,” said M S Unnikrishnan, managing director, Thermax.
The state of affairs may be about to reflect in analysts stock calls.
“With orders continuing to get awarded to Chinese vendors along with oversupply of power equipments in India, we remain cautious on the Indian power equipment space,” Venugopal Garre, capital goods analyst, Barclays Research, wrote in a recent report.