With a new slew of orders in the offing, India´s Rs 1.30 lakh crore electrical equipment industry has shown a positive trend after four consecutive quarters of negative growth.
The requirement of electrical equipment is one of the most important inputs for the development of the power sector. And why not? An industry which contributes a combined annual turnover in excess of Rs 120,000 crore and exports of Rs 22,000 crore is bound to gain from the recent developments and opportunities in the sector.
At present, there are more that 8,000 MW of projects on the block and up for grabs, an opportunity for electrical equipment manufacturers. Currently, developers like Essar Power, Meenakshi Energy Private Ltd, NHPC and KVK Energy are on the verge of placing orders for electrical equipment for their power projects.
Essar Power Jharkhand Limited (EPJL) is implementing a 1,800 MW coal-based power project in Latehar, Jharkhand. Phase I (1,200 MW) of the project is expected to be commissioned in 2014-15 based on coal sourced from the Chakla mine whereas Phase II of 600 MW is based on the Ashok Karkata coal mine. Meanwhile, Meenakshi Energy will be implementing, developing and operating 1,000 MW of a coal-based power project in Nellore district (Tamil Nadu) in two phases of which Phase I is already operational with a capacity of 300 MW.
On the hydro project side, Loktak Downstream HEP (66 MW) is a JV project between NHPC (CPSU) and the government of Manipur. The estimated cost of the project is Rs 1,350 crore. The project has been accorded environment clearance and Stage-I forest clearance.
On the other hand, Nagai Power Private Limited (NPPL), a special purpose vehicle (SPV), is implementing a 300 MW (2x150 MW) coal-based thermal power plant in Tamil Nadu in two phases. The projects are being implemented at a total cost of Rs 1,523.64 crore. Phase II will achieve completion of date COD in the next two years, from the date of initial disbursement.
Meanwhile, NTPC is poised to take up the 4,000 MW Pudimadaka super thermal power project in Telangana.
Jumping on the order placement bandwagon, IPPs and EPC players have started to put in place their budget for electrical equipment procurement. Officials from Vedanta Group suggest that for their power business, the company is gearing up to spend Rs 40 crore for the procurement of electrical equipment for FY15-16. Whereas Essar Power will spend nearly 40 per cent on procurement activity, subject to the power projects it bags. Currently, the company is undertaking several power projects and procurement for most of the projects has been completed. According to a senior official from JSW Energy who looks after the procurement function, the procurement procedure is as per plant requirement. ´The company maintains vital/essential as well as long lead items in stock and spares. Electrical equipment is also being procured as spares.´
Most of the IPPs and EPC contractors such as Tata Power, JSW Energy, Lanco, L&T, etc., that POWER TODAY spoke to, were reluctant to share figures for procurement of electrical equipment. But most suggested that with Rs 3.4 lakh crore power projects on the verge of being awarded, 40 per cent i.e., around Rs 1 lakh crore spending will be on the procurement side.
All in all, the total requirement considering transformers, emergency gensets, cables, HT & LT motors and switchgears are such that all vendors will look to capitalise on the given opportunity. (Readers can refer to our cover story ´Required Rs 1 lakh cr Power Equipment´, dated December 2014)
Reason to invest
It seems the above reason is more than enough to explain the reason to invest in the electrical manufacturing industry. Indian manufacturers are becoming more competitive with respect to their product designs, manufacturing and testing facilities. There is an increasing scope for direct exports to neighbouring countries. Incentives for capacity addition in power generation will increase the demand for electrical machinery. Market-oriented reforms, such as the target of ´Power for All´ and plans to add 88.5 GW of capacity by 2017 and 93 GW by 2022, will also play a major role. Investments in research and development in the electrical machinery industry are amongst the largest in India´s corporate sector. A large pool of human resources and advancements are in technologies.
Being a big daddy
For the development of the domestic electrical equipment industry and to enhance its competitiveness, the government of India launched the Indian Electrical Equipment Industry Mission Plan 2012-22 on 24.07.2013. It seeks to steer, coordinate and synergise the efforts of all stakeholders to accelerate and sustain the growth of the industry. In the Vision 2022, says GM Siddeshwara, Minister of State, Ministry of Heavy Industries and Public Enterprises, ´We have articulated in the Mission Plan is to make India the country of choice for production of electrical equipment and reach an output of $100 billion by balancing exports and imports.´ He adds, ´In this mission plan, five areas have been identified for strategic and policy interventions, both by the government and the industry. These are: industry competitiveness, technology upgradation, skills development, exports, and conversion of latent demand.´
At the end, as per CMIE, new investment announcements during the quarter ended September 2014 at Rs 2.5 trillion recorded a growth of 125 per cent over the year-ago level. It is the highest investment value recorded in the past nine quarters. A total of 538 new projects were announced. The power sector attracted the highest investment followed by the transport, infrastructure & services sector. Around 84 new power projects with investments worth Rs 1.1 trillion were announced. On the ground also, a lot of tenders and orders are getting in shape. The private sector is showing renewed interest as evident from new projects, consolidation activity and traction in outstanding payments.
Now, since there is a visibility in resolution of coal issues, experts are upbeat with the emerging scenario. Nevertheless, capital goods manufacturing being a late-cycle business will see some visible improvement soon.
It is expected that BTG project awards will improve from just 6 GW in FY14 to 10-12 GW annually during FY15-17. This is driven by the possibility of improved order intake from average levels of Rs 20,000 crore in FY12-14 (gross intake, excluding order cancellations) to an average of Rs 28,000 crore in FY15-17E. During FY14, of the Rs 20,400 crore of power sector intake, excluding R&M (Rs 3,400 crore)/Hydro-Nuclear-Gas (Rs 2,000 crore), the thermal power share was Rs 15,000 crore. Experts in the BTG sector expect this number to increase to Rs 22,000 crore during FY15-17E, led by expectations of industry ordering at 10-12 GW annually (vs. 6 GW in FY14). Thus, the analysts in the power sector expect BTG to bounce back three times in FY15.
Meanwhile in the BTG segment, recent trends suggest that pricing has stabilised, albeit at low levels from a market structure that was threatened by intense competition from Chinese, Korean and Japanese companies and, possibility of 5-6 players in the domestic market. The BTG manufacturing sector is undergoing a metamorphosis.
Erosion of competitive intensity
Of the 90 GW capacities under construction as per CEA, share of Chinese and other imported equipment stands at 36.2 per cent and 6.3 per cent respectively. This is a large market pie being captured by imported products. Going forward, players in the BTG segment believe the competitive intensity of such players has been largely impacted by currency movements (sharp 56 per cent currency depreciation over the last three years), imposition of 21 per cent import duty in 2012 leading to differential of 14 per cent for domestic players and also intense competition given commissioning of 21-24 GW of supercritical BTG manufacturing capacities in India. This has led to a 15 per cent price correction in boilers and 20 per cent in turbines under bulk tender category 2 versus bulk tender category 1.
BTG ordering to pick up
Though some green shoots are visible in the power equipment industry, these are present in the form of UMPP equipment ordering, award of private sector coal blocks, SEB bailouts, Coal FSAs and pass through of variable costs, these may take time to convert into fresh capex and ordering opportunity. Hence, with a stable government, expectations are high that policy issues in power will start getting sorted aggressively, which will be a strong impetus for commencement of ordering for the Thirteenth Five-Year Plan and active participation of private players in the power sector.
The growth prospects for the industry appear to be good over the next two years. Currently, as per IEEMA estimates, the production growth of the industry has grown at around 6 per cent from April to August 2014. Although during FY2012-13 the industry had witnessed a negative 8 per cent growth, it had grown at a marginal rate of 3.5 per cent during FY13-14, showing signs of revival. In terms of market share, the overall Indian electrical equipment market would be around Rs 140,000 crore of which the transmission and distribution sector would be around 60-65 per cent, i.e., Rs 84,000 crore.
´There is a very strong pipeline of projects being announced. Recently, MoP has announced Rs 12,500 crore worth of power projects for this year. And, if the momentum of projects on tariff -based competitive bidding is continued, the transmission sector has potential to attract huge investments,´ says Pratik Agarwal, Head-Infrastructure Business, Sterlite Technologies.
In the last couple of years, the sector has been witnessing considerable growth with the boom in infrastructure development. The rising demand and many proactive initiatives by the Indian government to boost manufacturing in India should potentially lead to further growth in the industry.
According to recent reports, the switchgear and control gear industry in India is currently valued at about 15 per cent with respect to the entire power equipment market. The industry is set to reach approximately Rs 21,500 crore by FY 2017, growing at a CAGR of about 9 to 10 per cent. The capacity addition in the power sector and upgradation in technology along with government initiatives to replace old redundant machinery will also lead to an increase in demand in the switchgear segment.
Switchgears are used across various sectors such as commercial, residential, infrastructure, construction, power, manufacturing etc. They are divided based on its load-bearing capacity: Low-voltage (LV) switchgear, medium-voltage (MV) switchgear, and high-voltage switchgear.
Low voltage switchgears provide centralised control and protection of low voltage power equipment in industrial, commercial, and utility installations involving generators, motors, feeder circuits, transmission and distribution lines. Examples of efficiency include front-access switchgear that can be mounted against a wall or tight corners enabling space efficiency, best-in-class energy efficiency ratings of UPS systems and VFDs, and Integrated Power Assemblies/Integrated Facility Systems that enable installation cost and space efficiencies.
The market for switchgears is well established in India, with a lot of potential for further growth coming from utilities, as well as commercial and industrial segments. With reforms on the way, the future of the Indian switchgear industry looks bright and investment in the market is likely to flow in.
From the technology standpoint, intelligence in switchgears is being demanded more and more to enable customers understand and manage their energy usage and to have closer control and protection of their electrical assets. Besides, space today is at a premium thus pushing demand for compact switchgear solutions particularly in urban areas.
With the announcement of 100 smart cities in India, the opportunities for the wire and cable industry have increased tremendously. The increase in industrial activity, further increases the opportunities for this sector. That said, Amol Kalsekar, Chief Manager Building Wire, International Copper Association India (ICA India), is of the opinion that the wires and cable industry may see 20 per cent growth in order booking in FY15. To this, Sunil Sikka, President, Havells India Limited says, ´The wire and cables market is currently estimated to be around Rs 15,000 crore and is passing through a sea change with frequent innovations.´
Meanwhile, manufacturers have already taken steps to bridge the gaps and issues by optimising the resources to meet the ever increasing demand for the future. This has resulted in the growth of this particular industry too. In the last couple of years, the industry has seen a positive growth. The industry is growing at a CAGR of 15 per cent as a result of growth in the power and infrastructure segments and suggests Kaleskar, ´We are expecting a similar growth rate for the next two years.´
In terms of market share, the wire and cable industry comprises 40 per cent of the entire electrical industry, which is expected to double in size over the next five years.
Maintaining the balance
A number of players in the balance of plant (BoP) sector, who had a phenomenal order intake in the past years, are reeling under tremendous working capital stretch because of stuck inventory and huge receivables. However, with the government´s push towards more power generation, the market outlook for BoP systems is likely to make strides in the positive direction.
But industry players, one of them KEC´s President -û Infrastructure Business, Rakesh Amol, suggest that while there is lot of optimism about this push and the general high level pitch that the new government is making in the public domain, at the ground, the immediate outlook in the generation sector itself does not seem to be very promising.
To this, Prayasvin Patel, Chairman & Managing Director of Elecon Engineering Co Ltd, adds: ´The BoP experience so far has not been good for independent power producers (IPP) and public sector. Therefore, many of them are going for engineering, procurement and construction (EPC) contracts.´
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