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We continue to expect steady ordering activity in the power transmission and distribution (T&D) space based on our meetings with 6 players focused on T&D space and analysis of nearly 12 players commentaries on this space. Also, the pipeline of projects approved by the Central Electricity Authority of India (CEA) stands robust for next 2-3 years. This is likely to be positive for most players in the value chain for the next 4-5 years. This is likely to be positive for most players in the value chain for the next 4-5 years. The capex-intensive nature of the value chain and high entry barriers for new players should restrict competition to a few players having control over the supply chain. As a result, these companies can either maintain their market share or improve it over the next few years. This is also likely to result in 15-20% growth in T&D or energy segment inflows and revenues. The scope for margin improvement in the near term is high for Siemens, Hitachi Energy, GE T&D, ABB, and transformer companies. In our coverage universe, we maintain BUY on ABB (TP: INR7,500), Siemens (TP: INR6,050), Kalpataru Projects (TP: INR1,200), and L&T (TP: INR4,400). We would be more comfortable at lower valuations on Hitachi Energy (Sell | TP: INR5,466) and KEC International (Neutral | TP: INR710).

T&D market witnessing improved tendering Improved tendering

activity, the CEA’s near-term pipeline of projects, and management commentaries of key players emphasize that the power T&D sector will continue to witness increased activity over the next few years. The spending target of INR2.4t by FY30 translates into a yearly addressable market of INR300- 500b. Moreover, expected spending of INR3.3t by FY30 on distribution gives a strong addressable market for T&D players over the next 3-4 years. As per CEA and Crisil report, larger share of investment is expected to be seen in the extra-high voltage space (220kV, 400kV and 765kV). Along with this, projects worth INR1t were recommended by the NCT to the Ministry of Power during the last few meetings of the NCT. There is also an increasing shift toward larger projects, apart from HVDC projects. With products forming nearly 50-60% and design and EPC forming another 30-35% of overall spending, we expect most players in the value chain to benefit over the next few years. Companies are indicating that tendering activity has already increased in the last one year as compared to the last 5-6 years. This augurs well for sustainability of order inflows for companies focused in the power T&D space.

Demand-supply dynamics in favor of industry players

Most industry players have indicated that 1) demand for T&D products has increased sharply in the domestic and international markets; 2) the expected addition of generation capacity will boost transformer capacity as the current supply is constrained by already high capacity utilization and limited capacity additions; 3) the capex-intensive nature of the sector and higher lead times to upgrade to higher kVA ranges will limit competition to just 5-6 players, thereby giving pricing advantage; 4) unlike the last cycle, this time players are rational in bidding as the demand opportunity is much bigger; 5) after the completion of renewable and thermal power targets, the focus would shift to replacement and refurbishment demand similar to in developed countries; and 6) key risk can come from sharp volatility in commodity prices.

Positioning of key players within the value chain

Considering a large addressable market, we believe there are ample opportunities for players across the value chain. Though there are unorganized players in the products and EPC categories, only 6-7 players control the entire value chain. Entry barriers are also high in the power T&D space as products such as high-kVA transformers need various stages of testing and approval, which take 1-3 years. We thus continue to see improved traction for players like Siemens, Hitachi Energy, GE T&D, TRIL, CG Power, BHEL and Schneider in which have presence in large projects and have offerings such as HVDC, higher kVA transformers, substations, switchgear, etc. Other players focused on transformers, sub-station and towers, such as Voltamp, TRIL, Techno Electric, Transrail, Skipper and Atlanta, are also increasing their technical capabilities to capture growth opportunities in high-kVA transformers and substations. Within the EPC segment, Kalpataru and KEC target 20-25% market share, and with the increasing size of projects, we expect L&T to also participate in the upcoming opportunities.

Improving financial metrics

Key players in the industry have seen a marked uptick in revenue and profitability in the past few quarters, driven by a) an improving demand scenario, b) healthy ordering momentum, c) improved pricing, and d) stable commodity prices. As lead times for transformers have increased globally, most players have reported higher capacity utilization and have announced expansion plans (Siemens, Voltamp, TRIL, CG Power, etc.) Consequently, margins have been on an upward trajectory for most players, led by higher capacity utilization, better product mix, and stable commodity prices, which have eased from the unprecedented highs seen in FY22. Going forward, companies expect the momentum to continue given the robust visibility in the power T&D space.

Raw material prices are subject to volatility

The basic raw material used for transformer core is cold-rolled grain-oriented (CRGO) steel as well as copper and aluminum for conductor coils. CRGO is largely imported and conductors are procured domestically. PLI scheme for specialty steel (CRGO) will help domestic players in coming years. Due to the exposure to these commodities, the industry is subject to fluctuations in raw material prices and thus has variable pricing clauses linked to indices created by the Indian Electrical and Electronics Manufacturers' Association (IEEMA). Copper and aluminum prices have started moving up in Apr’24. EPC players too have limited pricing power and were impacted earlier by a sharp swing in commodity prices.

Valuation and view

We remain positive on companies that have a presence across the transmission space, as a strong addressable market can result in 15-20% growth in T&D segment inflows and revenues. The scope for margin improvement in the near term will be higher for Siemens, Hitachi Energy, GE T&D, ABB, and transformer companies. In our coverage universe, we maintain BUY on ABB, Siemens, Kalpataru Projects, and L&T. We would be more comfortable at lower valuations on Hitachi Energy (Sell) and KEC International (Neutral).

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