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Chinese re-entry unlikely to disrupt transmission market

The Ministry of Power has allowed four Chinese entities having manufacturing units in India to bid for critical power projects. We hosted Mr. Bharanidharan Pandyan, Joint MD, Quality Power, to get his insights into this development on how it can impact the supply chain, pricing and competitive mapping of transformer players. He believes that out of the four players approved, three players will take significant capex and time to expand facilities in India as they currently have a limited scale in India, while the capacity of TBEA, one of the approved vendors, is still not sufficient to manage the demand-supply gap in transmission. We believe that the demand-supply situation still remains favorable for transformer players as incremental supplies from existing players will come in a staggered manner and the chosen Chinese players will take time to expand facilities in India. Only risk remains if the government decides to extend the concessions in terms of time of extension or direct imports. We do believe that over the next 1-2 years, domestic supplies too will start improving, which can soften the government’s stance on this. We remain positive on the transmission sector and maintain BUY on GE Vernova T&D, Siemens Energy, CG Power and Atlanta and Neutral on Hitachi Energy.

Key highlights of the discussion

Government approval for select Chinese players to participate in power transmission projects

The Ministry of Power has allowed four Chinese entities with manufacturing units in India to bid for critical power projects. However, the exemption to these Chinese entities would involve manufacturing in India and the procurement of minimum 50-60% domestic content. Direct imports or CKD imports are not allowed by them. The government’s move is directed to improving supplies for projects, which are stuck due to the non-availability of transformers and key components.

Component ecosystem in the transmission value chain

Component ecosystem in the transmission value chain: The transformer represents only a small portion of the overall transmission value chain. In a typical substation project worth ~INR5b, the transformer accounts for only ~INR800m, while the remaining value is distributed across switchgear, automation systems, instrument transformers, insulators, steel structures, cables and other balance-of-plant equipment. However, the inability of transformer manufacturers to deliver on time has emerged as the key bottleneck, delaying the commissioning of entire substations despite other equipment being ready. This has also constrained ordering across adjacent product categories, including STATCOMs and other grid equipment. According to the expert, TBEA has already achieved ~70- 80% localization, with only a limited portion of components such as transformer tanks still being imported. Consequently, increased participation of domestic manufacturing facilities is expected to improve transformer availability and unlock execution across the broader transmission ecosystem, benefiting companies such as Hitachi Energy India, Siemens Energy India, GE Vernova T&D India, Quality Power, CG Power, Bharat Heavy Electricals (BHEL) and other equipment suppliers, rather than only transformer manufacturers.

Demand-supply situation still remains favorable for manufacturers

Demand-supply outlook remains favorable for EHV transformers: The expert expects favorable demand-supply dynamics to persist in the 400-765kV transformer segment, as capacity additions have remained limited in India and globally despite strong demand. High entry barriers, including qualification requirements and long performance track records, have prevented meaningful new entrants in the EHV segment over the past decade. While capacity additions are accelerating in the 132-220kV segment and could make the lower-voltage market adequately supplied over the next 12-18 months, established players such as Hitachi Energy India, Siemens Energy India, GE Vernova T&D India, and CG Power are expected to remain capacity constrained in the EHV segment.Demand for 5-10MVA solar inverter-duty and decoupling transformers also remains strong, driven primarily by US data centers and renewable projects. With customers prioritizing delivery over pricing, this presents a near- to medium-term export opportunity for Indian lower-kV transformer manufacturers. However, as capacities are being added globally across the US, Europe, Australia and other regions, the current supply would eventually catch up to the current demand over the next 3-4 years

Our view on this development

We believe that

1) The demand-supply situation still remains favorable for transformer players, as incremental supplies will come in a staggered manner and we expect the demand-supply gap to remain for the next two years

2) Pricing may not get disrupted in the near to medium term as these players will not be quoting below-market prices given the expansion required

3) Currently, we do not see any major impact on our estimates over next 1-2 years from this. However, any future action from the government to extend the participation tenure for these players or direct imports from China can disrupt the monopoly enjoyed by transformer players and can impact rich valuation multiples enjoyed by the sector. We do believe that over the next 1-2 years, domestic supplies too will start improving, which can soften the government’s stance on this. We remain positive on the transmission sector and maintain BUY on GE Vernova T&D, Siemens Energy, CG Power and Atlanta and Neutral on Hitachi Energy

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