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Power transmission: Companies that’ll benefit
Dec 10, 2008

‘Power’ characterises India. Whether it is the race to ‘power’ by political parties, or deficiency of ‘power’ for the masses or industries, this is one of the oft used words in the Indian context. While leaving aside the discussion on political ‘power’ to some other day, let us here briefly talk about the current state of the ‘power’ sector. One word that captures the complete state of the Indian power sector is – deficiency. And with little progress happening (as compared to the plans) on new generation capacities, the deficiency is not expected to disappear in many years to come, not at least by 2012 by when the government had targeted to provide ‘power for all’.

Now while India has to cover a lot of ground on the power generation front, the country’s transmission and distribution (T&D) network is also something that we can least boast about. And given the progress that the T&D segment has seen over the past few quarters, the race to ‘power for all’ seems a long drawn one.

As per statistics from the Centre for Monitoring Indian Economy (CMIE), generators, transformers and switchgears that form part of the T&D framework have been witnessing decelerating sales growth in three of the past five quarters. In fact, the consolidated sales of India’s T&D companies grew by 22% during the September 2008 quarter, down from the 30% rate clocked during the September 2007 quarter. Combined EBIDTA margins of these companies were also lower at 12.3%, against 14.4% in the September 2007 quarter.

ABB: Consolidated Performance of India's T&D cos.
Source: CMIE

As per the CMIE, a large part of this growth can be attributed to power transformers, where production grew by almost 40% during the April-July 2008 period, as compared to 21% growth recorded in the corresponding period of the previous year. The healthy demand for power transformers has also had the effect of stimulating higher investments in setting up transformer capacities.

However, within the transformer segment, production of distribution transformers has been witnessing a slowdown. Output decreased by almost 12% in the first four months of this fiscal, compared to an increase of around 15% in FY08.

Conclusion
With new power generation facilities in process of being set up in the country, demand for transformers is expected to continue to remain robust going forward. This will consequently benefit the transformer segment of the companies involved in the business, notwithstanding the current slowdown. However, whether these companies will be able to ramp up their margins is an issue to look out for.

We maintain our long-term positive view on the leading T&D equipment companies like Crompton Greaves and ABB . However we believe that, in the short run, while sales growth will be impacted owing to execution issues, margins will also be under some kind of pressure.

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