Power sector is an important contributor to various engineering companies' revenues. These companies supply various power sector equipments like transformers, turbines, generators and boilers to power sector. The government of India has been planning to add large-scale generation capacities in view of the paucity of power in the country. And thus the potential seems huge for the engineering majors in both generation and the transmission & distribution space. However, coal shortages, scams, hike in prices of imported coal, lack of land availability, and policy logjam have together paralyzed the prospects of power sector in India over the past two years. The impact of this now seems to flow in some engineering companies also.
An article in Mint, has highlighted about an important problem that various power equipment manufacturers are facing now. Due to lack of demand from the power sector, the companies manufacturing power generation equipments have started offering more discounts to its customers. In order to keep their facilities working, these companies are compromising on margin front in order to get orders. It is worthwhile to note that no private sector equipment manufacturer received any significant order during 2012-13 and even for this year revival is not expected.
Various companies, viz ABB, BHELSiemens and BGR energy generate large part of their revenues from the manufacture of power equipments. Since two-three years these companies are witnessing lower growth and margin pressures. This is because, the order book of these companies is shrinking and they have increased the capacities, this has resulted into higher fixed costs. Over and above, intense competition especially from the Chinese and Korean players have too impacted the companies' revenues and margins.
Various challenges viz; sluggish power sector, lack of opportunities, and intensifying competition seems to plague the revenues of power equipment manufacturers. However in our view, the biggest problem is sluggishness in the power sector. Thus until the problems in the power sector viz; land, fuel, environment, and forest clearances are not resolved the power equipment manufacturers will continue to face the consequences.