CRISIL Power Opinion Nov 2011

7/31/2019 CRISIL Power Opinion Nov 2011

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CRISIL RESEARCH POWER ANNUAL REVIEW A-i

Sections

Executive summary A-1

- Capacity additions and high growth in GDP to boost power demand A-1

- Investments of Rs 9.3 trillion expected during the next 5 years A-1

- Power generation equipment BTG capacity to exceed demand A-1

- BoP a Rs 1.6 trillion opportunity A-1

- BoP players shifting from component-based model to turnkey model A-2

1.0 Review and outlook A-3

- Econom ic growth, capacity additions to fuel power demand A-3

- Industrial sector to lead demand growth A-3

- Demand growth across regions not expected to be uniform A-4

- Generat ion capacit ies of 82 GW expected to be added over

- the next 5 years A-5

- Capacity additions to lead to supply growth of 9.1 per cent CAGR A-8

- Country-wide deficit to reduce to 4.8 per cent by 2014-15 A-9

- Peak load deficit also expected to decline by 2014-15 A-11

- Investments to the tune of Rs 9.3 trillion expected over the next 5 years A-12

2.0 Generation equipment - BTG capacity to exceed demand A-15- Private players prefer EPC route to procure equipment A-15

- BTG - staring at an overcapacity situation A-17

3.0 BoP Huge opportunity amidst stiff competition A-21

- BoP - a Rs 1.6 trillion opportunity A-21

- BoP - a highly scattered segment with severe competition A-24

Charts

1.0 Review and outlook

01 Region-wise demand-supply A-10

2.0 Generat ion equipment - BTG capacity to exceed demand

01 NTPC awards each of the components separately A-16

02 Private utilit ies prefer EPC route A-17

3.0 BoP Huge opportunity amidst st iff competit ion

01 BoP: Opportunity in major components A-22

02 Coal handling capacity required by a 1,000 MW plant A-22

03 Ash handling capacity required by a 500 MW plant A-23

04 Water requirement for a 1,000 MW plant A-24

05 Players present in various components of BoP and their market shares A-25

Continued

Opinion November 2010


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A-ii CRISIL RESEARCH POWER ANNUAL REVIEW

continued

Figures


01 Consumer-wise share of demand A-4

02 Region-wise demand growth A-4

03 Sector-wise capacity additions A-6

04 Fuel-wise capacity additions A-7

05 Region-wise capacity additions A-7

06 Power supply and capacity additions A-9

07 Power deficit scenario A-9

08 Peak load - Expected demand-supply scenario A-12

09 Investments in the generation segment - Sector-wise A-13


01 Sector-wise share in coal-based capacity additions A-16


01 BoP industry size A-21

02 CHP players - Du Pont decomposition A-27

03 CHP players - Cash conversion cycle A-27

04 Performance of the CHP industry A-27

05 Water treatment players - Du Pont decomposition (2008-09) A-2906 Water treatment players - Cash conversion cycle (2008-09) A-29

07 Performance of the water treatment industry (excluding cooling tower) A-29

08 Turnkey players - Du Pont decomposition A-30

09 Turnkey players - Cash conversion cycle A-30

10 Performance of the turnkey segment A-31

Tables


01 Major projects expected to be commissioned over the next 5 years A-802 Capacity additions forecast A-12

03 Investments in the power sector A-13


01 Break-up of a coal based power plant cost A-15

02 Private players preference for Chinese equipments A-18

03 Capacity additions lined up in the BTG segment A-19


01 Financials of CHP companies A-26

02 Financials of water treatment and cooling tower companies A-28

03 Financials of turnkey players A-30


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CRISIL RESEARCH POWER ANNUAL REVIEW A-1

u

CRISIL Research expects Indias power deficit to decline to around 5 per cent by 2014-15, following the addition

of 82 GW of power generation capacities over the next 5 years. The sizeable capacity additions have encouraged

several private players to enter the boiler, turbine, generator (BTG) segment. However, with the domestic BTG

capacity expected to cross 30 GW by 2013, an overcapacity scenario is likely. On the balance of plant (BoP)

front, CRISIL Research expects Rs 1.6 trillion of projects to be executed by 2014-15. Severe competition in the

segment and player preference for awarding projects on turnkey basis is driving component manufacturers to

execute the entire BoP project.

Capacity additions and high growth in GDP to boost power demand

CRISIL Research expects 82 GW of power capacities to be added between 2009-10 and 2014-15 as compared to a

mere 33 GW added during the previous 5 years. This translates to a supply increase of 9.1 per cent CAGR over

the next 5 years. During the same period, GDP growth is likely to average 8.0-8.5 per cent. This growth together

with the increased supply of power is expected to boost power demand at a compounded rate of 7.8 per cent

during 2009-10 to 2014-15 vis--vis the previous 5-year CAGR of 7.0 per cent.

High growth in supply is expected to reduce the power deficit to around 5 per cent by 2014-15 from 10.1 per cent

in 2009-10. As per CRISIL Researchs region-wise analysis, the southern region is likely to inch closer to a

balanced scenario whereas the eastern region is expected to have a surplus situation. However, the western andnorthern regions are likely to continue to reel under high deficits.

Investments of Rs 9.3 trillion expected during the next 5 years

The sizeable capacity additions [inclusive of generation (utilities and captives) and concomitant transmission and

distribution] over the next 5 years will require an investment outlay Rs 9.3 trillion, according to CRISIL Research.

Of this, the generation segment would constitute a lions share at Rs 5.8 trillion, mainly driven by private sector

players.

Power generation equipment BTG capacity to exceed demandCRISIL Research expects the huge generation capacity additions to spur players like Larsen & Toubro, JSW

Energy, Bharat Forge, BGR Energy, amongst others, to install boiler, turbine, generator (BTG) capacities of more

than 15 GW in joint venture with foreign players; currently, Bharat Heavy Electricals Ltd is the only domestic

player in the BTG segment with an operational capacity of 15 GW. Hence, by 2013, the BTG capacity in the

country is likely to exceed 30 GW while capacity additions in the power sector would be 15-20 GW per year,

thus, leading to an overcapacity situation.

[Power generation equipment are divided in two broad categories: (i) BTG and (ii) balance of plant (BoP), with

the BTG segment accounting for around 50 per cent of the total cost involved in setting up a power plant.]

Executive summary


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A-2 CRISIL RESEARCH POWER ANNUAL REVIEW

BoP a Rs 1.6 trillion opportunity

BoP, which accounts for 40 per cent of the cost of a power plant, is further divided into components such as coal

handling plant (CHP), ash handling plant (AHP), water treatment systems, cooling tower, civil works etc. Over

the next 5 years, of the total investment expected in the sector, CRISIL Research expects Rs 1.6 trillion in the BoP

segment. In addition, a further Rs 0.7-trillion-worth of BoP orders would be placed for capacity additions beyond

the forecast period. CHP, AHP and civil works will account for 65-70 per cent of investments in the BoP segment.

BoP players shifting from component-based model to turnkey model

Competition in the BoP segment is severe with 7-8 suppliers for each component. Also, private players prefer to

award equipment contracts on a turnkey basis unlike central utilities which award components separately; CRISIL

Research expects more than 60 per cent of the total coal-based capacity additions to come from private sector

players. Due to these factors, players are shifting from executing the low value-high margin BoP components to

high value-low margin turnkey projects. While net margins for players in the turnkey segment are typically 5-7

per cent, those of component suppliers are higher at 8-10 per cent.


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Economic growth, capacity additions to fuel power demand

Power demand is likely to grow by 7.8 per cent CAGR between 2009-10 and 2014-15. The robust demand is on

account of Indias GDP growing at a fast pace as well as rapid augmentation of power generation in the country

translating to increased and improved availability of power. While Indias GDP, according to CRISIL Research,

will continue to be in the 8.0-8.5 per cent range over the next 5 years, 82 GW of power capacities are expected to

be added during the same period as compared to only 33 GW added over the previous 5-year period.

During 2004-05 and 2009-10, electricity demand rose at a compounded rate of 7.0 per cent. However, the growth

in demand was restrained by limited capacity additions, resulting in frequent load shedding throughout the

country.

Industrial sector to lead demand growth

CRISIL Research expects the industrial sectors share in the total electricity demand mix to increase to around 49

per cent by 2014-15 from 45 per cent in 2004-05, on account of significant growth in industrial activity.

Electricity demand from the real estate sector is expected to record steady growth due to new residential

developments. Growth in commercial complexes, malls and other super marts are expected to keep the

commercial sectors share in overall demand steady. However, the share of agriculture is likely to decline sharply,

to 19 per cent in 2014-15 from 24 per cent in 2004-05.

Domestic demand is expected to increase at a compounded rate of 7.8 per cent over the next 5 years as against 7.5

per cent (approximately) recorded in the previous years. This growth is likely on account of an increase in

household power consumption as income levels rise and increased sales of consumer durables. However, as the

overall demand growth is also expected to be high, the share of the domestic category in the overall demand mix

is likely to remain stable.

Between 2004-05 and 2008-09, the per capita consumption of power rose from 612 units to around 733 units.

Growth in demand was the result of industrial players adding huge capacities (as well as plants running at high

operating rates), residential demand increasing steadily on the back of sizeable real estate development, and

increasing consumption from households. Conversely, the share of the agricultural sector declined during the

same period.



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Figure 1: Consumer-wise share of demand

7

24

8

22

8

19

49

45

24

46

25 24

0

10

20

30

40

50

60

Domestic Commercial Agriculture Industry

(per cent)

2004-05 2009-10 2014-15 P

P: Projected

Source: CRISIL Research

Demand growth across regions not expected to be uniform

CRISIL Research expects domestic power demand to grow at a compounded rate of 7.8 per cent from 2009-10 to

2014-15, which is higher than the 7.0 per cent CAGR recorded over the previous 5 years. However, growth is not

expected to be uniform across regions. While demand in the southern region is expected to grow at a CAGR of 8.2

per cent, the eastern region is likely to register a lower 6.7 per cent growth rate.

Figure 2: Region-wise demand growth

259254

374 376

221

327

88

122

9 11

0

50

100

150

200

250

300

350

400

2009-10

2010-11

P

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2014-15

P

Northern Western Southern Eastern North-eastern

(bn units)

8.0%7.8%

8.2%

6.7%

4.0%

P- Projected

Note

Figures in per cent represent CAGR growth from 2009-10 to 2014-15.

Source: CEA, CRISIL Research


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Industries and domestic consumption to drive demand growth in the northern region

Power demand in the northern region is expected to grow by 8.0 per cent CAGR from 2009-10 to 2014-15 as

compared to a CAGR of 7.7 per cent during the last 5 years. Demand in 2010-11 is expected to rise by only 5.6

per cent as the region has received abundant rainfall and the weather conditions have been good. This is after

taking into account the incremental demand during the Commonwealth Games. However, from 2011-12 to 2014-

15 demand growth is expected to grow by 8.7 per cent CAGR. Delhi, Uttar Pradesh and Rajasthan will be the

primary demand centres.

Increasing industrialisation to drive demand growth in the western region

CRISIL Research expects demand in the western region to grow by 7.8 per cent CAGR from 2009-10 to 2014-15

vis--vis 4.8 per cent CAGR during the previous 5 years. The demand mix for electricity in the western region is

mainly industrial, domestic and agricultural. We expect steady growth in demand from the industrial and domesticsectors, whereas the agricultural sectors share in total demand is likely to decline. Gujarat and Maharashtra are

expected to be the main demand drivers.

Rising power availability to boost demand in the southern region

The southern region is expected to move towards a balanced situation over the medium term from a deficit of 6-7

per cent. Rising village electrification coupled with high growth in generation capacity additions is expected to

translate to a demand growth of 8.2 per cent CAGR between 2009-10 and 2014-15 in the southern region as

against a CAGR of 8.4 per cent in the previous corresponding period. Andhra Pradesh and Tamil Nadu are

expected to be the drivers of this growth in demand.

Industrial and domestic segments to account for bulk of the demand mix in the easternregion

West Bengal and Orissa are expected to drive demand growth in the eastern region, with demand from the

industrial and domestic segments expected to continue to account for 90 per cent of the demand mix. The demand

pattern in the north-eastern region, which accounts for around 1 per cent of Indias total power demand, is

expected to remain unchanged.Generation capacities of 82 GW expected to be added over the next 5 years

Capacity additions are expected to fall short of the targets set by the government. In the first 3 years of the

Eleventh Plan (2007-08 to 2011-12), 22 GW of capacities have been added as against the target of 62 GW during

the Plan period. After a detailed project-by-project status check, CRISIL Research expects capacity additions of

48 GW to be commissioned during the Eleventh Plan.

Between 2010-11 and 2014-15 (which includes CRISIL Researchs capacity estimates for the remaining 2 years

of the Eleventh Plan), capacities of 82 GW are expected to be added, wherein about 90 per cent is likely to be

thermal, with the remainder hydro and nuclear-based. The capacities include the Mundra and Sasan ultra mega

power plants (UMPPs), which are scheduled to be commissioned by 2014-15. Apart from these, projects via the

Case I* and Case II*bidding routes as well as memorandum of understanding (MoU)-based projects are expected

to become commercially operational over the next 5 years.

* Case I - The bidding process for procurement of power where location, technology and fuel is not specified by the procurer.

* Case II - The bidding process is for location-specific projects where the procurer assist the bidder in securing land, necessary

clearances, fuel, etc.


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As per CRISIL Research, an average of 16 GW would be added annually over the next 5 years vis--vis 6-7 GW

of capacities per year over the last 5 years. This is due to:

Entry and announcements by private sector players of huge capacity additions.

More than 90 per cent of the 82 GW scheduled to be commissioned over the next 5 years have received

environmental and forest clearances, acquired land, achieved financial closures and placed equipment orders.

Almost 80 per cent of the projects have signed power purchase agreements (PPAs) with various state utilities

or will sell power on merchant basis. Others are expected to enter into PPAs as more utilities invite bids for

procurement of power.

Capacity additions to be driven by private players; coal to be primary fuel

The private sector is expected to account for 55 per cent (45.5 GW) of these capacity additions, followed by the

central and state sectors at 26 per cent and 19 per cent, respectively.

Figure 3: Sector-wise capacity additions

3.7

5.7

3.7

2.83.5

2.6

4.3

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3.0 3.1 3.1

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Central State Private

(GW) 21.4 15.2 45.5

P- Projected

Note

Numbers at the top are totals for the 5-year period.


Coal will continue to dominate incremental capacity additions over the next 5 years, accounting for 80 per cent of

the total capacities being added (66 GW). Further, more than 90 per cent of the capacities scheduled to be

commissioned by private players would be coal-based.


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Figure 4: Fuel-wise capacity additions

14.3

0.7

4.2

9.8

4.7

0.72.2

41.6

1.8 2.2

0

5

10

15

20

25

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45

Coal Gas Hydel Nucle Coal Gas Hydel Coal Gas Hydel


(GW)

Note

Coal includes coal and lignite.


The western region is expected to lead in capacity additions on the back of commissioning of the two UMPPs and

the 4.6 GW power plant being set up by Adani Power. Hence, of the 82 GW of capacities likely to be added, the

western region is expected to account for 33 GW, whereas the northern and southern regions are likely to add 17

GW and 16 GW, respectively.

Figure 5: Region-wise capacity additions

4.0

3.12.7

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2.0

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10.2

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Northern Western Southern Eastern North-eastern

(GW)17.0 33.2 16.0 13.3 2.6

P- Projected

Note

Numbers at the top are totals for the 5-year period.



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Capacity additions in the northern region will increase in 2010-11 to meet demand for the Commonwealth Games.

In 2011-12, the regions capacity will rise further as delayed projects get commissioned. On the other hand, in the

southern and western regions, higher capacities will be added in 2013-14 and 2014-15.

Also, while capacities in the northern region are expected to be a mix of thermal (mainly coal) and hydel, in the

southern region capacities would mainly be coal and gas-based. The Kundankulam nuclear power plant in Tamil

Nadu is also expected to be commissioned during this period. Coal is expected to be the primary fuel for new

capacities in the western and eastern regions, whereas hydel capacities will comprise bulk of the upcoming

generation capacity in the north-eastern region.

Table 1: Major projects expected to be commissioned over the next 5 years

Company Project Fuel State Capacity (MW)

Central sector

NPCIL Kundankulam Nuclear Tamil Nadu 2,000

NTPC Sipat STPP Coal Chhattisgarh 1,980

NTPC Jhajjar Power Plant Coal Haryana 1,500

NTPC Simhadri Stage 2 Coal Andhra Pradesh 1,000

SJVNL Rampur hydro-electric project Hydro Himachal Pradesh 414

NHPC Uri-II Hydro Jammu & Kashmir 240

State sector

AP Power Dev. Co. Karim Nagar Gas Andhra Pradesh 2,100

Pragati Power Pragati- III Gas Delhi 1,500

Mahagenco Bhusawal TPS Expansion Coal Maharashtra 1,000

GSPC Pipavav Power Pipavav Power Project Gas Gujarat 700UPRUVNL Parichha TPS Extn - Stg 2 U5 Coal Uttar Pradesh 500

Private sector

Adani Power Mundra SEZ power plant Coal Gujarat 3,960

Tata Power Mundra UMPP Coal Gujarat 4,000

Reliance Power Ltd Sasan UMPP Coal Madhya Pradesh 3,960

Indiabulls Power Nashik TPP Coal Maharashtra 1,350

Lanco Infratech Anpara -C Coal Uttar Pradesh 1,200

Sterlite Energy Ltd. Jharsuguda Coal Orissa 2,400

Jaiprakash Associates Karcham Wangtoo Hydro Himachal Pradesh 1,000

GVK Goindwal Sahib Power Project Coal Punjab 540

JSW Energy Ratnagiri Coal Maharashtra 1,200

Essar Power Salaya Phase I and II Coal Gujarat 2,520


Capacity additions to lead to supply growth of 9.1 per cent CAGR

The 82 GW of capacity additions will translate to supply of power in the country growing at a CAGR of 9.1 per

cent over the next 5 years.


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Figure 6: Power supply and capacity additions

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(bn units)

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(GW)

Supply Capacity additions (RHS)

P- Projected


Country-wide deficit to reduce to 4.8 per cent by 2014-15

Power deficit in the country expanded from 7.3 per cent in 2004-05 to 11.1 per cent in 2008-09. However, the

trend reversed in 2009-10, with supply outpacing demand. This was mainly on account of 9.6 GW of capacities

commissioned along with commencement of gas supplies from the Krishna-Godavari (KG) basin.

CRISIL Research expects this trend to continue over the next 5 years. From 2010-11, the capacity additions

[especially during the Twelfth Plan (2012-13 onwards)] are expected to bring down the base deficit to 4.8 per cent

by end 2014-15.

Figure 7: Power deficit scenario

7.3

8.3

9.69.9

11.1

10.19.6

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6.1

4.8

0

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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 P 2011-12 P 2012-13 P 2013-14 P 2014-15 P

(bn units)

0

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12

(per cent)

Demand Supply Deficit (RHS)

P- Projected



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Since the western and northern regions form the main demand centers in the country while the eastern region has

most of the installed capacities, the region-wise demand-supply scenario differs significantly.

As per CRISIL Researchs region-wise analysis, the eastern region is expected to turn surplus over the next 5

years, whereas the western and northern regions would continue to be plagued by deficit scenarios. The southern

region is expected to inch towards a balanced situation during the same period.

Chart 1: Region-wise demand-supply

P- Projected


Northern region power deficit to decline significantly

Power deficit in the northern region is expected to decline significantly, especially over the next 2 years, as 7.5GW of capacities are scheduled to be added in this region. In addition, a number of plants from other regions will

supply power to the North (specifically Delhi) as they have been set up to supply power for Commonwealth

Games in 2010. Also, in 2011-12, some of the plants scheduled to come on-stream in 2010-11 would be


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commissioned. Hence, post 2011-12, the demand-supply situation is expected to remain stable, with the deficit

hovering in the 6-7 per cent range. Uttar Pradesh and Punjab are the main states where demand is expected to

significantly outstrip supply. However, Delhi is likely to witness a surplus situation.

Western region deficit to reduce from 2012-13

We expect the deficit in the western region to reduce significantly from 14 per cent to 7 per cent by end 2014-15

on account of significant capacity additions. The capacity additions in the western region are expected to be

around 33 GW with most of the capacities being added from 2012-13. Hence, the deficit is likely to start

contracting from 2012-13.

Maharashtra and Madhya Pradesh are the main states where demand is expected to considerably outstrip supply

by 2013-14 despite the huge capacity additions. Gujarat, on the other hand, is likely to have a surplus situation.

Southern region to move to a balanced demand-supply situation

The southern region is expected to add around 16 GW of power capacities over the next 5 years. As in the case of

the western region, the additions in this region would also be bundled in the last 2-3 years of the 5-year period.

Hence, the deficit is expected to decline significantly only in 2013-14 and 2014-15. This would result in a nearly

balanced demand-supply situation in the southern region.

State-wise, demand in Tamil Nadu and Karnataka is likely to exceed supply, although not considerably. Andhra

Pradesh is expected to witness a balanced situation.

Eastern region to become a surplus region

The demand-supply scenario in the eastern region is likely to improve significantly, from a deficit of 4-5 per cent

to a surplus situation by the end of 2014-15. This would be mainly on account of a stable demand scenario and

capacity additions of 13 GW.

States such as Orissa and West Bengal are expected to add large capacities, which will turn the region into a

surplus region by the end of 2013-14. Meanwhile, Bihar and Jharkhand would continue to reel under deficits.

North-eastern region deficit gap to be maintained

We expect around 2.6 GW of power capacities to be added in the north-eastern region, which will maintain the

demand-supply deficit at around 10 per cent.

Peak load deficit also expected to decline by 2014-15

On the peak load front, the deficit increased from 11.7 per cent in 2004-05 to 16.6 per cent in 2007-08, declining

thereafter to 12.7 per cent in 2009-10. Over the next 5 years, CRISIL Research expects the peak deficit to reduce

further to 8-9 per cent, as more peak load capacities (hydel and gas-based) are added to the system. This is critical

as most of the capacity additions would be coal-based.

CRISIL Research expects capacity additions in the range of 14-15 GW over the next 5 years from gas and hydel-based capacities (expected to add about 7 GW each). Capacity additions from gas-based projects in lieu with

access to KG basin gas and hydel capacity additions mainly from central and private players are expected to ease

peaking deficit to an extent.


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Figure 8: Peak load - Expected demand-supply scenario

12.7

10.710.2

9.6

8.59.0

0

40,000

80,000

120,000

160,000

200,000

2009-10 2010-11 P 2011-12 P 2012-13 P 2013-14 P 2014-15 P

(MW)

0.0

3.0

6.0

9.0

12.0

15.0

(per cent)

Demand Supply Deficit (RHS)

P- Projected


Investments to the tune of Rs 9.3 trillion expected over the next 5 years

In addition to the 82 GW of capacities to be added over the next 5 years, CRISIL Research expects captive

capacity additions of 13 GW during the same period. The capacity additions are expected to be spearheaded by the

private sector, with a share of 46 GW, followed by the central players.

Table 2: Capacity additions forecast

MW 2010-11 P 2011-12 P 2012-13 P 2013-14 P 2014-15 P Total

Central 3,690 5,736 5,262 3,021 3,705 21,414

State 3,112 2,800 3,510 3,103 2,648 15,173

Private 4,285 6,397 7,620 12,675 14,545 45,522

Total 11,087 14,933 16,392 18,799 20,898 82,109

Captive 2,362 2,722 2,351 2,673 2,865 12,973

Total (including captive) 13,449 17,655 18,743 21,472 23,763 95,082

P- Projected


This sizeable capacity addition is expected to translate to an investment potential of Rs 9.3 trillion over the next 5

years, with generation (both utilities and captives) contributing a major chunk at Rs 5.8 trillion (63 per cent). The

remaining Rs 3.4 trillion would be invested in transmission and distribution (T&D).

Though investments in T&D are lower than investments in generation, the figure is significantly higher than the

previous outlays. This is primarily due to the governments focus on reducing T&D losses. Investments in T&D is

expected to grow by 16 per cent CAGR over the next 5 years vis--vis a compounded growth of 15 per cent in

generation during the same period, leading to considerable opportunities in the T&D equipment space over the

next few years.


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Table 3: Investments in the power sector

Rs billion 2009-10 E 2010-11 P 2011-12 P 2012-13 P 2013-14 P 2014-15 P Total

(2010-11 to 2014-15)

Generation-Utilities 647.7 767.4 884.5 993.6 1,131.2 1,290.8 5,067.4

Generation-Captives 100.2 112.2 124.9 145.4 169.3 197.1 749.0

Total T&D 431.0 499.5 579.4 672.7 781.6 908.8 3,442.0

Total Investments 1,178.9 1,379.1 1,588.8 1,811.7 2,082.1 2,396.7 9,258.5

T&D/Generation-Utilities 67% 65% 66% 68% 69% 70%

E- Estimate, P- Projected


Private sector to account for more than 55 per cent of investments in the generationsegment

CRISIL Research estimates private sector investments to grow at a CAGR of 23 per cent as compared to the

overall investment growth of 15 per cent CAGR over the next 5 years. Consequently, the share of private sector

investments is expected to increase from 42 per cent in 2009-10 to 60 per cent in 2014-15.

During the same period, CRISIL Research expects total investments in the generation segment (utilities) to be

around Rs 5.1 trillion, with the private sector accounting for about 57 per cent. These investments would be

mainly through the setting up of capacities through UMPPs, and Case I and Case II routes. On the captive

generation side, we expect investments of around Rs 0.75 trillion.

Figure 9: Investments in the generation segment - Sector-wise

0

100

200

300

400

500

600

700

800

900

2009-10 E 2010-11 P 2011-12 P 2012-13 P 2013-14 P 2014-15 P

(Rs billion)


P- Projected


Investments in T&D would continue to be driven by central and state sectors, as private sector participation,

though increasing, remains limited in the segment.


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17/33


CRISIL Research expects 82 GW of capacities to be added over the next 5 years, which is an average of 16 GW

per year. Even beyond the forecast period, 15-20 GW of power capacities are likely to be added annually. These

capacity additions are expected to drive demand for power generation equipments. However, with a number of

private players setting up boiler, turbine, generator (BTG) capacities across the country, BTG manufacturing

capacity is expected to cross 30 GW by 2013, thus leading to an overcapacity situation.

Given the huge power capacity additions lined up, CRISIL Research has analysed the power generation

equipment market in India. Power generation equipments are divided in two broad categories:

BTG

Balance of plant (BoP), which includes coal-handling plant (CHP), ash-handling plant (AHP), water treatmentsystems, cooling tower, fuel oil handling system, etc.

While BTG accounts for about 50 per cent of the entire cost of setting up a power plant, BoP accounts for about

40 per cent. The remaining 10 per cent is towards other costs like interest during construction (IDC), land cost,

etc.

Table 1: Break-up of a coal based power plant cost

Component per cent

Boiler 25% Constitutes for the BTG portion of the plant

Turbine-generator 25% Accounts for 50 per cent of the total cost

Coal Handling plant 10-12%

Ash Handling plant 5-6%

Water treatment & Constitutes for the BoP portion of the plant

Cooling Tower 5-6% Accounts for 40 per cent of the total cost

Civil works 10-12%

Others* 6-7%

Others 10% This includes Interest during construction (IDC),

land costs etc.

Power plant 100%

*Other costs in BoP include cost of electric fittings, chimney, fuel oil system, fire protection etc.


Private players prefer EPC route to procure equipment

The demand for BTG and BoP equipment is primarily driven by coal-based power plants, as these plants need a

boiler, CHP and AHP to operate, which account for a substantial portion of the total cost of a plant. Going

forward, of the total 82 GW of capacity additions, 65.6 GW are expected from coal-based capacities. Of this, more

than 60 per cent would be from private sector players while the rest would be accounted for by central and state

utilities.

2.0 Generation equipment - BTG capacity to exceed demand


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Figure 1: Sector-wise share in coal-based capacity additions

(per cent)State

15

Central

22Private

63


While central utilities prefer to order each component of a power plant separately, private players favour

engineering, procurement, construction (EPC) or turnkey contracts. State utilities follow both routes, though

having a preference towards the EPC/BoP route.

Chart 1: NTPC awards each of the components separately

Central utilties

Eg. NTPCOthers

BTG

Coal

Handling

Plant

Ash

Handling

Plant

Cooling

tower

Waterworks


Difference in experience and expertise of National Thermal Power Corporation (NTPC) and private sector players

causes them to take different routes for awarding of equipment contracts. Given its scale and experience, NTPC

has departments assigned for each of the components such as BTG, CHP, AHP, water treatments etc. NTPC

typically saves 5-10 per cent on its BoP equipment costs as it awards them directly rather than going via the

EPC/BoP route.

On the other hand, since most private sector players are relatively new entrants in the sector, and lack the technical

expertise, they prefer a turnkey player like Larsen & Toubro (L&T), BGR Energy and Tecpro Systems.


19/33


Chart 2: Private utilities prefer EPC route

Private sector

players

BoP contractor

(L&T, BGR, Tecpro

etc)

BTG

Coal Handling plant

Ash Handling plant

Cooling tower &

water treatment

Others

OR

Private sector

players

EPC / BoP

contractor (L&T,

BGR, Tecpro etc)

BTG

Coal Handling plant

Ash Handling plant

Cooling tower &

water treatment

Others


Going forward, as a huge chunk of capacity additions are expected to come from private sector players, most

equipment contracts will be awarded on turnkey basis. In addition, some state utilities have also shown preference

towards the EPC route over component-wise awarding.

BTG - staring at an overcapacity situation

Currently, Bharat Heavy Electricals Ltd (BHEL) is the only domestic player in the BTG segment with an

operational capacity of 15 GW. L&T has recently started executing some orders in the BTG segment, with its

capacity expected to be completely operational by December 2010.

Up to 2009, BHEL was the only player in the domestic market with an operational capacity of 10 GW. From 2007

to 2010, several private sector players such as Adani Power, JSW Energy, Lanco Infratech and Sterlite Energy

laid out plans to set up large power generation capacities. Since BHEL was already facing delays in executing its

existing orders, these players had to look out for an alternative route. Chinese players like Shanghai Electric,

Harbin and Dong Fang emerged as primary choices, as these companies had experience and scale to execute super

critical power plants. In addition, Chinese equipment is on an average 15-20 per cent cheaper than Indian

equipment on account of the currency advantage and import duty exemptions available in India for mega power

plants and UMPPs.


20/33


Table 2: Private players preference for Chinese equipments

Player Project Size (MW) Contract

Lanco Infratech Anpara 1,200 Harbin Power

Babandh 2,640 Harbin Power

Amarkantak 1,320 Harbin Power

Sterlite Energy Jharsuguda 2,400 SEPCO

Talvandi Sabo 1,980 SEPCO

GMR Energy Kamalanga 1,050 SEPCO

Reliance Power Sasan UMPP 3,960 Shanghai Electric

Krishnapatnam UMPP 3,960 Shanghai Electric

Rosa Phase 1,200 Shanghai Electric

Adani Power Mundra 4,620 SEPCO, SCMEC

Tiroda 3,300 SCMEC

JSW Energy Raj WestPower Ltd 1,080 Dongfang Electric

Ratnagiri 1,200 Shanghai Electric

Torangallu Extension 600 Shanghai Electric

Essar Power Mahan 1,200 Harbin Power

Salaya 2,520 Harbin Power

Tori Power plant 1,200 Harbin Power

Total (Chinese players) 35,430

Note: The above list is indicative and not exhaustive


Looking at the in surge of Chinese equipments and healthy demand from generation companies, domestic players

like L&T, JSW Energy, Bharat Forge and BGR Energy are adding substantial BTG capacities. Since these players

do not have technological expertise of the segment, they have formed joint ventures (JVs) with foreign players.

After a shift in generation capacity additions from the central and state sectors to the private sector, CRISIL

Research expects the incremental BTG share to move from BHEL to domestic private players. The recent NTPC

bulk tender for supply of 11 units of 660 MW, where the Bharat Forge-Alstom JV emerged lowest bidder to

supply turbines and generators supports this view.


21/33


Table 3: Capacity additions lined up in the BTG segment

Current Capacity additions (GW)

PlayerJV

structure

capacity (GW)

Boilercapacity

Turbine-

Generatorcapacity Commissioning

BHEL 15 5 5 December-12

L&T - Mitsubishi 51:49 0 4 4 December-10

BGR Energy - Hitachi 51:49 0 4 4 2013

JSW - Toshiba 25:75 0 0 3 2012-13

Bharat Forge - Alstom 49:51 0 0 5 December-12

Thermax - Babcock & Wilcox 51:49 0 3 0 December-12

GB Engineering - Ansaldo(Gammon) 15:85 0 2 0 NA

Total 15 18 21

Total capacity 33 36 By 2013


By 2013, BTG capacity in the country is likely to exceed 30 GW while capacity additions in the power sector are

likely to range at 15-20 GW per year. Moreover, Reliance Power has recently awarded a BTG contract worth Rs

around 450 billion to Shanghai Electric for executing 30 GW of power capacities. This clearly highlights the

continued preference of private players to install Chinese equipment. Given these two factors, CRISIL Research

expects an overcapacity scenario in the domestic BTG market from 2013.

All future capacity additions are expected to come in the super-critical category, as most players are expected to

add capacities using this technology. Over the next 5 years, of the 65.6 GW capacity additions, 50-55 per cent is

likely to come from super-critical technology. However, awarding for these projects is almost completed. Beyond

the 5 years, the share of super-critical technology is likely to rise to 70-75 per cent of coal-based capacity

additions.

Even as the share of super-critical technology increases, CRISIL Research expects super-critical equipment to

witness an overcapacity scenario, due to the preference of private players for Chinese equipment. Hence, margins

will be under pressure going forward.

Import duty, indigenous procurement of equipment can shield domestic industry

Domestic players have been lobbying for a levy of 15-20 per cent import/customs duty on Chinese equipment

since the last 1 year on the grounds that domestic players have to pay excise duty on their production whereas

Chinese equipments are exempt from import duty. Moreover, Chinese manufacturers also enjoy the advantage of

a depreciated currency. These two factors lead to Chinese equipment being cheaper by 15-20 per cent.

The government has rejected the import duty demand on the grounds that there is not enough domestic capacity,

and hence players should be free to choose equipment suppliers to speed up execution. However, with substantial

BTG capacity additions lined up, CRISIL Research believes that following options can partly shield the domestic

industry:

Levy of import duty on Chinese equipment.

A regulation or rule stating that a minimum per cent of equipment procured by generation players must be

indigenous.

A notification requiring Chinese players to set up manufacturing base in India, thus ensuring a level playing

field.


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Balance of plant (BoP) covers all components of a power plant except BTG such as CHP, AHP, water treatment

systems, cooling tower, civil works, fuel handling system and chimney, amongst others. These components

account for about 40 per cent of the entire cost of setting up a power plant.

BoP - a Rs 1.6 trillion opportunity

Over the next 5 years (2010-11 to 2014-15), of the total investment expected in the power sector, CRISIL

Research estimates the BoP segment to account for Rs 1.6 trillion; this translates to a CAGR of almost 15 per

cent. In addition, a further Rs 0.7-trillion-worth of BoP orders are likely to be placed for capacity additions

beyond the forecast period.

Figure 1: BoP industry size

207

246

283

318

362

413

-

50

100

150

200

250

300

350

400

450

2009-10E 2010-11P 2011-12P 2012-13P 2013-14P 2014-15P

(Rs billion)

P: Projected


Growth of the BoP segment is expected primarily from coal-based capacity additions of 65.6 GW slated to be set

up over the forecast period. For a gas-based plant, the BoP order size would be 50-60 per cent of a similar

capacity coal-based plant.

CHP, AHP and civil works account for 65-70 per cent of investments in the BoP segment; CHP and AHP

combine provide the biggest opportunity in the BoP segment at about Rs 650 billion. Civil works, though a

sizeable component (Rs 405 billion), is also split between other components. Hence, one player may not be

awarded the entire civil works contract.

Further, demineralisation (DM) plant and pre-treatment (PT) plant form the major components of a water

treatment system. The size of a water treatment system is expected to be around Rs 110 billion while that of

cooling tower at around Rs 130 billion. Other components include the chimney, fuel oil system, electric and

control systems and fire protection system.

3.0 BoP Huge opportunity amidst stiff competition


24/33


Chart 1: BoP: Opportunity in major components

Ash handling plant

(Rs 245 bn)

Water treatment and

Cooling Tower

(Rs 240 bn)

Coal handling plant

(Rs 405 bn)

Civil works

(Rs 405 bn)

BoP

(~ Rs 1,620 bn)

Others

(Rs 325 bn)


Coal handling plant

CHP handles coal from the unloading stage to transporting it to the boiler and storing it in bunkers. It also

processes raw coal to make it suitable for boiler operation, i.e. covers receipt of coal from coal mines, weighing of

coal, crushing it to the required size and transferring the coal to various coal mill bunkers. Major equipment used

in a CHP are wagon tipplers, stacker-reclaimers, conveyor belts, coal crushers and dust extraction systems. The

construction period for a CHP is 18-30 months.

Chart 2: Coal handling capacity required by a 1,000 MW plant

Power plant capacity

1,000 MW (500x2)

@ 100% PLF

Heat rate = 2,425

Kcal/kWh

UHV = 3,150 Kcal/kg

CHP capacity required =

1,600 TPH (no. of CHPs

to be added = 111)

PLF: Plant load factor; UHV: Useful heat value; tph: Tonnes per hour


A CHP typically works for only 14 hours a day with the rest of the time required for maintenance of the plant.

Hence, for a typical 1,000 MW power plant having two units of 500 MW, the CHP capacity required is 1,600

tonnes per hour (tph), as the CHP has to make coal available which is sufficient for the entire days operations.

[This is assuming a 100 per cent plant load factor (PLF), calorific value of coal at 3,150 Kcal/kg and a station heat

rate of 2,425 Kcal/kWh.]

After a detailed analysis of various projects, CRISIL Research believes that the 65.6 GW of coal-based capacity

additions will require about 111 CHPs to be executed over the next 5 years. (One CHP can cater to one or more

units of a power plant, depending on the units capacity.)

Ash handling plant

AHP refers to the system of collecting fly ash and bottom ash generated when coal is burned. Fly ash is one of the

residues generated in combustion, and comprises fine particles that rise with the flue gases. Ash which does not


25/33


rise is termed as bottom ash. The ash is high in the case of power plants using domestic coal as Indian coal has

high ash content (around 40 per cent). It is generally disposed in an ash pond till arrangements are made for 100

per cent utilisation of the ash. Ash generated can be utilised in brick manufacturing, in roads, cement etc. The

gestation period for an AHP is 12-18 months.

Fly ash and bottom ash

Fly ash is captured and removed from flue gas by electrostatic precipitators. The fly ash is periodically removed

from collection hoppers below the precipitators. Typically, the fly ash is transported to storage silos for

subsequent transport by trucks or railroad cars. At the bottom of the boiler there is a hopper for collection of

bottom ash. This hopper is filled with water to quench the ash and clinkers falling from the furnace. Bottom ash

and crushed clinkers are conveyed to silos or ash pond. Ash ponds are structures for the disposal of fly ash. Wet

disposal of fly ash into ash ponds is the most common fly ash disposal method.

Chart 3: Ash handling capacity required by a 500 MW plant


500 MW (500x1)

@ 100% PLF

UHV = 3,150 Kcal/kg

Ash content = 46%

AHP capacity required

~300 TPH (No. of AHPs

to be added = 153)

PLF: Plant load factor; UHV: Useful heat value; tph: Tonnes per hour


An AHP works on a continuous basis as ash is generated constantly during the working of a power plant. Unlike

in CHP, one AHP can cater only to one unit of a power plant, as each unit has a different boiler necessitating

different systems for collection of the ash. After a detailed project analysis, CRISIL Research believes that the

65.6 GW of coal-based capacity additions will require about 153 AHPs to be executed over the next 5 years.

A typical 500 MW power unit requires an AHP with a capacity of around 300 tph. This is assuming a 100 per cent

PLF, calorific value of coal at 3,150 Kcal/kg, station heat rate of 2,425 Kcal/kWh and an ash content of 46 per

cent (taken for the lowest grade coal as per CEA specifications).

Water treatment system and cooling tower

The water treatment system mainly consists of systems to transport water from the source to the plant, PT plant

and DM plant. PT plant produces clarified water to meet the requirement of clarified water applications of the

power plant, viz cooling tower make-up, service water and input water for producing potable and DM water. DM

plant is meant to supply demineralised water to the plant. The gestation period for water systems is 12-18 months.

Cooling towers are heat removal devices that transfer process waste heat to the atmosphere. Cooling towers

evaporate water to remove process heat and cool the water. The construction period of a cooling tower is 18-24

months.


26/33


Chart 4: Water requirement for a 1,000 MW plant


1,000 MW (500x2)

3,000 m3/hour (3 mn

litres) of water

is required

65.6 GW requires 1.72

trillion litres or 1.72

billion m3

per year


The water requirement of a power plant is high at around 3,000 litres per hour per MW. As per this benchmark,

65.6 GW of coal-based capacity additions would require around 1.72 trillion litres of water per year. Of the total

water required, 85 per cent is required for the cooling tower make-up, i.e. to make up for the evaporated water.

The remaining 15 per cent is required for DM plant, potable water, reservoir evaporation, etc.

BoP - a highly scattered segment with severe competition

Competition in the BoP segment is severe with 7-8 suppliers for each component. Since each of these components

have their own set of suppliers, CRISIL Research has looked at the major components individually.

CHP and water treatment are the categories facing high competition with the market divided amongst the top 4-5players. In the case of AHP, Indure and Macawber Beekey are the leading suppliers with a combined market share

of around 65 per cent. For cooling towers, Paharpur Cooling Towers is the market leader, having a share of about

60 per cent.

In the turnkey (total BoP) business, BGR Energy and L&T are the market leaders. Other prominent players in this

segment are Tata Projects Ltd (TPL), BHEL, Reliance Infrastructure and Lanco Infratech. These players are fairly

experienced in handling turnkey projects. Reliance Infrastructure and Lanco Infratech mostly execute in-house

(group company) projects. Players such as Tecpro, TRF and McNally Bharat used to execute only CHPs and

AHPs, but to gain scale have recently entered the turnkey segment.


27/33


Chart 5: Players present in various components of BoP and their market shares

Ash handling plant

12-18 mths

(Rs 245 bn)

BoP

Rs 1,620 bn

Water treatment & CT

18-30 mths

(Rs 240 bn)

Turnkey players

Coal handling plant

18-30 mths

(Rs 405 bn)

L&T (18-20%)

Tecpro(18-20%)

TRF (15-18%)

McNally Bharat

(10-15%)

Elecon (8-10%)

Thyssenkrupp

(8-10%)

Indure (35-40%)

Macawber Beekay

(25-30%)

DCIPS (10-15%)

Tecpro (8-10%)

McNally Bharat

(5-8%)

Cooling Tower

Paharpur CT

(55-60%) Gammon Infra.

(20-25%)

Water treatment

Driplex (25-30%)

Thermax (15-20%)

Doshion (15-20%)

Va Tech (10-15%)

Existing

BGR

L&T Tata Projects

BHEL

Reliance Infra

New entrants

Tecpro

Mc Nally Bharat

TRF

Note: Numbers in brackets indicate market share of players


Private players prefer to award equipment contracts on a turnkey basis whereas central utilities award components

separately. With more than 60 per cent of the total coal-based capacity additions expected to come from private

sector players, component players are shifting from executing the low value-high margin BoP components to high

value-low margin turnkey projects. This shift is also due to high competition in the BoP segment. While the net

margins for players in the turnkey segment are typically 5-7 per cent, those of component suppliers are higher at

8-10 per cent. Hence, margins for the BoP industry are likely to decline going forward, and stabilise at 5-8 per

cent.

Since players are present in different components, CRISIL Research has divided them into component-wise

categories* to analyse their financials:

Companies present in CHP Companies present in water treatment

Companies present in turnkey business

The typical payment terms are:

10 per cent advance

10 per cent on design

70 per cent during execution

10 per cent after a minimum of 6 months post the commissioning of the plant. This amount is also known as

payment for meeting the performance guarantee test. In several instances, payment of this amount gets

excessively delayed.

*We have not looked at AHP separately, as the main companies in this segment are unlisted and their financial details are not

available.


28/33


CHP companies - TRF, Tecpro fare better on margins and cash conversion

Within the CHP space, the financials of Elecon, TRF, Tecpro and McNally Bharat have been analysed.

This segment is characterised by high working capital requirement. Current assets usually comprise 85-90 per cent

of the total assets. Since the industry is not capital intensive, companies have low gearing. Most of their debt is in

the form of trade credit.

Two major factors that can affect a companys performance are: (i) ratio of in-house manufacturing to sourcing,

and (ii) mix of BoP orders to component orders. A company having a higher ratio of in-house manufacturing will

enjoy high margins. In terms of orders, equipment orders comprise for the high margin business, but the value of

these orders is low. Conversely, a BoP order will have low margins, but higher value.

Table 1: Financials of CHP companies

Elecon Mcnally

Bharat

T R F Tecpro

Systems

2009-10 2009-10 2009-10 2009-10

Sales Rs Million 11,300 14,862 6,593 14,758

Sales growth (3 year CAGR) Per cent 10.4 42.2 22.8 83.0

Operating margins Per cent 15.7 7.4 14.0 15.9

Operating profit growth (3 Year CAGR) Per cent 9.2 44.2 37.0 80.1

Net margins Per cent 5.9 2.3 7.2 7.5

Net profit growth (3 Year CAGR) Per cent 4.0 24.5 32.3 71.5Order book Rs Million 15,001 42,000 18,000 24,000

Order book to sales Times 1.3 2.8 2.7 1.6

In house Mfg. (% of contract value) Per cent n.a 60 40 40

ROE Per cent 22.3 16.5 31.2 42.8

ROCE Per cent 15.8 19.0 27.2 24.5

Debt Equity ratio Times 1.6 0.9 0.9 0.2

Cash conversion Days 192 83 44 59

n.a.: Not available

Source: CRISIL Research, Prowess

TRF and Tecpro fare better on net margins and cash conversion cycle while Elecons margins are slightly lower.

McNally has very low margins of 2.3 per cent. This is because the equipment business (high margin business) is

under a subsidiary company, and McNally Bharat is mainly carrying out projects on a turnkey basis.


29/33


Figure 2: CHP players - Du Pont decomposition Figure 3: CHP players - Cash conversion cycle

0

1

2

3

4

5

6

7

8

Elecon Mcnally Bharat T R F Tecpro Systems

(per cent)

0

1

2

3

4

5

6

7

(times)

Net margins (LHS) Total Asset turnover (RHS) Assets/Equity (RHS)

22.3 16.5 31.2 42.8

-173

-61

-94

-167

-244

-208

-227

147

172

225

262

-11

-400 -300 -200 -100 0 100 200 300

Elecon

Mcnally

Bharat

T R F Ltd

Tecpro

(Days)

Inventory days Debtors days Creditors days

59

44

83

192

Note: Numbers on the top are RoE.


Note: Numbers to the extreme right are cash

conversion days.


The growth rate and order book-to-sales ratio is good for the CHP industry. Tecpro has grown at the fastest rate

over the last 3 years as it has entered the turnkey space. Its return on equity (RoE) is about 42 per cent, the best in

its category. Tecpro and TRF have the best RoE within this industry as they are able to maintain high margins. In

addition, these companies also have the most efficient cash conversion cycle.

On account of its robust revenue growth and an order book-to-sales ratio of 1.6 times, Tecpro is poised to

continue to grow at the highest rate within this industry. While core competency of Tecpro lies in being able to

execute turnkey projects, TRF and McNally derive a substantial part of their revenues from the sale of equipment.

Figure 4: Performance of the CHP industry

19.5

23.9

32.9

47.5

0

10

20

30

40

50

2006-07 2007-08 2008-09 2009-10

(Rs billion)

0

2

4

6

8

10

12

14

16

(per cent)

Sales Operating margins (RHS) Net margins (RHS)


The CHP industry has clocked revenues of 35 per cent CAGR over the last 3 years. On account of increasingcompetition there has been some margin pressure on the industry with net margins declining from 7.8 per cent in

2007-08 to 5.6 per cent in 2009-10.


30/33


Driplex is leader in water treatment, Paharpur in cooling towers

Within the water space CRISIL Research has covered Driplex, Va Tech and Thermax in water treatment and

Paharpur in cooling towers. In terms of revenues, though Driplex is the lowest, most of its revenues come from

the power sector. Va Tech is also a major player in areas such as municipal water treatment and sewage treatment

while a substantial portion of Thermaxs revenues are from the boiler and environment segments.

Though Gammon Infrastructures market share in the cooling towers segment is 20-25 per cent, in terms of the

companys overall revenues, it accounts for a very small share. Hence, the company has not been considered for

the purpose of this analysis.

Table 2: Financials of water treatment and cooling tower companies

Driplex Va Tech Thermax Paharpur

2009-10 2009-10 2009-10 2009-10

Sales Rs Million 2,378 7,077 31,422 9,326

Sales growth (3 year CAGR) Per cent 31.0 39.6 11.8 15.7

Operating margins Per cent 11.3 12.4 11.8 20.3

Operating profit growth (3 Year CAGR) Per cent 32.5 72.7 8.4 29.7

Net margins Per cent 6.1 6.6 4.5 16.7

Net profit growth (3 Year CAGR) Per cent 31.0 87.8 - 9.9 25.6

Order book Rs Million 5,700 21,634 53,810 60,000

Order book to sales Times 2.4 3.1 1.7 6.4

Inhouse Mfg. (% of contract value) Per cent n.a n.a n.a 90

ROE Per cent 25.4 27.0 14.1 24.2

ROCE Per cent 26.5 44.8 37.3 30.2

Debt Equity ratio Times 0.6 0.1 - 0.1

Cash conversion Days 38 - 28 31 126

n.a.: Not available


Companies in the water treatment segment have grown at a healthy rate over the last 3-4 years, with their order

books having sufficient revenue visibility. For Thermax, even though the performance is muted as compared to its

peers, this is mainly because a substantial part of its revenue comes from other businesses. The cash conversion

for Driplex is high at 38 days mainly because most of its orders are from BHEL and NTPC, which often delaypayments.

In cooling towers, Paharpur has been able to maintain its market leadership as it has the technology and capability

to produce most of the equipments required for a cooling tower in-house. This allows the company to bid at lower

price points, enabling considerable inflow of orders. Moreover, it has a good track record in executing cooling

towers units.


31/33


Figure 5: Water treatment players - Du Pont

decomposition (2008-09)

Figure 6: Water treatment players - Cash

conversion cycle (2008-09)

0

4

8

12

16

20

Driplex Va Tech Thermax Paharpur

(per cent)

0

1

2

3

4

5

(times)


27.8 10.0 14.1 26.4

-16

-75

-84

-110

-224

-87

-140

88

256

131

98

-4

-300 -200 -100 0 100 200 300

Driplex

Va Tech

Thermax

Paharpur

(Days)


126

31

-28

38

Notes

1) Numbers on the top are RoE.

2) Thermaxs RoE is for 2009-10.


Notes

1) Numbers to the extreme right are cash conversion

days.

2) Thermaxs RoE is for 2009-10.


The water treatment industry registered revenue growth 16 per cent CAGR over the last 3 years. In 2009-10, net

margins declined to 5 per cent from 8 per cent. This was mainly because margins of Thermax halved during the

year. Excluding Thermax, the industry was able to maintain margins.

Figure 7: Performance of the water treatment industry (excluding cooling tower)

26.1

37.139.6

40.9

0

10

20

30

40

50

2006-07 2007-08 2008-09 2009-10

(Rs billion)

0

2

4

6

8

10

12

14

16

(per cent)



Turnkey - BGR well-established, competition intensifying

Within the turnkey industry, CRISIL Research has covered only two players - BGR Energy and Tecpro. This is

because other key players such as L&T and BHEL have a major portion of their revenues coming from otherbusiness divisions.


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Table 3: Financials of turnkey players

Tecpro BGR

2009-10 2009-10

Sales Rs Million 14,597 30,762

Sales growth (3 year CAGR) Per cent 83.0 57.6

Operating margins Per cent 15.9 13.0

Operating profit growth (3 Year CAGR) Per cent 80.1 60.4

Net margins Per cent 7.5 6.5

Net profit growth (3 Year CAGR) Per cent 71.5 71.7

Order book Rs Million 24,000 105,000

Order book to sales Times 1.6 3.4

Inhouse Mfg. (% of contract value) Per cent 60 40

ROE Per cent 42.8 31.8

ROCE Per cent 24.5 19.9Debt Equity ratio Times 0.2 1.4

Cash conversion Days 59 53

n.a.: Not available


Both analysed players in this segment have recorded high growth rates over the last 3-4 years. This is in line with

CRISIL Researchs view of capacity additions being driven by private players who prefer to award projects on a

turnkey basis. CRISIL Research believes that the turnkey category will continue to register the highest growth rate

in the BoP industry.

BGR Energy was an early entrant in the turnkey segment and has managed to grow at a CAGR of 58 per cent.

Since projects in this segment are high value and involve coordination with other players, project management

skill is the most important criteria for success. Both the companies have been able to achieve growth without

sacrificing margins and while maintaining healthy cash conversion cycle. In addition to these, players like L&T

and TPL also have good project management skills.

Figure 8: Turnkey players - Du Pont

decomposition

Figure 9: Turnkey players - Cash conversion

cycle

0

2

4

6

8

10

Tecpro Systems BGR Energy

(per cent)

0

1

2

3

4

5

(times)


42.8 31.8

-94-227

-235

262

184-2

-400 -300 -200 -100 0 100 200 300

Tecpro

BGR

(Days)


53

59

Note: Numbers on the top are RoE.


Note: Numbers to the extreme right are cash

conversion days.



33/33

Tecpro is a relatively new entrant in this segment, but has won a large number of orders. It has a higher proportion

of in-house manufacturing which benefits the company. In addition, the bidding strategy has been aggressive and

targets volume-based growth. More players like McNally Bharat and TRF are planning to enter this segment.

With increasing competition and aggressive bidding, players are expected to continue to target volume-based

growth, and consequently margins will be under pressure. A key differentiator here could be the capability to

manufacture components in-house which is leading players to enter technological tie-ups with foreign companies.

Figure 10: Performance of the turnkey segment

10.3

20.2

26.6

45.5

0

10

20

30

40

50

2006-07 2007-08 2008-09 2009-10

(Rs billion)

0

2

4

6

8

10

12

14

16

(per cent)



The turnkey segment has witnessed high revenue CAGR of 64 per cent between 2006-07 and 2009-10. Thisgrowth has been driven by both players - Tecpro and BGR. Players have been able to maintain operating and net

margins despite the rising competition. Operating margins have ranged at 12-14 per cent over the last 4 years

while net margins have been at 6-7 per cent.

CRISIL Power Opinion Nov 2011

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