Motilal Oswal Financial Services

Sector Update | 22 April 2024

Capital Goods

T&D – Benefiting from the new investment cycle

Companies

TP (INR) Rating

ABB India ^

7,500

BUY

Siemens $

5,900

BUY

Hitachi Energy

5,466

SELL

KEC International 710 NEUTRAL

Kalpataru Projects 1,190

BUY

GE T&D*

TRIL*

Voltamp*

Skipper*

CG Power*

Techno Electric*

^ABB’s estimates are for CY24 and

CY25 (December end) / $Siemens

estimates are for FY25 and FY26

(September end) / *Bloomberg

estimates

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

Winds of change: Powering up for

sustainable growth

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.

Teena Virmani - Research Analyst

(Teena.Virmani@MotilalOswal.com)

Harsh Tewaney - Research Analyst

(Harsh.Tewaney@MotilalOswal.com)

Investors

22 April 2024

are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Capital Goods

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).

22 April 2024

Capital Goods

Industry growth momentum to continue

Growth to be driven by generation capacity additions

We expect growth in the transmission and substation capacity to be driven by

incremental additions to the generation capacity. Historically, the ratio of

transformer capacity to installed generation has been around 2.6-2.8x and with a

similar ratio of ~3x for future, the expected installed transformation capacity can be

around 1,575 GVA for a 520 GW generation capacity. This requires an addition of

nearly 400MVA from the levels of FY23 capacity of 1180MVA. With this expected

incremental requirement for transformation capacity, significant capacity

expansions will be required for transformers and substations. Currently only a few

players like CG Power, Siemens, and TRIL have announced capex plans. The T&D

system in India operates at several voltage levels, such as extra-high voltage (765 kV,

400 kV and 220 kV), high voltage (132 kV and 66 kV), medium voltage (33 kV, 11 kV,

6.6 kV and 3.3 kV) and low voltage (1.1 kV, 220 volts and below). This time the

growth is more visible across the extra-high voltage range for the transmission line

as well as substations by FY30.

Moreover, the near-term pipeline of CEA approvals stands at ~INR1t, which we

believe could benefit the entire value chain of players across products and EPC

players.

Exhibit 1:

Expected increase in installed generation capacity to 520GW by FY27E would need transformation capacity of 1,575

GVA, translating into sharp uptick in demand for transformers (transformation vs. generation capacity (MW:MVA))

Installed generation capacity (GW)

Installed transformation capacity (GVA) (220 kV & above substation capacity)

MVA:MW ratio for generation system

2.8

2.7

2.6

2.2

2.1

370

602

968

FY20

382

1,025

FY21

399

1,104

FY22

3.0

1.7

1.1

69 75

FY92

105

182

199

410

275

520

1,575

FY27F

Source: CEA, Crisil, MOFSL

FY02

FY12

FY15

Exhibit 2:

Planned transmission capacity additions by CEA till 2030

Transmission system type/ voltage class

(a) + 800 kV

(b) + 350 kV

(d) 400 kV

(e) 220 kV cable

Total transmission lines

(a) + 800 kV

(b) + 350 kV

(d) 400 kV

(e) 220 kV cable

Total substations

Unit

ckm

MVA

Capacity additions till 2030

6,200

1,920

25,960

15,758

1,052

50,890

20,000

5,000

2,74,500

1,34,075

4,33,575

Source: CEA, Crisil, MOFSL

22 April 2024

Capital Goods

Exhibit 3:

Current total transmission line network in the

country (220 kV and above) (ckm)

4,71,341

4,56,716

4,41,821

4,25,071

4,13,407

413,407

41,809

1,80,746

1,75,296

FY19

FY20

FY21

FY22

FY23

FY19

Exhibit 4:

Strong growth in the length of high-voltage

transmission lines (220 kV and above) (ckm)

220kv

425,071

44,853

1,84,521

400kv

441,821

46,090

1,89,910

765kv

456,716

51,023

1,93,978

471,341

52,678

1,97,750

1,80,141

FY20

1,86,446

FY21

1,92,340

FY22

2,01,538

FY23

Source: CEA, Crisil, MOFSL

Exhibit 5:

Sector-wise share of transmission line additions (ckm)

Central

22,437

3,840

10,007

11,664

868

6,307

8,590

FY19

4,489

FY20

7,166

FY21

16,750

1,927

7,657

14,895

1,280

8,939

4,676

FY22

14,625

3,883

6,816

3,926

FY23

Source: CEA, Crisil, MOFSL

State

Private

Exhibit 6:

Robust growth in high-voltage sub-station capacity

Exhibit 7:

Centre and state continue to form the majority

(above 220 kV) (MVA)

sector-wise share of substation additions

220kv

967,893

2,31,000

3,37,772

3,73,621

FY20

400kv

765kv

11,80,352

2,76,700

4,25,748

4,44,404

FY23

899,663

33,597

5,17,710

3,48,356

FY19

Central

967,893

38,597

5,49,965

3,79,331

FY20

State

Private

11,04,450

43,807

6,20,407

4,40,236

FY22

11,80,352

48,807

6,60,939

899,663

2,11,500

3,13,182

3,52,481

FY19

10,25,468

2,38,700

3,61,727

3,95,541

FY21

11,04,450

2,57,200

3,93,113

4,20,637

FY22

10,25,468

42,807

5,82,000

4,00,661

FY21

4,70,606

FY23

Source: CEA, Crisil, MOFSL

22 April 2024

Capital Goods

Exhibit 8:

ISTS project approvals over last four meetings outline a strong tendering pipeline of nearly INR1t projects to be

awarded over next 2-2.5 years

Transmission scheme for evacuation of power from zones

14th meeting recommendations

Khavda area of Gujarat under Phase-IV (7 GW): Part A

Khavda area of Gujarat under Phase-IV (7 GW): Part B

Khavda area of Gujarat under Phase-IV (7 GW): Part C

Khavda area of Gujarat under Phase-IV (7 GW): Part D

Khavda area of Gujarat under Phase-IV (7 GW): Part E2

Khavda area of Gujarat under Phase-V (8 GW): Part A

Khavda area of Gujarat under Phase-V (8 GW): Part C

Rajasthan REZ PhIV (Part-2 :5.5 GW) (Jaisalmer/Barmer Complex): Part A

Rajasthan REZ PhIV (Part-2 :5.5 GW) (Jaisalmer/Barmer Complex): Part B

Rajasthan REZ PhIV (Part-2 :5.5 GW) (Jaisalmer/Barmer Complex): Part C

Rajasthan REZ PhIV (Part-2 :5.5 GW) (Jaisalmer/Barmer Complex): Part D

Rajasthan REZ PhIV (Part-2 :5.5 GW) (Jaisalmer/Barmer Complex): Part E

Rajasthan REZ PhIV (Part-2 :5.5 GW) (Jaisalmer/Barmer Complex): Part F

Rajasthan REZ PhIV (Part-2 :5.5 GW) (Jaisalmer/Barmer Complex): Part H1

15th meeting recommendations

Integration of Tumkur-II REZ in Karnataka

Strengthening for interconnections of Bhadla-III & Bikaner-III complex.

Network Expansion scheme in Gujarat for drawl of about 3.6 GW load

under Phase-I in Jamnagar area

16th meeting recommendations

Network Expansion Scheme in Navinal (Mundra) area of Gujarat for

drawal of power in the area

Eastern Region Expansion SchemeXXXIX (ERESXXXIX)

17th and 18th meeting recommendations

Rajasthan REZ PhIV (Part 3: 6GW) (Bikaner Complex): Part A

Rajasthan REZ PhIV (Part 3: 6GW) (Bikaner Complex): Part B

Integration of Davanagere / Chitradurga and Bellary REZ in Karnataka

Integration of Bijapur REZ in Karnataka

Evacuation of power from Kudankulam Unit - 3 & 4 (2x1000 MW)

Total

Mode

TBCB

Timeframe

24 months

21 months

48 and 54 months

48 months

24 months

21 months

June,2026

24 months

BPC

RECPDCL

PFCCL

RECPDCL

PFCCL

RECPDCL

PFCCL

RECPDCL

PFCCL

RECPDCL

PFCCL

RECPDCL

PFCCL

RECPDCL

PFCCL

Est Cost

(INR b)

40.9

47.7

53.4

34.6

6.9

248.2

120.0

22.0

32.8

27.1

22.3

32.5

27.4

36.7

7.9

13.8

38.2

23.8

29.0

59.7

53.6

34.5

11.1

5.5

1,030

Source: CEA, MOFSL

Exhibit 9:

Cost breakup of T&D infrastructure, including EPC

Equipment cost

Civil construction

Design & Engineering

Other costs

Exhibit 10:

Historical and expected trends in T&D investments

(INR t)

Generation

Transmission

3.7

Distribution

4.1

4.2

18%

1.6

55%

0.9

1.0 1.0

0.7 0.6

0.4

2.1

2.2

3.2

18%

0.5

0.6 0.7 0.7 0.7 0.7

0.4 0.3 0.5

0.4 0.3 0.3 0.4 0.5 0.5 0.5 0.5

FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E FY27E FY28E

Source: CEA, Crisil, MOFSL

22 April 2024

Capital Goods

Views from industry experts

Exhibit 11:

Key takeaways from our interaction with various players

Companies

TRIL

Key takeaways from our interaction with various players

Comments



Demand for transformers has increased both globally and domestically. Currently supply is not able to keep pace

with demand as capacity expansion in backward integration is not happening at the same pace as the

requirement of transformers is moving. Demand is high for high-voltage transformers such as 765kVA, 440 kVA

and 220 kVA, particularly in power transformers. The share of organized players in renewable T&D demand has

gone up. Unorganized players do not have capacity, technology, scale and necessary approvals for manufacturing

higher kVA. After the achievement of renewable and thermal targets, replacement and refurbishment demand

will start kicking in similar to in developed countries.

Techno Electric



Since power demand has spiked in the country, capex on T&D is increasing. For renewable, a larger capacity is

needed for T&D. Techno Electric mostly does substation-related work. Out of the total addressable market of

INR500-600b on a yearly basis, substations form 30-35% of the cost (INR150-180b) and Techno Electric targets a

15% market share in it.

Atlanta



Players expect increased demand, particularly from domestic green energy projects. State electricity boards are

Electricals

also catching up selectively. Unlike the last cycle, players are rational this time in terms of bidding as the demand

opportunity is much bigger. Internationally, demand from Europe and America is also high as transformers with

older technology are getting replaced by newer ones, along with demand for new distribution transformers in

these regions. The lead time to enter a new kVA range is also high, so entry barriers are high in the transformer

industry, thereby limiting competition to 5-6 players.

Skipper



Witnessing strong traction across both domestic and international markets, led by thrust on energy transition

and rising power demand. Confident of achieving ~25% revenue CAGR for the coming 2-3 years. The company is

benefiting from the ‘China +1 strategy’ and is bullish on its export footprint expansion.

KEC International



Power demand is continuously going up as it is driven by general growth in the economy as well as data centers

and metros, which have much higher power requirement. India T&D segment will have a positive surprise as the

thrust on renewable and now even thermal has moved up. Overall, the value of projects has gone up in recent

times to more than INR5-10b per project.

Kalpataru



The domestic transmission pipeline has improved significantly over the last 15-18 months, and now the annual

Projects

addressable market is expected to be closer to INR400b. The number of bids floated by tendering agencies is

higher than the bids put together in the last four years. The average size of projects has also increased

meaningfully, thereby allowing only serious players in the bidding process, such as KPIL, KEC, L&T, Transrail,

Skipper, and Bajaj Electricals. The company aims to increase its market share to 20-25% in the current

addressable market.

Key highlights from company releases and calls



The enquiry pipeline is healthy and the momentum is expected to continue, led by robust investments in the

power sector, primarily in renewable energy sources. The previous capex cycle (2003-08) was driven by traditional

Voltamp

sectors such as power, steel, cement, mining, oil & gas, etc. and was primarily bank-funded. The current cycle is

Transformers

more broad-based in terms of funding sources as well as industries leading the investments. However, with

incremental investments from MNC firms and a revival of sick units, pricing can come under pressure.



The company is bullish on its core competencies of HVDC, STATCOM, digital substations, et al on the back of CEA’s

draft energy plan (NEP), which outlines the government’s intent till FY32 and provides strong visibility to

participants in the transmission supply chain. Green energy corridor (GEC) projects offer a strong visibility for the

GE T&D

next 12 months and the company is confident of bagging a significant number of orders and maintaining the order

inflow run rate. Though the demand scenario continues to be robust, there is enough headroom to debottleneck

the current capacity, so the company has no imminent plan to expand the same.



On the transformer and switchgear side, enquiry levels are robust (~INR100b). Lead times for transformers are

quite stretched (~12 months) and all the players have announced capacity expansions. The company expects a

CG Power

CAGR of ~10-12% in the addressable market for HV transformers. Its power transformer facility is running at ~85%

capacity utilization, and in light of the demand momentum, the company has announced a capex of ~INR310m to

increase the installed capacity by ~10,000 MVA.



The company sees a healthy opportunity pipeline in renewable energy integration, transmission network

expansion, etc. Accordingly, the company has earmarked a capex of ~INR4.2b for the doubling of its power

Siemens

transformer capacity from 15,000MVA to 30,000MVA by Dec’25 and increasing the capacity of vacuum interrupter

tubes from 40,000 to 70,000 by 2H2026. This will cater to domestic and export demand, which has been robust.



Hitachi is eyeing a wallet share of 20-30% in any HVDC project. It expects sharp growth in the STATCOM market

Hitachi Energy

from the renewable energy expansion.



The company sees a robust opportunity pipeline on the back of the government’s thrust on the upgrade and

expansion of the T&D network. Similarly, the outlook for the African region, where the company has a significant

Transrail

presence, is sanguine as a huge chunk of the population lacks access to electricity. Latin America as well is

expected to see improved power sector investments, led by rising electricity demand and modernization of the

existing grid network.

Source: Company, MOFSL

22 April 2024

Capital Goods

Capability mapping of various players

Exhibit 12:

Capability mapping of various players across segments of T&D

Company

ABB India

Siemens

Hitachi Energy

GE T&D

CG Power

Voltamp

TRIL

Atlanta

Transrail

Skipper

Techno electric

KEC

KPI

Offerings



AIS/GIS switchgear, circuit breaker, distribution automation, grid automation, instrument transformers, LV/MV

products and systems, power transmission solutions, vacuum interrupters



Energy automation and smart grid, LV & MV power distribution



Transformers (up to 1,100 kV), HV products, grid integration (STATCOM), HVDC, grid automation solutions



Power transformers (up to 1,200 kV), Circuit breakers (LV), GIS switchgear, instrument transformers, FACTS, HVDC,

substation automation equipment



Wide range of power and distribution transformers, extra-high voltage and medium voltage (MV) circuit breakers,

switchgears, EHV instrument transformers, lightning arrestors, isolators and vacuum interrupters along with substation

and EPC related work



Power and distribution transformers (up to 220 kV)



Power transformers (up to 1,200 kV), Distribution transformers (>160 kVA), Furnace transformers (220MVA/101KA),

Rectifier transformers (<100KA DC), Shunt reactors (<765 kV)



Atlanta Electricals Private Limited is engaged in manufacturing Power, Distribution and special transformers up to and

including 160 MVA / 220 kV class.



EPC of power transmission and distribution (including substations), supplier of engineered products such as tower,

conductor, poles and lighting, tower testing



Transmission tower manufacturing company with expertise in angle rolling, tower, accessories & fastener

manufacturing and EPC line construction. In India, it is the largest transmission tower company with an installed

capacity of 3,00,000 MT



EHV substation up to 765kV, distribution system management, advanced metering, STATCOM installation up to

250MVar



EPC player having expertise in domestic and international market for T&D segment



EPC player having expertise in domestic and international market for T&D segment



EPC player having expertise in domestic and international market for T&D segment

Source: Company, MOFSL

Exhibit 13:

Revenues for key players have been improving for last few quarters across value chain

1QFY23

2QFY23

18.5

11.1

11.6

14.5

15.2

11.5

9.9

13.3 12.3

12.7

10.4

9.9

12.5

13.4

13.1

3QFY23

4QFY23

1QFY24

2QFY24

16.6

13.3

16.3

12.9

13.1

14.8

14.0

KPIL (T&D)

Source: Company, MOFSL

19.2

3QFY24

19.6

16.3

16.3 15.6

8.8

8.4

10.0 10.4

9.5

11.3

10.1

10.3

ABB India (Electrification) Siemens (Energy segment)

Hitachi Energy

KEC (Dom. T&D)

Exhibit 14:

Revenues for transformers players too have been growing

1QFY23

2QFY23

3QFY23

4QFY23

1QFY24

5.9

3.6

3QFY24

8.4

7.8

7.0 7.07.27.0

4.85.24.8

2QFY24

2.73.2

3.6

4.4

3.2

3.84.1

3.03.33.3

4.4

1.6

2.6

3.7

1.41.81.8

4.5

4.8

3.4

5.9

5.1

6.26.5

Voltamp

TRIL

Techno Electric (EPC

segment)

GE T&D

CG Power (Power

systems)

Source: Company, MOFSL

22 April 2024

Capital Goods

Product prices are higher despite lower RM prices

Product prices remain high despite lower RM prices

The industry is subject to fluctuations in raw material prices; hence, it has variable

pricing clauses linked to indices created by IEEMA. Key raw materials used in the

T&D industry are CRGO steel, copper, and aluminum. CRGO steel prices had seen a

spike in FY22 but have eased significantly. Average copper price (LME price

converted in INR) increased ~2% YoY in FY24, while the current spot price is

~6%/10% higher than the Mar’24/4QFY24 average. Conversely, average aluminum

price (LME price converted in INR) declined ~8% YoY in FY24, while the current spot

price is ~8%/10% above the Mar’24/4QFY24 average. This could lead to short-term

volatility in margins. EPC players, however, have limited pricing power and were

impacted earlier by a sharp swing in commodity prices.

Input prices have remained largely stable in recent quarters but are now inching up

Exhibit 15:

Electrical steel price trend (USD/t)

1,600

1,300

1,000

700

400

Electrical steel (USD/t)

Source: Bloomberg, MOFSL

Exhibit 16:

Zinc price trend (USD/t)

5,000

4,000

3,000

2,000

1,000

Zinc (USD/t)

Source: Bloomberg, MOFSL

22 April 2024

Capital Goods

Exhibit 17:

Copper price trend (INR/t)

10,00,000

8,00,000

6,00,000

4,00,000

2,00,000

Copper (INR/t)

Source: Bloomberg, MOFSL

Exhibit 18:

Aluminum price trend (INR/t)

2,90,000

2,40,000

1,90,000

1,40,000

90,000

Aluminum (INR/t)

Source: Bloomberg, MOFSL

Exhibit 19:

EBIT margins for most large players have been on an uptrend

19.3

15.3 16.3

11.5

19.5

14.5

19.0

1QFY23

2QFY23

3QFY23

4QFY23

1QFY24

2QFY24

3QFY24

8.5

11.9

11.5 10.4

11.4

9.5

10.9

1.9

3.5

3.6

3.9

3.4

3.6

4.4

KEC

4.85.1

5.2

6.5

6.2

6.6

5.2

KPIL

Source: Company, MOFSL

6.15.7

6.0

0.55.1

5.51.1

ABB India (Electrification) Siemens (Energy segment)

Hitachi Energy

Exhibit 20:

Margins of transformers players too have moved up sharply over last few quarters

1QFY23

24.9

20.5

17.3

12.6 14.8

13.8

14.2

6.2

9.2

6.7 5.8

5.2

2QFY23

3QFY23

4QFY23

1QFY24

2QFY24

3QFY24

16.3

8.7

12.2

8.7

15.0

12.1

1.6

4.1

1.9 5.3

15.3

13.2

10.0

6.9

9.0

12.5

12.4

15.7

15.3

11.2

12.1

Voltamp

-1.2

TRIL

Techno Electric (EPC

segment)

-1.2

GE T&D

CG Power (Power systems)

Source: Company, MOFSL

22 April 2024

Capital Goods

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 (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).

Exhibit 21:

Valuation metrics

Mcap

EPS (INR)

P/E (X)

RoE (%)

Companies

TP (INR) Rating (INR b) FY24E

FY25E

FY26E

FY24E

FY25E

FY26E

FY24E

FY25E

FY26E

ABB India ^

7,500

BUY

1,333

58.9

73.4

90.1

110.5

88.7

72.2

22.9

23.4

23.2

Siemens $

5,900

BUY

1,990

68.0

81.2

95.4

80.3

67.3

57.2

17.3

18.1

18.6

Hitachi Energy

5,466

SELL

349

24.7

66.0

116.9

283.7

106.2

60.0

7.9

17.5

23.6

KEC International

710 NEUTRAL 179

13.7

28.3

41.6

52.3

25.4

17.3

9.0

16.5

20.5

Kalpataru Projects

1,190

BUY

196

34.6

53.4

74.7

32.3

20.9

15.0

10.2

14.2

17.2

GE T&D*

246

6.4

10.6

15.6

142.9

86.5

59.0

14.3

20.5

24.7

TRIL*

10.8

18.2

26.0

55.8

33.1

23.2

24.3

31.0

32.1

Voltamp*

102

284.4

300.4

326.3

35.1

33.2

30.6

22.6

20.6

19.7

Skipper Ltd*

8.4

12.7

16.0

38.5

25.4

20.2

10.3

12.7

14.1

CG Power*

813

5.6

6.9

8.7

90.3

73.2

58.2

40.4

37.2

35.4

Techno Electric*

101

21.1

26.4

33.4

39.5

31.6

25.0

11.3

12.9

15.0

^ABB’s estimates are for CY24 and CY25 (December end) / $Siemens estimates are for FY25 and FY26 (September end) / *Bloomberg

estimates

Source: MOFSL, Bloomberg

22 April 2024

Capital Goods

Meeting takeaways with companies

Transformers and Rectifiers (India)



Demand environment.

Demand for transformers has increased both globally

and domestically. Currently supply is not able to keep pace with demand as

capacity expansion in backward integration is not happening at the same pace

as the requirement for transformers is moving. Demand is coming from multiple

sectors such as EPC, power, states, central utilities, Indian railways, and

renewable, and is on an uptrend for the next 6-7 years. After the achievement

of renewable and thermal targets, replacement and refurbishment demand will

start kicking in similar to in developed countries.

Category of demand.

Demand is higher for high-voltage transformers such as

765kVA, 440 kVA and 220 kVA, particularly in power transformers. The share of

organized players in renewable T&D demand has gone up. Unorganized players

do not have capacity, technology, scale and necessary approvals for

manufacturing higher kVA.

Capacity of TRIL.

The present capacity of TRIL is 40,000 MVA and the company is

adding another 5,000 MVA by Sep’24. The current capacity utilization is around

60% and the company is taking certain operational efficiency steps to increase

capacity by 20% without doing much capex. This will reduce the manufacturing

time of 765 kVA transformers from 55 days earlier to 35 days. The company is

getting the majority of its orders from Power Grid for 765kVA.

Pricing and margins.

The company is increasing prices in a calculative way and

expects PAT margin of 8-9% going forward. They are working more on cost-

control measures for sustainable margins. TRIL has also changed the product

mix and customer mix. It has reduced dependence on state utilities and now

state utilities account for just 11-12% of the company’s revenues. It also

depends on state utilities of UP, MP, and West Bengal, which are the best

paymasters. In terms of the client mix, Power Grid and Railways account for 45%

of its order book, where payments are faster. Payment from EPC players is on LC

basis. The company also aims to increase exports to 20% of revenues, mainly to

Europe and the US.

High entry barriers in transformer industry.

The transformer industry is capex

intensive and also has high entry barriers in getting approvals for commercial

production of the higher kVA range of transformers. It takes nearly 2-3 years for

any new product to pass through the testing and trial phase.

Techno Electric



Addressable market in power T&D.

Since power demand has spiked in the

country, capex on T&D is increasing. For renewable, a larger capacity is needed

for T&D. Techno Electric mostly does substation related work. Out of the total

addressable market of INR500-600b on yearly basis, substations form 30-35% of

the cost (INR150-180b) and Techno Electric targets a 15% market share.

Distribution segment targeting smart meter projects.

The distribution segment

of Techno Electric includes smart meter projects. Nearly 250m meters will be

changed in India, with 110m meters already being tendered out and the rest to

be tendered in a couple of years. Around 5-6 companies are increasing their

22 April 2024

Capital Goods

capacities for smart meter projects. Techno Electric competes with GMR, NCC,

Secure Meters, Genus Power, and LT.

Expects data center market growth to remain strong.

Techno Electric aims to

develop 250 MW of data centers with a capex of over USD1.3b in the next 5-6

years.

FGD.

It is also eyeing opportunities in the FGD space, where bid pricing has

improved from the initial bids that came in 2019.

Outlook.

T&D will continue to account for a major pie of revenue, followed

by FGD and then data centers. The company expects EBITDA margin of 14%

despite having a tight market for equipment supplies. Due to supply chain issues

and limited capacity of players in equipment, the demand-supply situation may

remain tight.



Atlanta Electricals (unlisted)



Company.

Atlanta Electricals is engaged in manufacturing power, distribution

and special transformers up to and including 160 MVA/220 kVA class. It has a

capacity of 18,000 MVA and has products including 160 MVA/220 kva

transformers, mobile substations, motor starting transformers, neutral

grounding transformers, rectifier duty transformers, air cooled transformers,

special application transformers. The company has a strong customer base,

which includes state electricity boards and other priority sectors such as private

electricity supply companies, steel plants, hydro power projects, windmill plants,

textile units, and oil units both in India and abroad. The company has an order

book in excess of INR10b. It had a turnover of INR8.6b during FY23 with EBIDTA

margin of 13.72%.

Demand.

Players expect huge demand inflows, particularly from domestic green

energy projects. State electricity boards are also catching up selectively. Unlike

the last cycle, players are rational this time in terms of bidding as the demand

opportunity is much bigger. Internationally, demand from Europe and America is

also high as transformers with older technology are getting replaced by newer

ones, along with new distribution transformers demand in these regions.

Limited players in higher kVA range.

It is difficult for new players to come in the

400kVA/765 kVA range as the process involves test production, trial run,

certification, and testing from CPRI (Bangalore), which involves additional

cost. Every design change needs approval. The entire process takes nearly 2-3

years for commercial ramp-up. Currently, Hitachi, Siemens, TRIL, CG

Power, TBEA (Chinese), and BTW-Atlanta are present in the 500-765kVA, and

players such as TRIL, Voltamp, Atlanta, and Technical Associates are present in

categories below that. The establishment time is higher for the 765kVA range,

but margins are also higher in this range.

State electricity companies.

The company is selectively eyeing projects from

state electricity boards, such as UP, Bihar, Punjab, and GETCO, where payment

terms are better.

Skipper



Key player in tower manufacturing.

Skipper is one of the world’s largest

integrated transmission tower manufacturing companies, with angle rolling,

tower, accessories & fastener manufacturing and EPC line construction. In India,

22 April 2024

Capital Goods

it is the largest transmission tower company with an installed capacity of

300,000 MT.

Demand.

On the back of the government’s thrust on green energy, coupled with

rising power demand, the company is witnessing strong traction across both

India and international geographies. Accordingly, the management is confident

of achieving a ~25% revenue CAGR for the coming 2-3 years.

Exports.

The China +1 strategy is playing out in countries such as Australia and

North America, which should benefit Indian players. Notably, the company is

also trying to foray into Israel, US, Canada, and the Middle East. Exports have a

better margin profile (~200-300bp) vs. domestic sales, so the company is

targeting export markets.

Market share.

Though Skipper is the market leader in transmission towers in

India, it aims to further increase its market share by increasing its installed

capacity of 300,000 MT, which is currently operating at ~85-90% utilization

levels.



Transrail (unlisted)



Focus on EPC and substation related projects.

Transrail is a leading EPC

company with a focus on power T&D, manufacturing facilities for lattice

structures, conductors and monopoles with a presence in 58 countries. The

company operates as EPC service provider and as a supplier of engineered

products in the power T&D segment. Company also provides EPC services in

relation to air-insulated and gas-insulated substations. Over FY21-23, the

company’s power T&D segment (~78% of FY23 revenues) clocked in a CAGR of

~18% owing to strong tailwinds in the sector, both in India and internationally

(~53% of FY23 revenues). It had made EBITDA margin of 11% in 1HFY24. The

company has an order book of INR96b as of Sep’23, out of which INR86b is from

power transmission.

Backward integration.

The company has steadily invested in backward

integration by adding manufacturing units for towers, conductors and poles. It

has developed the ability to provide comprehensive solutions, including

designing, manufacturing, procuring, testing and supplying of conductors and

towers.

Demand scenario.

The company sees a robust opportunity pipeline thanks to

the government’s thrust on the upgrade and expansion of the T&D network.

Similarly, the outlook for the African region (where the company has a

significant presence) is sanguine as a huge chunk of the population lacks access

to electricity. Latin America is also expected to see improved power sector

investments, led by rising electricity demand and modernization of the existing

grid network.

KEC International



Demand.

Power demand is continuously going up as it is driven by growth in the

economy as well as data centers and metros, which have a much higher power

requirement.

Improving ticket size of projects.

India T&D segment will have a positive

surprise as the thrust on renewable and now even thermal has moved up.

Overall, the value of projects has gone up in recent times to more than INR5-10b

per project.

22 April 2024

Capital Goods



Margins.

T&D margins have potential to move up as demand has moved up.

Strong pipeline.

The domestic transmission pipeline has improved significantly

over the last 15-18 months, and now the annual addressable market is expected

to be closer to INR400b.

Sharp increase in bids that are floated.

The number of bids floated by tendering

agencies is higher than the bids put together in the last four years. The average

size of projects has also increased meaningfully, thereby allowing only serious

players in the bidding process, such as KPIL, KEC, L&T, Transrail, Skipper, and

Bajaj Electricals.

Market share.

The company aims to increase its market share to 20-25% in the

current addressable market.

Kalpataru Projects International



Takeaways from conference calls and company data

Voltamp Transformers



Capex cycle — then and now.

The enquiry pipeline is healthy and the

momentum is expected to continue, led by robust investments in the power

sector, mainly in renewable energy sources. The previous capex cycle (2003-08)

was driven by traditional sectors such as power, steel, cement, mining, and oil &

gas, and was primarily bank-funded. However, the current cycle is more broad-

based in terms of funding sources as well as industries leading the investments.

Key demand drivers.

Private capex recovery is on an upswing amid favorable

factors, such as improved capacity utilization, healthy bank and corporate

balance sheets. Notably, private investment is driven by the reorientation of

global supply chains, electrification, sustainability-related capex, and initiatives

such as PLI scheme, Make in India, etc.

Competitive intensity.

The buoyancy in demand and strong visibility are

prompting players to go for capacity expansion; some MNC players have already

announced ambitious capex plans. This, along with the revival of sick units,

could lead to rising competitive intensity and exert pressure on prices.

Capacity.

Voltamp has an installed capacity of 14,000 MVA and the company

has been operating at ~85-90% utilization. It has planned a capex of ~INR1.5b

(entirely from internal accruals), which will enhance the capacity by a further

4,000 MVA.

GE T&D India



Opportunity pipeline.

There is a robust pipeline thanks to the government’s

thrust on renewable energy. Globally as well, there is strong momentum driven

by the focus on energy transition, which is leading to the expansion of TAM

across geographies. There is a clear focus on grid expansion, modernization and

digitization, where GE T&D has a meaningful presence.

Outlook.

The company is bullish on its core competencies of HVDC, STATCOM,

digital substations, et al on the back of CEA’s draft energy plan (NEP), which

outlines the government’s intent till FY32 and provides strong visibility to

participants in the transmission supply chain. GEC projects offer a strong

visibility for the next 12 months and the company is confident of bagging

significant orders and maintaining the order inflow run rate.

22 April 2024

Capital Goods



Business mix.

Over the past few quarters, the company has consciously reduced

the share of state government orders in the order book (21% in 4QFY22 to 8% in

3QFY24), which helped the company keep its working capital under control and

improve its margin performance.

Capacity.

Though the demand scenario continues to be robust, there is still

enough headroom to debottleneck the current capacity so the company has no

imminent plan to expand the capacity.

CG Power



Demand.

The Motors segment is seeing muted demand, which has resulted in a

pricing war across the industry as newer entrants are vying for market share.

However, on the transformer and switchgear side, enquiry levels are robust

(~INR100b). Lead times for transformers are quite stretched (~12 months) and

all players have announced capacity expansion. The company expects a CAGR of

~10-12% in the addressable market for HV transformers.

Capacity.

The power transformer facility is running at ~85% capacity utilization

and in light of the demand momentum, the company has announced a capex of

~INR310m, which will increase the installed capacity by ~10,000 MVA. Similarly,

the capacities for switchgears and HT motors will be enhanced with a collective

outlay of ~INR1.9b. The company envisages ~25% revenue growth once the new

capacity is commissioned.

Siemens



Growth.

The company is witnessing robust traction in the oil & gas, transmission

and transformer segments, translating into 9% YoY order inflow growth on a

high base. Margin for the year came in at 12.7%, up ~80bp.

Healthy pipeline.

The company sees a healthy opportunity pipeline in

renewable energy integration, transmission network expansion, modernization

of aging turbines, adoption of WHRS in cement plants, etc. Accordingly, the

company has earmarked a capex of ~INR4.2b for the doubling of its power

transformer capacity from 15,000MVA to 30,000MVA by Dec’25 and increasing

vacuum interrupter tubes capacity from 40,000 to 70,000 tubes by 2H2026. This

will cater to both domestic and export demand, which has been robust.

Hitachi Energy



Demand.

The management highlighted that macroeconomic indicators continue

to be robust, and growth drivers such as renewables, T&D, railways, data

centers, steel, cement, etc. are expected to witness a long-term growth

trajectory on the back of the government’s thrust on capex and manufacturing-

led growth.

Inflow momentum strong.

Order inflow momentum continues to be strong

from renewables and data centers, while transmission and railways have seen

some moderation.

Large projects.

The long-term outlook also remains intact with a healthy

investment pipeline in the form of HVDC, TBCB projects, metros, HSR,

electrification, etc.

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

22 April 2024

Capital Goods

NOTES

22 April 2024

Capital Goods

Explanation of Investment Rating

Investment Rating

BUY

SELL

NEUTRAL

UNDER REVIEW

NOT RATED

Expected return (over 12-month)

>=15%

< - 10%

< - 10 % to 15%

Rating may undergo a change

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall be within following

30 days take appropriate measures to make the recommendation consistent with the investment rating legend.

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Specific Disclosures

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2 MOFSL, Research Analyst and/or his relatives do not have actual/beneficial ownership of 1% or more securities in the subject company

3 MOFSL, Research Analyst and/or his relatives have not received compensation/other benefits from the subject company in the past 12 months

4 MOFSL, Research Analyst and/or his relatives do not have material conflict of interest in the subject company at the time of publication of research report

5 Research Analyst has not served as director/officer/employee in the subject company

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9 MOFSL has not received any compensation or other benefits from third party in connection with the research report

10 MOFSL has not engaged in market making activity for the subject company

*****

22 April 2024

Capital Goods

*************************************************************************************************************************

The associates of MOFSL may have:

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date of the public appearance.

- received compensation/other benefits from the subject company in the past 12 months

- any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on

the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOFSL

even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report.

- acted as a manager or co-manager of public offering of securities of the subject company in past 12 months

- be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the

company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies)

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22 April 2024