Indian Capital Goods- Hsbc Jan 2011

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By Rahul Garg, CFA

India is expected to double its power generation capacity to c300GW by FY17-18. As the

Indian government rushes to create the requisite infrastructure for this, we forecast that

domestic power transmission orders alone will increase 45-50% during FY12

We drill deep down into order flows and pricing trends in nine different end markets to

identify which companies will benefit most, helped by our new proprietary Q-benanalytical tool that compares value with asset quality

We initiate coverage of Siemens India (OW), Crompton Greaves (OW), and Areva T&D

(Neutral). We are OW on Jyoti Structures and Kalpataru Power, Neutral on KEC

International, and UW on ABB India. Our top picks are Siemens and Kalpataru Power

Indian Capital GoodsBrighter days ahead

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Industrials

Electrical equipment

January 2011


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Indian Capital Goods

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Investment summary 2

Demand analysis 23End-market analysis 24

Domestic transmission Strong growth ahead 27

Intl transmission A USD400bn opportunity 49

Distribution Little visibility beyond central schemes 55

Construction Infra spend to drive growth 65

Industrial mfg Capacity addition to accelerate 72

Other end markets Rail, Medical, Oil & Consumer 75

Risk analysis 83Competitive landscape changing rapidly 84

Sector remains highly geared to metal prices 90

Excess capacity likely but not a major threat 92

Valuation & performance

analysis 95Our coverage universe doesnt look overbought 96

Benchmarking Analysis 119Q-ben Framework Measure of a companys worth 120

Company profiles 145Jyoti Structures Plain Jane, but deep value 146

Kalpataru Strong growth at attractive price 166

KEC Robust outlook but priced in 189

ABB An expensive recovery story 210

Areva T&D Likely recovery seems priced in 230

Crompton Everything premier except the price 248

Siemens Powering through 270

Disclosure appendix 293

Disclaimer 296

Contents


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In this report, we initiate coverage of Siemens India, Areva T&D, and Crompton Greaves. In addition, we

transfer coverage of Jyoti Structures, Kalpataru, KEC International (from Rajesh Singla) and ABB India

(from Suman Guliani) to Rahul Garg.

Brighter days ahead

Capital goods companies saw muted order growth of c5% during FY09-10 (March year-end), driven primarily

by a weak economic environment and delays in several large projects. Earnings suffered further due to price

erosion and cost pressures and the sector experienced marginal EPS decline of c2% during FY09-10. However,

we believe that the demand environment is now at an inflection point, and should benefit in particular from

the rush to create the requisite transmission infrastructure for the upcoming generation capacity over the

next four to five years. Therefore, we have a positive view on demand outlook and expect a turnaround in

sector profitability and underlying returns. The highlights of our report include the following:

We discuss nine major end markets for our companies (pages 23-82) and carry out an extensive

analysis of the opportunities in the domestic transmission markets (pages 27-48).

We drill deep down into Power Grid order flows and analyse the rapidly changing competitive

landscape in the transmission value chain (pages 83-89).

We introduce our new proprietary analytical tool the Q-ben Framework to better relate

companies valuations to their asset quality (pages 119 -143).

We have a non-consensus view on three of our seven companies Areva T&D (pages 230-247),

KEC International (pages 189-209) and Siemens (pages 270-292). Siemens and Kalpataru Power

(pages 166-188) are our top picks in the sector.

Investment summary

We are bullish on the demand outlook and expect a turnaround in

sector profitability and underlying returns. We forecast order growth of

c20% during FY12-13 vs c5% in FY09-10, largely from the pick-up in

domestic transmission orders. While we expect competitive and cost

pressures to persist, we believe the pricing environment will stabilize.Therefore, we expect margins to improve and forecast an earnings

CAGR of c30% for the sector during FY12-13. We continue to find

the sector valuation undemanding relative to its history and introduce

our proprietary Q-ben analytical tool to better relate valuations to

asset quality. We highlight Siemens and KPP as our top picks.


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We conclude that while companies in our coverage universe serve many end markets, their relatively high

gearing to the domestic transmission and distribution (T&D) markets should provide them with strong

demand impetus over the next couple of years. This is because we expect domestic transmission orders to

pick up sharply (c45-50%) going into FY12 as orders related to the recently announced nine high capacity

corridors (HCPTCs), spill-over from the 11th five-year plan and expenditure from the 12th plan feed

through. For the overall sector, we forecast demand growth of c28-33% during FY12e.

Moreover, while we dont expect earnings growth to be devoid of challenges, such as rising competition,

increasing metal prices and a risk of excess capacity, we believe most of our companies remain well

placed to deal with them. Consequently, we expect sector profitability (and in turn sector returns) to

improve by c70bp during FY12-13e, driven largely by volume growth and self-help initiatives. Overall,we forecast sector earnings CAGR of c30% during FY12-13e.

We further note that our coverage universe doesnt look overbought at this stage and, at c20x 12-month

forward PE and c11.6x 12-month forward EV/EBITDA (on consensus), is trading at a modest discount of

c5% to its historical (FY05-10) average. Within our coverage, while EPC players (Jyoti, KEC and

Kalpataru) have de-rated in line with their declining returns, equipment manufacturers (ABB, Areva

T&D, Siemens and Crompton) have re-rated in spite of it. In our opinion, this disconnect was primarily

driven by the buyout premium built into the valuation of foreign manufacturers. However, as the corporate

action is now largely behind us, we expect valuations to normalize and therefore we expect most of the

EPC players to re-rate going forward and most of the equipment manufacturers to witness a de-rating.

We remain OW on Kalpataru Power and Jyoti Structures, Neutral on KEC, and UW on ABB. We remove

the volatility flags on the ratings of Jyoti Structures, KEC, and ABB, as these stocks are no longer considered

volatile by HSBCs definition (see definition of volatility status, page 293). We initiate coverage of Siemens

and Crompton Greaves with an OW and Areva T&D with a Neutral. We highlight Siemens India and

Kalpataru Power as our top picks in the sector. We like Siemens because of its strong order book, improving

market position, ambitious capex plan and strong balance sheet to fund growth. We like Kalpataru

because of its strong market position, robust earnings outlook and significant discount on valuation.

With this report, we also introduce our proprietary analytical tool called the Q-ben Framework (the

Quality Benchmarking Framework), to better relate companies relative valuation to their asset qualities.

Under this framework, we evaluate companies on five fundamental criteria and measure their quality on

16 objective metrics to arrive at a Q-ben score for each company. When plotted against the forward

looking valuation of the company on a scatter chart, we believe that this score is a good way to identify

potential cases for re-rating or de-rating in the sector. We note that within our universe Crompton remains

most undervalued based on its overall quality relative to its peers, while ABB remains most overvalued.

We highlight our key bull and bear points related to the sector as follows:

Bull points

Demand outlook remains strong, particularly for the domestic transmission sector which is the

biggest end market (c40% exposure) for our companies.


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Our universe should witness strong earnings CAGR of c30% over FY12-13e after a lacklustre recent

performance (earnings CAGR of -2% during FY09-10). This is largely driven by an anticipated pick

up in deliveries and an improvement in profitability.

We expect sector fundamentals to improve (i.e. cash generation, return ratios, financial strength) as

demand picks up and investment plans wind down.

After a modest underperformance of c5% over the last six months, our companies should outperform

the wider capital goods sector as orders pick up and earnings improve.

Sector valuation remains undemanding relative to historical average and most of the companies under

our coverage should re-rate somewhat as their earnings outlook improves and returns increase.

Bear points

Competition remains intense and although some of the major players have regained their market

position in FY11, we believe pricing pressures may persist in the near term.

Our sector remains prone to metal price risk (average steel exposure of c9% of sales).

Excess capacity built-up remains likely (particularly for transformer manufacturers) in view of

capacity ramp-up by major companies and the entry of several new players.

Demand outlook remains strong

Although companies under our coverage serve 8-9 major end markets, they remain highly geared to the

T&D markets (c70% exposure), particularly domestic transmission (c40% exposure), and the industrial

capex cycle (c12% exposure). In addition, domestic demand remains crucial as the sector derives c70% of

its revenues from India.

While industrial capex should benefit from a cyclical recovery in the capacity utilization rates and rising

business confidence, the investment in the domestic T&D market remains secular. We note that starting

with a mere capacity of around 1,350MW at the time of independence, India is now on track to achieve a

power generation capacity of c300GW by FY17e. Much of this capacity has either come over the last 7-8

years (c60-65GW) or is expected to arrive over the next 7-8 years (c130-135GW). Given the decades-

long underinvestment in transmission, we believe this sector is now bound to catch up and witness

significant investment as the government rushes to create adequate capacity.

In this context, we believe that transmission segment provides a two way opportunity for vendors:

The ramp up in transmission capacity over the next five years will create significant demand for T&D

equipment and engineering, procurement and construction (EPC) work.

The increasing private participation in this segment will provide many vendors with an opportunity to

partake in asset ownership and raise their business profile.

In the near term, we forecast domestic transmission orders to grow by c45-50% in FY12, driven largely

by orders related to the nine high capacity corridors (HCPTCs), spill-over from the 11th five-year plan

and expenditure from the 12th five-year plan. For most other markets we expect double digit growth indemand in FY12, driving a blended demand growth of c28-33% for the entire sector.


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End market growth forecast (5)

End market Sector exposure FY11e FY12e FY13e

Transmission Domestic 33% 20-25% 45-50% 5-10%Transmission Intl 15% 10-15% 10-15% 8-12%Distribution 14% 25-30% 30-35% 5-10%Construction 5% 15-20% 25-30% 15-20%Industrials 18% 20-25% 15-20% 10-13%Railways 4% 20-25% 25-30% 10-15%Oil & Gas 3% 8-12% 10-15% 10-15%Consumer Durables 4% 30-35% 20-25% 20-25%Healthcare 1% 10-15% 10-15% 10-15%Others 3% 10-15% 10-15% 10-15%Sector growth 100% 20-25% 28-33% 8-13%

Source: HSBC research

Cost and pricing pressures may persist but wont deteriorate

The sector has seen significant price erosion (c10-20%) over the last couple of years, driven largely by

the entry of new players in the EPC segment and, in our view, misguided qualification requirements (QR)

in ultra high-voltage (UHV) products such as 765kV transformers. However, we note that the competitive

landscape is changing very rapidly and recent developments indicate that the pricing environment will

most likely stabilise for our companies. We highlight three key points in support of our view:

Vendor concentration for Power Grid (PG) orders has increased again after falling sharply in FY10.

In the substation/transformer segment, competition from China for PG orders is absent this year and

both Areva and Siemens have regained their position in the market. We expect Chinese competition

to ease because the new QRs for 765kV transformers require them to set up local manufacturing

facilities.

In the tower EPC segment, KEC and Kalpataru have regained their position, winning c25% of the

total orders. We expect pricing to stabilise as margins of new entrants look unsustainable.

In addition to the weak pricing environment, we expect cost pressures to persist as the sector remains

highly geared to metal prices (particularly steel) and our metals and mining team expects steel prices to

increase by c10% during 2011. We note that within our coverage universe EPC players remain most at

risk, with Jyoti Structures having the highest exposure to steel of c24% (as % sales). We further note that

while we dont expect margins in the current contracts to suffer due to price escalation clauses, we

believe margins on new contracts may be squeezed.

We have also looked at the production capacity of listed players in our space and although excess

capacity build up looks likely in the medium term, we dont see it as an immediate threat. We note that

the manufacturing capacity (for both transformers/reactors and towers/structures) remains in line with the

expected demand; however, if and when the new capacity comes on line (either greenfield or brownfield),

the demand supply balance will deteriorate. But having said we believe that utilization rates should

remain healthy in the near term, particularly as order inflow picks up.


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We forecast sector earnings to grow at c30% during FY12-13After a marginal earnings decline of c2% over the last couple of years (FY09-10), we forecast earnings

momentum to pick up going forward, driven by a pick up in deliveries and improvement in operational

performance. As we have highlighted earlier, we remain bullish on the demand outlook and consequently

forecast an order growth for the sector of c25% and c15% during FY12 and FY13, respectively.

Subsequently, assuming that the execution rates remain at the current level, we forecast sales CAGR of

c20% during FY12-13.

We also remain optimistic that margin improvement and forecast sector profitability will increase by c70bp

during FY12-13, driven largely by volume growth and self-help initiatives. Consequently, we forecast a sector

earnings (EPS) CAGR of c30% during FY12-13. We remain c8-10% ahead of consensus on our FY12

estimates for most of our companies. We highlight the summary of our estimates in the table that follows.

Earnings estimate summary

FY11e FY12e FY13e FY11e FY12e FY13e FY11e FY12e FY13e

Jyoti Structures 25,016 30,285 36,328 2,844 3,376 3,958 13.5 16.9 20.6 30%

Kalpataru Pow er 44,933 56,102 67,151 5,134 6,671 7,946 15.1 21.5 27.2 28%

KEC International 47,276 56,829 64,738 4,903 5,922 6,617 8.2 10.5 12.4 18%

ABB Ltd 82,746 100,034 116,019 7,709 10,128 12,902 23.1 30.7 39.6 48%

Areva T&D 46,803 55,343 60,902 5,479 6,979 7,763 10.6 14.5 16.7 28%

Crompton Greaves 103,134 122,198 142,637 14,511 17,916 20,947 14.1 17.4 20.6 18%

Siemens Ltd 115,936 141,265 168,734 15,620 18,659 21,590 29.8 34.9 39.9 21%

Sector Total 465,843 562,057 656,509 56,200 69,650 81,722 114.4 146.4 177.0 28%


Jyoti Structures 24,441 28,380 34,555 2,704 3,134 3,767 13.1 15.5 19.3 27%

Kalpataru Pow er 46,992 56,038 65,992 5,191 6,212 7,334 15.8 19.0 22.6 20%

KEC International 46,773 54,863 57,731 4,684 5,630 6,309 8.3 10.4 11.2 15%

ABB Ltd 81,139 95,717 n/a 7,733 9,839 n/a 23.9 29.9 n/a n/a

A reva T&D 47,658 57,665 n/a 5,191 6,217 n/a 9.5 11.8 n/a n/a

Crompton Greaves 98,680 113,726 130,108 13,980 16,100 18,400 14.1 16.4 18.9 15%

Siemens Ltd 111,462 133,790 159,121 14,415 17,107 18,647 28.1 32.3 33.9 14%

Sector Total 457,145 540,179 447,507 53,898 64,239 54,456 112.7 135.3 105.9 18%


Jyoti Structures 2% 7% 5% 5% 8% 5% 3% 9% 7%

Kalpataru Pow er -4% 0% 2% -1% 7% 8% -4% 13% 20%

KEC International 1% 4% 12% 5% 5% 5% -1% 2% 10%

ABB Ltd* 2% 5% n/a 0% 3% n/a -3% 3% n/a

Areva T&D* -2% -4% n/a 6% 12% n/a 12% 23% n/a

Crompton Greaves 5% 7% 10% 4% 11% 14% 0% 6% 9%

Siemens Ltd** 4% 6% 6% 8% 9% 16% 6% 8% 18%Sector Total 2% 4% 7% 4% 8% 12% 1% 8% 14%

* Dec YE

** Sept YE

HSBC vs.

Consensus

Sales (INRm ) EBITDA (INRm ) EPS (INR)

Earnings CAGR

(FY11-13e)

Earnings CAGR

(FY11-13e)

HSBC es timatesSales (INRm ) EBITDA (INRm ) EPS (INR)

Consensus

Sales (INRm ) EBITDA (INRm ) EPS (INR)

Source: HSBC estimates

Sector valuation remains undemanding

Our coverage universe doesnt look overbought at this stage and, at c20x 12-month forward PE and c11.6x

12-month forward EV/EBITDA (on consensus), it is trading at a modest discount of c5% to its historical

(FY05-10) average. We note that, within our coverage universe, while EPC players have de-rated in line

with their declining returns, equipment manufacturers have re-rated in spite of it. This disconnect in our

opinion was driven primarily by the takeover premium built into the valuation of foreign manufacturers.However, as the corporate actions are now largely behind us, valuations should normalise and we expect


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most of the EPC players to witness a re-rating going forward and most of the equipment manufacturers to

see a de-rating.

We note that most of our companies also look inexpensive compared with their trade peers or the wider

capital goods sector. On our FY12 estimates, our universe is trading at c17x PE and c10.6x EV/EBITDA.

We highlight the performance and valuation of our coverage universe relative to their trade peers and the

wider capital goods sector in the following tables.

We further note that we value companies under our coverage based on the Economic Value Added (EVA)

methodology. This is because we believe that being in a capital intensive industry, the quality of a capital

goods company (and hence its value) should be judged based on its ability to generate superior returns

over and above the cost of capital committed to it. We have also used DCF to sense check the valuations

derived from our EVA model.

PE candle chart

0

10

20

30

40

50

60

Jy oti KPTL KEC ABB Arev a CG Siemens EPC Av g Eqp Mfg

Avg

Sect Avg

Trading Range Historic Av erage Current multiple - Consensus


EV/EBITDA candle chart

0

5

10

15

20

25

30

35

Jy oti KPTL KEC ABB Arev a CG Siemens EPC Av g Eqp Mfg

Avg

Sect Av g

Trading Range Historic Av erage Current multiple - Consensus



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We introduce Q-ben Framework to better judge a companysworth

With this initiation report, we introduce our proprietary analytical tool called the Q-ben Framework to

better relate companies relative valuation with their asset qualities. Under this framework, we evaluate

companies on five fundamental criteria and measure their quality on 16 objective metrics to arrive at a

normalised score, called the Q-ben score, for each company. Barring other factors, we believe that a

company with a high Q-ben score should typically trade at a premium to its peers whereas a company

with low score should trade at a discount.

We have plotted the Q-ben score of all the companies under our coverage (and the sector and sub-sector

averages) versus 12-month forward PE and EV/EBITDA in the scatter chart format on the next page. We

have divided this chart into four quadrants to identify the potential cases for re-rating and/or de-rating.

From our analysis, we conclude that Crompton remains the most attractive on valuation and ABB the

least attractive given their overall quality relative to their peers.

EPC PE vs RoE Equipment Mfg PE vs RoE

0

5

10

15

20

25

30

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

10%

20%

30%

40%

50%

EPC Av g 12m fw d RoE

0

10

20

30

40

50

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

20%

25%

30%

35%

40%

Equipment Mfg Av g 12m fw d RoE

Source: HSBC research Source: HSBC research

Sector score

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Jy oti Structures

Kalpataru Power

KEC Intl

ABB Ltd

Arev a T&D India

Crompton Greav es

Siemens India

Median = 5.0



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FY12e EV/EBITDA

0.0

5.0

10.0

15.0

20.0

25.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Crompton

Greaves

Siemens

Eqp Mfg Avg

Sector Av g

EPC Avg

Jyoti

KECKalpataru

ABB

Areva T&D

Can be restructuring stories or

'Overvalued'

Can be 'Undervalued' if

operating perf improv ing

Can be cyclical or

'Undervalued'

Can be premium

quality or 'Expensive'

Q-ben Score

1

2mfwd

EV/EBITDA


FY12e PE

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Crompton

Greaves

Siemens

Eqp Mfg Avg

Sector Av g

EPC Avg

Jyoti

KECKalpataru

ABB

Areva T&D

Can be restructuring stories or

'Overvalued'

Can be 'Undervalued' if

operating perf improv ing

Can be cyclical or

'Undervalued'

Can be premium

quality or 'Expensive'

Q-ben Score

12mfwd

P/E


Coverage of seven companies

We initiate coverage of Siemens India, Areva T&D, and Crompton Greaves. In this report we also

transfer coverage of Jyoti Structures, Kalpataru, KEC International (from Rajesh Singla) and ABB India

(from Suman Guliani) to Rahul Garg.

Of these seven companies, three are transmission EPC players (Jyoti Structures, Kalpataru Power, KEC

International) and four are equipment manufacturers (ABB, Areva T&D, Crompton Greaves, Siemens).

We favour companies which show either or all of the following traits:

Strong market position

High gearing to domestic growth (particularly in transmission markets)

Capacity to generate superior returns

Undemanding multiples relative to peers


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On the other hand, we remain cautious of the companies which have seen deterioration in their market

position and remain expensive relative to their peers.

Siemens and Kalpataru Power are our top picks. We briefly discuss our investment case for each of the

seven companies below.

Jyoti Structures: OW, TP INR165

It is tricky to take an investment call on Jyoti Structures at this stage, as the company seems to be

struggling with new orders and its balance sheet doesnt allow much room to test new waters. However,

the stock has de-rated significantly over the last six months and Jyoti, at c4.8x FY12e EV/EBITDA and

c7.0x FY12e PE, is the most inexpensive stock compared with its peer group as well as its own history.

Although some of this de-rating is justified, given the firms deteriorating Power Grid market share and

the equity dilution overhang, we believe this does not justify writing-off the companys future earnings

potential completely, particularly when it is one of the market leaders and has a strong order book for the

next two years.

Moreover, the company remains highly geared to strong domestic transmission growth (c70% exposure)

and this, coupled with Jyotis strong order book and managements focus on margins, in our opinion

Coverage summary

CompanyTicker (RIC

Code)HSBC Rating

Current

price (INIR)

HSBC TP

(INR)

Potential

return

12m fw d

target P/E

Jyoti Structures JYTS.BO Overw eight 118 165 41% 8.4

Kalpataru Pow er KECL.BO Overw eight 149 225 53% 8.8

KEC International KAPT.BO Neutral 92 105 16% 8.8

ABB Ltd AREV.BO Underw eight 737 630 -14% 20.6

Areva T&D India SIEM.BO Neutral 308 340 11% 23.5

Crompton Greaves CROM.BO Overw eight 289 365 27% 18.4

Siemens India ABB.BO Overw eight 732 950 31% 26.3

1) Strongly geared to domestic transmission grow th

2) Margins likely to pic k up as deliveries pick up &

pricing stabilizes

3) Valuation looks full but company may surpr ise

positively on earnings

1) High quality company w ith a consistent earnings

record

2) Earnings to benefit f rom domestic transmission

orders, rec overy in industrial capex & improvement in

subsidiary mgns

3) Looks attractive on v aluation

1) Strong order book w ith improving market position

2) Strong balance sheet & INR16bn capex plan to

support grow th

3) Premium quality justifies valuation

Key investm ent drivers

1) Strong order book w ith high gearing to domestic

transmission

2) At c30% d/c to peers, looks attractive on valuation

3) Equity dilution may prove risky

1) Strong market position w ith biggest order bookamongst peers

2) Margins likely to improve

3) At c30% d/c to peers, looks attractive on valuation

1) Strong earnings outlook, particularly in light of

recent orders

2) Stock has s harply outperformed peers in last 6m

3) Current premium to peers imply outlook is baked in

1) Stock remains rich inspite of o ur earnings CAGR of

c60% during CY11-12e

2) Market position remains w eak w ith significant

pricing pressure & cost overruns

3) Currently the w eakest company on fundamentals

Note: Potential return includes prospective dividend yield

Source: HSBC research and estimates


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should allow the group to report strong earnings over the next couple of years. Consequently, we remain

ahead of consensus by c7-9% on FY12-13e earnings.

We remain Overweight on the stock with a target price of INR165, which offers c41% potential return.

We have removed the volatility flag from the rating, as this stock is no longer considered volatile by

HSBCs definition (see definition of volatility status, page 293).

Kalpataru Power: OW, TP INR225

Kalpataru in our opinion is going through an important transition phase, with the company not only expanding

the scope of its business but also improving operational efficiency. The group has now built a strong position in

several EPC markets, such as T&D, roads and pipelines. The group has also shown improvement in its

EBITDA margins over the last six quarters. In spite of this, the stock has significantly underperformed the

wider capital goods sector by c15% over the last six months, driven largely, in our opinion, by falling Power

Grid orders (until Nov 2010) and the poor order execution at JMC (during H1 FY11).

However, we note that Kalpataru remains a clear market leader in the transmission EPC segment and is

bound to benefit from strong growth in transmission orders during FY12 and FY13. The company is also

seeing strong growth in construction related orders at JMC this year. The group margins are also expected

to increase, driven largely by the improving performance of JMC. On top of this, the company has also

successfully secured a couple of build-operate-transfer (BOT) projects which should provide further

visibility to the top line. In light of all this positive momentum, the sharp underperformance of the stock

seems unwarranted at this stage.

We see limited risk to Kalpatarus earnings and remain c12-20% ahead of consensus on our FY12-13

EPS estimates. We continue to find Kalpatarus valuation attractive, at c7.4x FY12e PE and c5.4x FY12e

EV/EBITDA compared with trade peer average of c11.1x and c8.5x (on consensus), respectively.

Therefore, we remain Overweight with a target price of INR225, which offers c53% potential return.

KEC International: Neutral, TP INR105

KEC has made significant strides this year as can be seen from its order book that has grown over 30%

since the previous year end (Mar 10). The group has not only secured several large orders in virtually

every business segment but has also made a couple of strategic acquisitions, thus bringing in further

ammunition for future growth. However, the company has failed to show any improvement in its margins.

But even so the stock has reacted well to the order inflows and the news from the recently acquired

business of SAE Towers.

We highlight that, unlike Kalpataru and Jyoti, who have each underperformed the wider capital goods

sector by c15-20% over the last 6 months, KEC has performed inline with the sector. Therefore, although

the earnings outlook for KEC remains robust in light of the rising order book, the story seems well known

and well owned. After the recent outperformance, KECs valuation now looks full, particularly compared

with its closest peers, Jyoti and Kalpataru. On our FY12 estimates, KEC is trading at c8.7x PE versus

Jyoti and Kalpatarus multiples of c7.0x and c7.4x, respectively.

We believe that KECs growth story is baked into the numbers and hence we remain largely in line with

consensus on our FY12 estimates. We remain Neutral with a target price of INR105, which offers c16%


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potential return. We have removed the volatility flag from the rating, as this stock is no longer considered

volatile by HSBCs definition (see definition of volatility status, page 293).

ABB India: UW, TP INR630

ABB has seen significant erosion of margins and hence earnings potential over the last 4-5 years, driven

primarily by declining revenues, significant pricing pressure and the cost of exiting non-core businesses,

such as Rural Electrification (RE). The margins in the current financial year have taken a further hit from

the cost overruns on some large power system orders. The EBIT margins have come down to c1.6% in

Q3 CY10 from c12.4% in CY07. While margins are likely to recover going into CY11 and CY12 as exit

costs wind down and better margin order backlog starts feeding through into sales, we dont expect the

profitability to recover to the pre-recessionary level of c12-13% (EBIT margins during CY07-08) anytime soon (i.e. during CY11-13).

However, we remain positive on the demand outlook going into CY11-12 (Dec YE) and we expect ABB

to witness strong order growth of c20-25% in the next couple of years, assuming it does not lose market

share from here on. This strong inflow of orders, coupled with an already strong order book, should drive

sales growth of c20-25% during CY11-12e, in our opinion. We remain marginally ahead of consensus

(c2-4%) on our FY10-12 sales and EBITDA estimates.

But even in light of this recovery potential, ABB remains expensive relative to its peers. On our calendarised

FY12 estimate, ABB is trading at c30x PE and c19.5x EV/EBITDA versus equipment manufacturing

average of c24x and c14x, respectively. We remain Underweight with a target price of INR630, whichoffers a potential return of -14%. We have removed the volatility flag from the rating, as this stock is no

longer considered volatile by HSBCs definition (see definition of volatility status, page 293).

Areva T&D India: Neutral, TP INR340

Areva T&D has seen significant deterioration in its earnings over the last couple of years, driven largely

by declining margins. We note that Areva reported flat EPS growth in CY08 and a c20% decline in EPS

in CY09 in spite of c30-35% sales growth during these years. We believe earnings have suffered due to a

change in sales mix (increasing content of substation packages versus standalone products such as

transformers or reactors), increasing pricing pressure and operational inefficiencies leading to a margin

decline of c700bp during FY08 and FY09.

However, management has carried out a rationalisation of their manufacturing processes and have tried to

reduce their exposure to lower margin offerings such as rural electrification (RE) and low voltage

products. The company has also built the necessary capacity and experience to produce 765kV

transformers domestically. In addition, the company seems to have consolidated its position with Power

Grid during the current financial year (FY11) and hence we remain positive on the companys earnings

outlook going forward.

Management has highlighted that margins can go back to low-to-mid teen levels by CY12. Although we

remain more cautious than management on profitability, we are nonetheless ahead of consensus by c100-

200bp on our CY10-12e EBITDA margin estimates. This has driven our CY10-11 net income estimatesc9% ahead of consensus. We note that there remains significant upside risk to our estimates, if

management delivers on margin improvement.


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However, at this stage the stock remains rich relative to its peers. On our calendarised FY12 estimates,

the stock is trading at c27x PE and c14x EV/EBITDA compared with its peer group (ABB, Siemens &

Crompton) average of c24x and c14x, respectively.

Therefore, in light of these stretched multiples, we initiate coverage with a Neutral and a target price of

INR340, which offers c11% potential return.

Crompton Greaves: OW, TP INR365

Crompton is a premium quality company within our coverage universe that has delivered consistent

improvement in its operational performance over the last five years. Not only has it increased the range of

its product offering but it has also established a solid market position in its key business segments. More

importantly, Crompton has managed to grow its business without compromising on returns. In fact, it is

the only company within our coverage universe which has shown a consistent improvement in its returns

over the last five years and hasnt seen a decline in its earnings during the economic crisis of FY09-10 in

spite of having a significant international exposure.

Today, Crompton is a leading player in the T&D equipment market and will be a key beneficiary of the

expected strong growth in domestic transmission orders going into FY12 and FY13. The company is also

a leading player in the consumer segment and should continue to benefit from increasing penetration of

basic consumer durables (fans & lighting) in rural areas.

Furthermore, we believe that the demand in the groups international markets is currently at an inflection

point and should gradually recover going further into CY11 and CY12. This in our opinion should drive

improvement in subsidiary margins. Therefore, we remain positive on Cromptons earnings potential over

the next two to three years and are c5% ahead of consensus on our FY12 EPS estimate.

We continue to find Cromptons valuation attractive relative to its peers as well as its own history. On our

FY12 estimates, Crompton remains at a discount to its peers under our coverage (ABB, Areva T&D and

Siemens), trading at c16.6x PE and c10x EV/EBITDA compared with its peer group average of c24x and

c14x, respectively. Therefore, we initiate coverage with an Overweight rating and a target price of

INR365, which offers c27% potential return.

Siemens India: OW, TP INR950Siemens doesnt look particularly inexpensive at this stage; however, the group is aggressively building

its presence in India and hence, we believe, is bound to deliver premium quality growth over the next five

years. The company has recently announced an ambitious INR16bn investment plan over the next three

years which will not only help Siemens meet domestic demand but also become a global outsourcing hub

for lower priced value products.

We believe that Siemens is now a key beneficiary of the domestic transmission growth story as not only

has it gained market share in substation related orders but also because the energy division is now a key

driver of Siemens earnings, contributing c60% to the groups earnings. Moreover, the company has

lately shown significant improvement in its EBITDA margins, from c7.5% in FY08 to c13.7% in FY10

(September year-end), driven largely by a sharp improvement in the profitability of the Mobility and the

Fossil Power Generation businesses.


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We are bullish on Siemens in the near term and believe that the group should benefit from its improving

market position as well as operational performance. We remain modestly ahead of consensus by c6-8% on

our FY11-12 EPS estimates. On our calendarised FY12e numbers, the stock is trading at c22.6x PE and

c13.7x EV/EBITDA versus equipment manufacturing average of c24x and c14x, respectively.

We further note that over the last five years, both of Siemens closest foreign peers, ABB and Areva, have

increased stakes in their Indian subsidiaries; however, Siemens has not. However, we believe that in light of

Siemens global expansion plans and strong focus on India, a potential increase in the parents stake in the

Indian subsidiary remains likely and hence, we find the current multiples attractive at this stage. Therefore, we

initiate coverage with an Overweight and a target price of INR950, which offers c31% potential return.

Summary: Changes to our earnings estimates

INRm Target price Rating

FY11e FY12e FY11e FY12e FY11e FY12e (INR)

ABB Ltd. New 67,047 82,746 4,197 7,709 12.0 23.1 630 Underweight

Old 94,335 112,041 7409 9,721 29.1 35.4 710 UW (V)

Change -29% -26% -43% -21% -59% -35%

Jyoti Structures New 25,016 30,285 2,844 3,376 13.5 16.9 165 Overwe igh t

Old 25,137 29,913 2,771 3,298 13.3 16.7 185 OW (V)

Change 0% 1% 3% 2% 1% 1%

Kalpataru Pow er New 44,933 56,012 5,134 6,671 14.6 20.5 225 Overwe igh t

Old 50,654 62,940 5,312 6,434 15.2 19.4 250 OW

Change -11% -11% -3% 4% -4% 6%

KEC International New 47,276 56,829 4,903 5,922 8.0 10.3 105 Neutral

Old 42,809 47,091 4,522 4,974 8.1 9.2 119 N (V)

Change 10% 21% 8% 19% -1% 12%

EPS (INR)EBITDARevenue

Source: HSBC estimates


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Share price performance summary trade peers

Company CMP ___________________________ Absolute performance (%)_____________________________ ___________________________ Relativ1 week 1 mth 3 mths 6 mths 12 mths 1 week 1 mth

EPC:

Bajaj Electricals 211 -3.2% -9.6% -34.0% -12.2% 16.3% 1.4% 2.2%EMCO 68 4.1% 10.6% 4.4% -11.0% -34.3% 8.7% 22.4%Gammon 145 -8.8% -15.1% -27.4% -35.0% -43.9% -4.2% -3.3%Jyoti Structures 118 -4.3% -4.2% -12.8% -27.3% -35.9% 0.3% 7.7%Kalpataru Power 149 -7.3% -14.2% -15.1% -24.9% -38.4% -2.7% -2.3%

KEC Intl 92 -3.8% 5.9% -6.6% -10.2% -24.5% 0.8% 17.7%L&T 1,652 -6.1% -16.7% -17.2% -12.7% 0.5% -1.5% -4.9%Average simple -4.2% -6.2% -15.5% -19.1% -22.9% 0.4% 5.7%Average weighted -6.0% -15.8% -17.3% -13.4% -1.8% -1.4% -4.0%

Eqp Mfg:ABB Ltd 737 -1.3% -5.1% -18.2% -13.5% -12.2% 3.3% 6.8%Areva T&D India 308 -3.2% -6.0% 2.8% 6.4% 11.6% 1.4% 5.9%BHEL 2,181 -2.7% -5.4% -12.7% -9.7% -9.0% 2.0% 6.5%Crompton Greaves 289 -0.9% -12.6% -5.9% 7.2% 21.6% 3.7% -0.7%Indotech 185 -7.5% -6.0% -22.4% -32.7% -46.8% -2.9% 5.8%Siemens Ltd 732 -5.2% -5.9% -8.7% 1.0% 13.5% -0.6% 6.0%Voltamp 704 -2.5% -10.2% -21.7% -33.7% -25.6% 2.1% 1.6%Average simple -3.3% -7.3% -12.4% -10.7% -6.7% 1.3% 4.5%Average weighted -2.7% -6.2% -11.3% -6.1% -2.1% 1.9% 5.6%

Source: Thomson Reuters Datastream, HSBC


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Share price performance summary Sector peers

Company CMP ___________________________ Absolute performance (%)_____________________________ ___________________________ Relativ1 week 1 mth 3 mths 6 mths 12 mths 1 week 1 mth

ABB Ltd 737 -1.3% -5.1% -18.2% -13.5% -12.2% 3.3% 6.8%Areva T&D India 308 -3.2% -6.0% 2.8% 6.4% 11.6% 1.4% 5.9%Bajaj Electricals 211 -3.2% -9.6% -34.0% -12.2% 16.3% 1.4% 2.2%Bharat Electronics 1,694 0.8% -1.9% -4.4% -5.6% -17.7% 5.4% 10.0%BHEL 2,181 -2.7% -5.4% -12.7% -9.7% -9.0% 2.0% 6.5%Blue Star 399 -3.2% -7.1% -12.6% -10.2% -0.3% 1.4% 4.8%

Crompton Greaves 289 -0.9% -12.6% -5.9% 7.2% 21.6% 3.7% -0.7%Cummins India 746 0.4% -2.2% 2.8% 26.9% 67.5% 5.0% 9.6%EMCO 68 4.1% 10.6% 4.4% -11.0% -34.3% 8.7% 22.4%Gammon 145 -8.8% -15.1% -27.4% -35.0% -43.9% -4.2% -3.3%Indotech 185 -7.5% -6.0% -22.4% -32.7% -46.8% -2.9% 5.8%IVRCL Infra 100 -12.6% -21.1% -35.9% -47.6% -46.6% -8.0% -9.3%Jaiprakash Assoc 91 -6.1% -12.6% -28.5% -29.7% -43.3% -1.4% -0.7%Jyoti Structures 118 -4.3% -4.2% -12.8% -27.3% -35.9% 0.3% 7.7%Kalpataru Power 149 -7.3% -14.2% -15.1% -24.9% -38.4% -2.7% -2.3%KEC Intl 92 -3.8% 5.9% -6.6% -10.2% -24.5% 0.8% 17.7%L&T 1,652 -6.1% -16.7% -17.2% -12.7% 0.5% -1.5% -4.9%Patel Engineering 253 -7.1% -20.0% -33.3% -39.0% -47.4% -2.5% -8.1%Punj Lloyd 99 -3.6% -6.9% -22.5% -28.6% -54.2% 1.0% 4.9%Siemens Ltd 732 -5.2% -5.9% -8.7% 1.0% 13.5% -0.6% 6.0%Simplex 368 -5.7% -12.7% -23.0% -23.5% -30.2% -1.1% -0.9%Thermax 730 -7.3% -14.3% -7.1% -5.4% 7.9% -2.7% -2.5%

Voltamp 704 -2.5% -10.2% -21.7% -33.7% -25.6% 2.1% 1.6%Voltas 209 -0.1% -4.6% -10.8% 4.0% 12.3% 4.5% 7.2%Average simple -4.0% -8.2% -15.4% -15.3% -15.0% 0.6% 3.6%Average weighted -3.8% -9.6% -13.6% -8.8% -2.6% 0.8% 2.3%



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Share price performance summary Coverage universe

Company CMP _______________________________Absolute Performance (%)__________________________ ___________________________ Relativ1 week 1 mth 3 mths 6 mths 12 mths 1 week 1 mth

Jyoti Structures 118 -4.3% -4.2% -12.8% -27.3% -35.9% 0.3% 7.7%Kalpataru Power 149 -7.3% -14.2% -15.1% -24.9% -38.4% -2.7% -2.3%KEC Intl 92 -3.8% 5.9% -6.6% -10.2% -24.5% 0.8% 17.7%ABB Ltd 737 -1.3% -5.1% -18.2% -13.5% -12.2% 3.3% 6.8%Areva T&D India 308 -3.2% -6.0% 2.8% 6.4% 11.6% 1.4% 5.9%Crompton Greaves 289 -0.9% -12.6% -5.9% 7.2% 21.6% 3.7% -0.7%

Siemens Ltd 732 -5.2% -5.9% -8.7% 1.0% 13.5% -0.6% 6.0%Average simple -3.7% -6.0% -9.2% -8.7% -9.2% 0.9% 5.9%Average weighted -3.0% -7.3% -9.0% -1.6% 6.3% 1.6% 4.6%



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Demand analysis Domestic transmission Strong growth ahead International transmission A USD400bn opportunity

Distribution Not much visibility beyond central schemes

Construction Infra spend to drive growth

Industrial Mfg Capacity addition to accelerate

Railways A INR14trn opportunity

Oil & gas infrastructure Strengthening pipeline Consumer durables Rural penetration strengthens

growth

Healthcare still in its infancy


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In this section, we discuss in detail most of the

key end markets where the companies under our

coverage are present.

Domestic transmission a key market

for our companies

As we highlight in the table below, our coverage

universe is most geared towards the transmission

and distribution markets, with highest exposure to

the domestic transmission demand followed by

the international transmission and the power

distribution demand.

On a sales weighted basis however, the exposure

to demand from the industrial manufacturing

customers emerges as the second highest for our

companies (i.e. ahead of the international

transmission and the power distribution markets).

This is largely driven by a relatively high

exposure of big players like ABB, Siemens and

Crompton to the industrial markets.

End-market analysis

Our coverage universe remains highly geared to the T&D market

(c70%), with highest exposure of c40% to domestic transmission

Domestic demand remains key for our companies, with an

average exposure of c75%. Africa & Middle East remain the next

most important regions

We have analyzed 9 key end markets for our companies and

while we expect double digit growth in most markets, we remain

particularly positive on domestic transmission going into FY12

End-market exposure

End-market exposure Transmission domestic

Transmission international

Powerdistribution

Construction Industrials Railways Oil & Gasinfra

Consumerdurables

Healthcare Others Total

Jyoti Structures 68% 8% 25% 0% 0% 0% 0% 0% 0% 0% 100%Kalpataru Power 36% 19% 1% 33% 0% 1% 9% 0% 0% 1% 100%KEC International 26% 51% 15% 0% 0% 2% 0% 0% 0% 6% 100%EPC average simple 43% 26% 14% 11% 0% 1% 3% 0% 0% 2% 100%EPC average wtd 39% 29% 12% 13% 0% 1% 4% 0% 0% 3% 100%ABB Ltd 45% 4% 5% 6% 31% 4% 5% 0% 0% 0% 100%Areva T&D India 60% 15% 17% 0% 8% 0% 0% 0% 0% 0% 100%Crompton Greaves 22% 20% 26% 0% 14% 0% 0% 18% 0% 0% 100%Siemens Ltd 20% 4% 9% 3% 33% 10% 6% 0% 5% 10% 100%Eqp mfg avg simple 37% 11% 14% 2% 22% 4% 3% 5% 1% 3% 100%Eqp mfg avg wtd 31% 10% 14% 2% 23% 4% 3% 6% 2% 3% 100%

Simple average 40% 17% 14% 6% 12% 2% 3% 3% 1% 2% 100%Weighted average 33% 15% 14% 5% 18% 4% 3% 4% 1% 3% 100%



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Domestic demand remains key for

our sector

Our coverage remains highly geared to domestic

demand, with c70% exposure to the domestic

market. Our universe also has a relatively low

exposure of c8-12% to the western economies of

North America and Europe, where demandenvironment remains subdued. The exposure of

c18% to the rest of the world (RoW) is largely

biased to the regions of Middle East, Africa and

Latin America.

We are bullish on demand outlook,

particularly domestic T&D markets

In the following chapters, we discuss the following

eight key end markets for our companies.

Domestic transmission

International transmission

Power distribution

Construction

Industrials

Railways

Oil & Gas infrastructure

Consumer durables

Healthcare

While we expect double digit growth in most of

these markets going into FY12, we remain

particularly positive on demand outlook within

the domestic transmission sector. We believe

investment in the domestic transmission markets

is bound to gather pace as the Indian governmentprepares for an unprecedented step-up in

Geographic exposure

End-market exposure India Europe North America RoW Total

Jyoti Structures 90% 0% 0% 10% 100%Kalpataru Power 83% 0% 2% 15% 100%KEC International 48% 0% 10% 42% 100%

EPC average simple 74% 0% 4% 22% 100%EPC average wtd 71% 0% 5% 24% 100%

ABB Ltd 90% 1% 1% 8% 100%Areva T&D India 77% 3% 1% 19% 100%Crompton Greaves 47% 17% 13% 23% 100%Siemens Ltd 79% 10% 1% 10% 100%

Eqp mfg avg simple 73% 8% 4% 15% 100%Eqp mfg avg wtd 71% 9% 5% 15% 100%

Simple average 73% 4% 4% 18% 100%Weighted average 71% 7% 5% 17% 100%


End market growth (%)

End market Sector exposure FY11e FY12e FY13e

Transmission Domestic 33% 20-25% 45-50% 5-10%Transmission Intl 15% 10-15% 10-15% 8-12%Distribution 14% 25-30% 30-35% 5-10%Construction 5% 15-20% 25-30% 15-20%Industrials 18% 20-25% 15-20% 10-15%Railways 4% 20-25% 25-30% 10-15%Oil & Gas 3% 8-12% 10-15% 10-15%

Consumer Durables 4% 30-35% 20-25% 20-25%Healthcare 1% 10-15% 10-15% 10-15%Others 3% 10-15% 10-15% 10-15%Sector growth 100% 20-25% 28-33% 8-13%



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generation capacity and opens the transmission

sector to private players.

In the medium term, we expect the order activity

to pick up sharply, driven largely by the 11th five-

year plan spillover and the orders related to the

nine high capacity corridors (HCPTCs) which

have been recently announced. We highlight our

growth forecasts for all the end markets in the

table on the previous page.


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At the cusp of strong growth

The last decade (2000-10) has seen a significant

progress in power reforms and has laid a strong

foundation to enable India to envision ambitious

power capacity targets. Starting with capacity of

only 1,350MW at the time of independence, India

is now on track to achieve power generation

capacity of c300GW by FY17e. Much of this

capacity has either come over the last 7-8 years

(c60-65GW) or is expected to come over the next

7-8 years (c130-135GW). We believe that this

heightened sense of urgency to provide the country

with more power has led to two things:

The power reforms, successive to the

Electricity Act of 2003, have changed the

industry dynamics at every level. Most notable

have been the increasing participation from

the private sector and the unbundling of theState Electricity Boards (SEBs) into respective

utilities (GenCo, TransCo and Discoms). This

has not only helped the government to

expedite power capacity addition in an

economically beneficial manner but also

diversified (and thus reduced) the risk for

other players (such as equipment vendors) in

the value chain.

The rapid increase in power generation capacity

has finally brought the related bottlenecks in the

Transmission and Distribution (T&D) network

to the forefront. The present investment in

generation versus T&D remains at around 1:0.5

compared with the desired ratio of around 1:1.

Having tried, tested and successfully deployed

various reforms in the generation segment, the

Government of India (GoI) is now trying to

bring similar changes (i.e. privatization, ultra

mega projects, tariff based competitive bidding

etc) in the transmission segment, and to some

extent in the distribution segment (i.e.

franchisee based private participation).

Domestic transmission Strong growth ahead

We forecast domestic transmission orders to grow by c45-50% in

FY12, driven largely by HCPTCs, 11th five-year plan spillover and

expenditure on the 12 five-year plan

We expect growth to slow down to c10% in FY13; however,

substation vendors should continue to witness growth of c25% in

FY13, driven by a lower lead time for their products

Increasing privatization in transmission to provide additional

opportunity for EPC players to partake in asset ownership


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Report on the performance of state power utilities

MilestonesArunachalPradesh

AndhraPradesh

Assam

Bihar

Chattisgarh

Delhi

Gujrat

Goa

Haryana

HimachalPradesh

Jammu&Kashmir

Jharkhand

Karnataka

Kerela

Meghalaya

Manipur

Mizoram

Maharashtra

MadhyaPrsdeah

Nagaland

Orissa

1 SERCa Constituted * * * b Operationalisation c Issuing tariff orders

2 Unbundling / Corporatisationa Unbundling / Corporatisation- Implementation ** # b Privatisation of distribution

3 Distribution reforma 100 % metering -11 kV feeder metering b 100 % metering -consumer metering

Notes:*(i) This includes SERC notified of Manipur, Mizoram & Nagaland (i.e. SERC-25 constituted and 3 notified)(ii) Tariff Order issued include any one Order issued since operationalisation# (iii) Corporatisation is being implemented.

**(iv) Steps have been initiated t owards corporatisation/unbundling.(v) Consumer and Grid metering almost achieved 95 % and more.Source: APDRP


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This, we believe, is a key positive for suppliers,

particularly EPC contractors, as not only will they

see significant demand for their products as their

customers ramp up capacity but some of them

may also get an opportunity to partake in asset

ownership, thus raising their profile.

Even though the pace of power capacity addition

has picked up in an unprecedented manner overthe last five years, we dont expect the party to

end any time soon. We note that Indias per capita

electricity consumption stood at around 543kWh

in 2009 which was significantly below its closest

competitor Chinas consumption of c2,346kWh

and the world average of c2,752kWh. It is only

natural that as India accelerates its drive towards

industrialization, the need for electricity will

continue to increase, thus creating continuous

demand for additional capacity.

In this section, we discuss the dynamics and

drivers within the domestic transmission sector

and evaluate the growth opportunities over the

next five to six years.

India in the power-play mode!

As we highlight in the chart above, India is

rapidly moving from a conservative 15-20GW

five year power plan on average to an ambitious

80-100GW five-year plan. The 11th five-year plan

(FY07-12) marked the first material step change

in the generation capacity target and the

subsequent plans are expected to follow suit.

We note that Indias power deficit (based on peak

demand) has averaged around 14% during the last

decade with a peak deficit of over 16% in FY08

and the current deficit of just under 13%. The

Per capita electricity consumption Power generation capacity addition

2,752

543

2,346

8,475 8,477

13,616

0

3,000

6,000

9,000

12,000

15,000

India Japan China US OECD World

average

kWh

0

50,000

100,000

150,000

200,000

VI VII VIII IX X XI XII XIII XIV

Five Year Plans

MW

Source: Power Grid Source: CEA, HSBC research

Peak demand scenario Installed capacity requirement

323

437

218

152100

0

100

200

300

400

500

End of X

Plan

2012 2017 2022 2027

GW

575

132

220

306

425

0

100

200

300

400

500

600

2007 2012 2017 2022 2027

GW

88 GW

During 11th

plan

150 GW

119 GW

86 GW

During 13th

planDuring 12th

plan

Source: Power Grid Source: Power Grid


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deficit problem persists in India even through the

countrys per capita electricity consumption of

c623kWh is among the lowest in the world. A

study released by IEA in 2009 shows that Indias

electricity consumption stood at around one-fifth

of that of China and the world average in 2007.

Our India Utilities analyst, Arun Kumar,

forecasts that even with an increase in generation

capacity to around 300GW by FY17e, the power

deficit will only reduce to c8.5%. Including the

latent demand, the deficit will stand at c14%. Our

analyst has assumed only a modest increase in

electricity consumption to c1,050kWh by FY17e,

which continues to remain significantly below

Chinas current consumption of c2,760kWh.

It is only natural that with rising industrialization,

urbanization and factory automation, the need for

electricity and the per capita consumption will

move closer to the world average, thus creating

continuous demand for additional capacity. In this

context, we believe that the power deficit in India

may persist for a long time, driving increasing

investment into the power value chain.

Same game, different rules

The Electricity Act introduced in 2003 replaced

the old Electricity Act of 1948 and was aimed at

consolidating the laws relating to generation,

transmission, distribution, trading and the use of

electricity. Not only did this act bring in several

game changing proposals, such as

Opening up the power generation segment for

direct private participation

Unbundling SEBs into respective utilities

GenCo, TransCo and DisCom to improve

their operational efficiency and financial

viability

Making theft of electricity a criminal offence

but it also acted as a catalyst for future reforms,

such as:

Introduction of tariff based competitive

bidding for generation projects

Introduction of provision for open access to

utilities

The launch of Rajiv Gandhi Gramin

Vidyutikaran Yojna (RGGVY) in 2005 which

aimed at electrifying all villages under the

banner of Power for all by 2012

Restructuring of the Accelerated PowerDevelopment & Reforms Programme

(APDRP) and the introduction of R-APDRP.

Demand supply deficit to narrow, but could be higher if we consider latent demand

0

50

100

150

200

250

300

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY17e

0%

4%

8%

12%

16%

20%

24%

Installed capacity (GW) Peak demand (GW) Peak met (GW)

Peak shortfall % Deficit considering latent demand %

Source: CEA, HSBC research


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Most of these reforms/developments have

significantly changed the playing field for players

in the power value chain. For example, while the

increase in private participation has brought in cost

and operational efficiencies in the system (reducing

the risk of project delays and deferrals), the

unbundling of SEBs to some extent has limited the

financial/counterparty risk for the vendors. The net

effect of all these reforms has been a significant

increase in India Incs ability to channel substantial

investments into the power sector and undertake

ambitious capacity addition plans.

Since the power generation landscape has

changed rapidly, we believe its rub-off effect on

the T&D segment will not only drive significant

investment into the sector but change the rules of

the game here too.

Transmission a two wayopportunity

We believe that most of the major bottlenecks

associated with setting up new generation capacity

have been addressed over the last 5-8 years. There

is now a strong need to address the bottlenecks

associated with the downstream operations like

transmission and distribution of power.

While distribution is largely managed at the state

level, with only a handful of central schemes (such

as RGGVY and R-APDRP), a significant portion

of the transmission segment (in the form of

National Grid) remains under the purview of the

central sector and is managed by the Power Grid

(PGCIL). The transmission segment is similar to

the generation segment in this regard and therefore

should enjoy similar levels of political will and

consensus for the on-going and/or future reforms.

In this context, we believe that the transmission

segment provides a two way opportunity:

Given the decades-long underinvestment in thesector, the transmission segment is now bound

to catch up and witness significant investments

as the GoI rushes to clear the backlog and

create adequate transmission capacity for the

upcoming generation capacity.

The increasing private participation in this

segment will provide many vendors with an

opportunity to partake in asset ownership and

raise their business profile.

A brief history of transmission

Landmark events in the development of power sector

1948 Electricity (Supply) Act 19481950-60 Growth of state grids & introduction of 220kV voltage level1964 Constitution of Regional Electricity Boards1965-73 Interconnecting state grids to form Regional grid systems1977 Introduction of 400kV voltage level1980-88 Growth of Regional Grid Systems as associated

transmission system with Central Sector Generation1989 HVDC back-to-back system1990 Introduction of HVDC bi-pole line1997 Synchronous interconnection of ER and NER1999 Transmission planning re-oriented towards all-India system2000 765kV transmission line (initially charged at 400kV)2002 Planning for National Power Grid by 20102003 Electricity Act 20032003 Open access in transmission

2003 Synchronous interconnection of WR with ER-NER system2003 Bulk inter-regional HVDC transmission system2006 Synchronous interconnection of NR with ER-NER-WR system2007 765kV operation of Sipat substation2007 765kV operation of 765kV transmission lines

Source: National Electricity Plan

Historically most of the transmission capex has

been evacuation based i.e. utilities used to lay

transmission lines as per the power evacuation

requirements of the up-coming generation plants

rather than based on a central plan. This naturally

led to an inefficient development of the gridwhich was incapable of transmitting electricity

over long distances. This led to the incorporation

of Power Grid in 1989, which aimed at creating a

national grid with the capability to transfer

electricity across states and regions. Since then,

Power Grid has become the third largest

transmission utility in the world and the biggest

transmission utility in India, carrying over 50% of

the total power generated in India.


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National Grid a dream come truePower Grid has been very systematic in its

approach to building the National Grid and as a

result India now has one of the largest

synchronized grids in the world. Indias

transmission grid today can be divided into five

main regions:

Northern Region (NR)

Southern Region (SR)

Western Region (WR)

Eastern Region (ER)

North-Eastern Region (NER)

Four of these regions have been synchronized so

far and the Southern Region (SR) is expected to

be hooked up to the grid by the end of 2012. After

the synchronization of all the five regions, Indias

National Grid will be the worlds largest

synchronized grid.

Transmission regions in India

Southern region

Western region

Northern region

Eastern region

North Easternregion

Southern region

Western region

Northern region

Eastern region

North Easternregion

Source: CEA

The development of National Grid has played a

key role in streamlining the transmission planning

in India. Not only has it enabled India to move

from an Evacuation based planning to a Grid

based planning, but also provided the flexibility

to undertake transmission planning in parallel to

the generation plans (i.e. before the identification

of PowerGen beneficiaries).

The development of the National Grid in terms of

the inter-regional (IR) transmission capacity hasbeen slow as much of the time went on proper

planning and rationalization of the network.

However, the pace of IR capacity addition has

picked up lately and the Power Grid is now targeting

an IR transmission capacity of 32,650MW by FY12e

and 75,000MW by FY17e compared with a capacity

of around 14,100MW in FY07.

National grid inter regional transfer capacity

32650

505014100

75000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2002 2007 2012E 2017E

MW



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Inter-regional transmission capacity in India

System At the end of the10th five-yr plan

Additions during11th five-yr plan

As of Sep 2009 Balance prog forthe 11th plan

Proposed by the endof the 11th plan

Eastern region -Southern regionGazuwaka HVDC back to back 1000 1000 - 1000Balimela Upper Sileru 220 kV S/C 130 130 - 130Talcher Kolar HVDC bipole 2000 2000 - 2000Talcher Kolar HVDC bipole upgrade - 500 500 - 500Subtotal 3,130 500 3,630 - 3,630

Eastern region Northern regionMuzaffarpur Gorakhpur 400 kV D/C (quad moose) with TCSC 2000 - 2000 - 2000Dehri Sahupuri 220 kV S/C 130 - 130 - 130Patna Balia 400 kV D/C quad 800 800 1600 - 1600Biharshariff Balia 400 kV D/C quad - 1600 1600 - 1600

Barh Balia 400 kV D/C quad - - - 1600 1600Sasaram Fatehpur 765 kV S/C line 1 - - - 2100 2100Gaya Balia 765 kV S/C - - - 2100 2100Sasaram: (i) HVDC back-to-back (ii) Bypassing of HVDC back-to-backto establish Sasaram Allahabad / Varanasi 400 kV D/C line

500 500 1000 - 1000

Subtotal 3,430 2900 6,330 5,800 12,130

Eastern region Western regionRourkela Raipur 400 kV D/C 1000 - 1000 - 1000TCSC on Rourkela Raipur 400 kV D/C 400 - 400 - 400Budhipara Korba 220 kV D/C + S/C 390 - 390 - 390Ranchi Sipat 400 kV D/C - 1200 1200 - 1200Ranchi Rourkela Raipur 400 kV D/C with fixed series capacitor,TCSC in parallel line

- - - 1400 1400

Ranchi Sipat Pooling Point 765 kV S/C - - - 2100 2100Subtotal 1,790 1,200 2,990 3,500 6,490

Eastern region North-eastern region

Birpara Salakati 220 kV D/C 260 - 260 - 260Malda Bongaigaon 400 kV D/C 1000 - 1000 - 1000Bongaigaon Siliguri 400 kV D/C quad - - - 1600 1600Subtotal 1,260 - 1,260 1,600 2,860Northern region Western regionVindhychal HVDC back to back 500 - 500 - 500Auria Mlanpur 220 kV D/C 260 - 260 - 260Kota Ujjain 220 kV D/C 260 - 260 - 260Agra Gwalior 765 kV S/C line1 400 kV op. 1100 - 1100 - 1100Agra Gwalior 765 kV S/C line2 400 kV op. - 1100 1100 - 1100Kankroli Zerda 400 kV D/C - 1000 1000 - 1000Subtotal 2,120 2,100 4,220 - 4,220

Western region Southern regionChandrapur HVDC back to back 1000 - 1000 - 1000Barsur-L. Sileru 200 kV HVDC monopole 200 - 200 - 200Kolhapur Belgaum 220 kV D/C 260 - 260 - 260

Ponda Nagajhari 220 kV D/C 260 - 260 - 260Narendra / Kolhapur HVDC back-to-back with Narendra Kolhapur 400 kV D/C line

0 - - 1000 1000

Subtotal 1,720 - 1,720 1,000 2,720All India (200 kV & above) 13,450 6,700 20,150 11,900 32,050132 kV / 110 kV interregional links 600 - 600 - 600Total (110/132 kV & above) 14,050 6,700 20,750 11,900 32,650



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Regional grid map

Source: CEA


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Technology has turned the cornerAs we have highlighted earlier, the transmission

planning in India had historically been evacuation

based which meant that most of the transmission

requirements were inter-state or intra-state, thus

requiring relatively shorter transmission lines. As a

result, most of the transmission lines used 400kV

and 220kV AC transmission.

We note that the load centres are usually far away

from the supply centres and with the introductionof Ultra Mega Power Projects (UMPPs), there is a

strong need to create efficient and high capacity

transmission lines, which can transfer electricity

over very long distances (i.e. up to 2,000kms).

Hence, India is now rapidly moving towards

superior technologies, such as Ultra High Voltage

AC (UHVAC) 765kV and 1200kV and High

Voltage DC (HVDC) 500kV, are required. We

note that India has successfully installed a

transmission line using 800kV UHVDC line and

is currently testing a 1200kV UHVAC line at

Bina, Madhya Pradesh.

India Load centres are far away from the supply centres,increasing the need for transmission

Jammu

Ludhiana

Delhi

JaipurRAPP

Pipavav

Gandhinagar

Indore Bhopal

PartabpurLucknow

Patna

Kolkata

Korba

RaipurTalcker/lb valley

ChichenNeck

Guwahati

Bhubaneswar

NR

Tarapur

Kaiga

Kozhikode

Mangalore

Bangalore

VizagHydrabad Simhadri

WR

SR

ER

NER

Mumbai

Krishnapatnam

EnnoreSouth MadrasChennai

Cuddalore

KudaokolamKayamkulam

Thiruvananthapuram

Coal

Hydro

Lignite

Coastal

Nuclear

Load-Centre

Jammu

Ludhiana

Delhi

JaipurRAPP

Pipavav

Gandhinagar

Indore Bhopal

PartabpurLucknow

Patna

Kolkata

Korba


ChichenNeck

Guwahati

Bhubaneswar

NR

Tarapur

Kaiga

Kozhikode

Mangalore

Bangalore


WR

SR

ER

NER

Mumbai

Krishnapatnam


Cuddalore


Thiruvananthapuram

Coal

Hydro

Lignite

Coastal

Nuclear

Load-Centre

Coal

Hydro

Lignite

Coastal

Nuclear

Load-Centre

Jammu

Ludhiana

Delhi

JaipurRAPP

Pipavav

Gandhinagar

Indore Bhopal

PartabpurLucknow

Patna

Kolkata

Korba


ChichenNeck

Guwahati

Bhubaneswar

NR

Tarapur

Kaiga

Kozhikode

Mangalore

Bangalore


WR

SR

ER

NER

Mumbai

Krishnapatnam


Cuddalore


Thiruvananthapuram

Coal

Hydro

Lignite

Coastal

Nuclear

Load-Centre

Jammu

Ludhiana

Delhi

JaipurRAPP

Pipavav

Gandhinagar

Indore Bhopal

PartabpurLucknow

Patna

Kolkata

Korba


ChichenNeck

Guwahati

Bhubaneswar

NR

Tarapur

Kaiga

Kozhikode

Mangalore

Bangalore


WR

SR

ER

NER

Mumbai

Krishnapatnam


Cuddalore


Thiruvananthapuram

Coal

Hydro

Lignite

Jammu

Ludhiana

Delhi

JaipurRAPP

Pipavav

Gandhinagar

Indore Bhopal

PartabpurLucknow

Patna

Kolkata

Korba


ChichenNeck

Guwahati

Bhubaneswar

NR

Tarapur

Kaiga

Kozhikode

Mangalore

Bangalore


WR

SR

ER

NER

Mumbai

Krishnapatnam


Cuddalore


Thiruvananthapuram

Coal

Hydro

Lignite

Coastal

Nuclear

Load-Centre

Coal

Hydro

Lignite

Coastal

Nuclear

Load-Centre

Source: Power Grid

Transmission capacity targets

Transmission

capacity addition

9th plan

(1998-02)

10th plan

(2003-07)

11th plan

(2008-12e)

12th plan

(2013-17e)

Transmission lines (ckms)765 KV 562 733 5,428 27,500HVDC +/- 800 KV 0 0 0 5,000HVDC +/- 500 KV 0 2,734 5,206 0HVDC 200kVMonopole

162 0 0 0

400 KV 13,236 26,344 49,278 50,000220 KV 17,392 17,636 35,371 40,000Total 31,352 47,447 95,283 122,500

Substation capacity (MVA)HVDC BTB 500 1,000 0 0HVDC Bipole +Monopole

1,700 2,000 6,000 15,000

765 KV 0 2,000 51,000 120,000400 KV 19,515 32,562 52,058 80,000220 KV 32,186 40,134 73,503 95,000Total 53,901 77,696 182,561 310,000



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Transmission lines built historically

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08

220 KV 400 KV 765 KV +/-500 KV


Transformation capacity built historically

0

5000

10000

15000

20000

25000

30000

FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08

220 KV 400 KV 765 KV +/-500 KV



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On the road to privatisation

The GoI has been slow to embrace private players

in the transmission segment, largely, we believe,

due to the apprehension of Power Grid (as the

development of National Grid requires systematic

planning and too many inexperienced players

could jeopardize the efficiency). But after the

introduction of the Electricity Act, Power Grid

established a Joint Venture (JV) with Tata Power

(51% stake) for implementation of transmission

system for the Tata Hydro Electric project.

Subsequent to the successful implementation of

projects under this JV, Power Grid entered into a

few more JVs, but with a lesser stake of 24%.

Power Grid JVs

% stake

Powerlinks Transmission Ltd. (POWERLINKS) 49%Jaypee Powergrid Ltd. (JPL) 26%Torrent Powergrid Ltd. (TPL) 26%Parbati Koldam Transmission Company Ltd. n/aTeestavalley Power Transmission Ltd. 26%North East Transmission Company Ltd. (NETC) n/aNational High Power Test Laboratory Pvt. Ltd. 50%Energy Efficiency Services Ltd. 50%Powergrid IL&FS Transmission Pvt. Ltd. 50%

Source: Power Grid annual report

After the success of these JVs, the GoI decided to

give 100% ownership of transmission projects to

the private players (similar to the generation

projects) and identified around 14 large

transmission lines which were to be developed

with private participation through the IndependentPrivate Transmission Company (IPTC) route. The

GoI appointed REC and PFC as the nodal agency

to award the first four (two each) of such projects

costing a total of around INR120bn during the

11th five-year plan.

List of original 14 IPTC projects

Evacuation System for 1980MW North Karanpura projectTalcher Augmentation schemeEvacuation System for 1000MW Maithon RB projectImport of NER/ER surplus by NRSR-WR Synchronous Inter-connectorKawas-Navsari 400kV D/CNavsari-Mumbai 400kV D/CEvacuation System for 1320MW Barh-II projectEvacuation System for 1000MW Nabinagar projectEvacuation System for 3200MW Daripally projectEvacuation System for 500MW Koderma projectEvacuation System for 1000MW Mejia Ext projectEvacuation System for 4000MW Lara projectEvacuation System for 1000MW Simhadri Ext project

Source: Project Monitor

The first of these projects Western Region

System Strengthening Scheme (WRSSS II) with

a cost of INR18bn (transmission line of 1,500km)

was awarded to Reliance Power Transmission in

late 2007.

We expect several such large central transmission

projects to come under the private sector during

the 12-five-year plan, thus eliminating the

monopoly of Power Grid.

On similar lines to the central sector, the state

sector has also adopted the PPP route and several

state transmission projects have been awarded on

a BOT basis. Given the weak financial health of

most of the state TransCos, we expect the state

sector to increasingly invite private players for

transmission projects.

The increasing size of the generation projects has

also led to the development of dedicated

transmission lines for end-to-end power transfer.

The recent example is the construction of Indias

longest private 500kV HVDC line to transfer

power from Mundra (Gujarat) to Mohindergarh

(Haryana). The 1,000km line is owned by Adani

Power Ltd.


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Summary of private participation

Type Project structure Project details

Type 1 Dedicated powertransmissioncorridors:transmissionprojects which areset up by IPP toevacuate power

Adani Powers INR15bn dedicated1000km bipolar 500kV HVDC linefrom its Mundra project in Gujarat toMohindergarh in Haryana

Type 2 JVs with CentralTransmission Utility(CTU) or STU forsetting uptransmission

evacuation systems

Adani Power is developing a 765kVline in a JV with Mahatransco tosecure evacuation of power from itsupcoming plant in the state

1. East West InterconnectionSystem: Awarded to SterliteTechnologies by PFC2. Transmission system for NorthKaranpura (2000 MW): Awarded toReliance Power Transmission byREC

Type 3 100% private sectorparticipation

3. Augmentation of Talcher IITransmission system: Awarded toRPTL by REC

Type 4 STU linked BOTprojects

Haryana Vidyut Prasaran Nigamawarded a INR3.8bn Jhajjar powertransmission project to Jhajjar KTTransco, SPV of Kalpataru PowerTransmission and Techno Electric

and Engineering. The projectincludes setting up of two 400kVsubstations and an associated 100kmD/C 400 kV transmission line


11th plan (FY08-12) so far so good

After steady growth in the transmission capacity

over the last few five-year plans, the 11th plan

brought in a material step change in addition

targets. The plan aimed to increase the size of the

transmission network in India by c50% (versus

c25% growth seen in previous plans) and

transformation capacity by c70% (versus c35%

growth seen in previous plans), with greater

emphasis on 765kV AC lines and 500kV HVDC

lines. India planned to invest a total of around

INR1,400bn on transmission during the 11th plan,

with the state sector contributing around INR650bn

and the rest coming from the central and the private

sector. We highlight the original 11th plan

transmission outlay on the following page.

Transmission capacity growth

Transmissioncapacity growth (%)

9th plan(1998-02)

10th plan(2003-07)

11th plan(2008-12e)

12th plan(2013-17e)

Transmission lines765 KV 137% 75% 319% 386%HVDC +/- 800 KV n/a n/a n/a n/aHVDC +/- 500 KV 0% 87% 89% 0%HVDC 200kVMonopole

n/a 0% 0% 0%

400 KV 37% 53% 65% 40%220 KV 22% 18% 31% 27%Total 26% 31% 48% 42%

Substation capacity HVDC BTB 33% 50% 0% 0%HVDC Bipole +Monopole

113% 63% 115% 134%

765 KV n/a n/a 2550% 226%400 KV 48% 54% 56% 55%220 KV 38% 34% 47% 41%Total 42% 43% 70% 70%


We also highlight the intended use of the

transmission capex planned at both the state and

the central level.

Of the various participants in this plan, we believethat Power Grid is on track to invest its intended

INR550bn by FY12e.

Transmission capex end use

Central sector (11th plan) Fundestimates

(INRbn)

11th plan transmission schemes for central sectorgeneration capacity requiring inter-state transmission

592

Transmission schemes for IPP generation capacityseeking open access from CTU

80

Spill over from 10th plan and advance action for 12thplan

70

Other related important schemes in the central sector 8Total central sector 750

State sector (11th plan) Fundestimates

(INRbn)

11th plan transmission schemes for state sector & IPPgeneration capacity requiring inter-state transmission

144

STU transmission schemes at 220kV, 132kV and 66kV 288Transmission schemes for 220kV, 132kV and 66kVsystem in the states of Assam, Nagaland, Bihar,Jharkhand, Goa and UP

60

Spill over from 10th plan and advance action for 12thplan

78

Other related important schemes in the state sector 80

Total state sector 650



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Transmission capex 11th five-year plan

Uti li ties _____________Proposed transmission works (INRm)______________ TotalFY08 FY09 FY10 FY11 FY12

State Sector:Northern Region (N.R.)Chandigarh 120 40 40 60 70 330DTL 3,750 5,950 5,410 3,780 1,170 20,060HPSEB 3,000 2,390 3,950 2,100 850 12,290HVPN 430 1,270 2,360 1,280 200 5,540PDD,J&K 2,050 2,000 1,040 4,000 4,350 13,440PSEB 1,850 2,410 3,100 3,780 4,210 15,350RVPN 4,480 6,400 8,430 7,100 6,300 32,710UPPCL 5,620 4,250 4,250 5,500 6,500 26,120Uttarakhand 1,000 1,500 2,000 2,500 2,500 9,500Total N.R. 22,300 26,210 30,580 30,100 26,150 135,340

Western Region (W.R.)CSEB 5,530 11,850 13,920 7,740 1,770 40,810GETCO 390 2,650 3,050 360 1,000 7,450GOA 350 420 450 450 500 2,170MPPTCL 3,460 6,970 7,150 4,520 1,260 23,360MSETCL 5,810 11,170 28,000 25,070 18,360 88,410D&D 20 30 310 150 20 530DNH 30 230 270 300 10 840Total W.R. 15,590 33,320 53,150 38,590 22,920 163,570

Southern Region (S.R.)APTRANSCO 7,440 8,970 9,460 7,660 9,090 42,620KPTCL 11,890 12,980 4,470 2,180 3,750 35,270KSEB 2,500 3,000 3,500 4,000 4,500 17,500TNEB 17,020 16,660 2,680 4,780 12,170 53,310

Puducherry 320 510 490 550 560 2,430Total S.R. 39,170 42,120 20,600 19,170 30,070 151,130

Eastern Region (S.R.)

Documents

Indian Capital Goods- Hsbc Jan 2011