05.11.2011 Инвестиционная компания Motival Oswal (Индия)
Chinese company aims to set up BTG, spare-parts manufacturing facility
We recently interacted with the management of Dongfang Electric Machinery Company (DFEM). Key takeaways:
— Concerns over rising competition in the Indian power equipment market on Chinese aspirations in India.
— Dongfang plans to set up BTG, spare parts manufacturing facilities in India.
— The management tried to allay fears about quality issues, which they said, originated due differences to in operational practices at generating units.
— We believe the recent proposal to levy import duty on power equipment will benefit local companies like BHEL, but the industry will stay competitive given slowing demand and a spurt in manufacturing capacity.
DFEM considers manufacturing in India: India continues to be an important market for Dongfang Electric Machinery Company (DFEM), which is involved in over 20GW of power projects in India. DFEM is considering the possibility of setting up a power equipment (Boiler and Turbine Generator) manufacturing plant in India. DFEM has technology collaboration with Hitachi for boilers and turbine generators (TG). Hitachi has an exclusive tie-up with BGR Energy in India for super-critical boilers and TG. This may prove to be an area of contention if DFEM wishes to set up manufacturing in India. We are doubtful about DFEM’s intentions to set up a BTG plant in India, given its 30GW of manufacturing capacity in China, which would be underutilized if another plant were to be set up in a growing market like India. However, DFEM is certainly looking to set up a manufacturing facility for spares to serve Indian customers. We believe that with spares manufacturing, DFEM will gain higher acceptance among Indian private power deve opers.
Focus on equipment supply, not EPC: DFEM is focusing on equipment orders and not EPC contracts. This is due to difficulty in getting work visas for workers. Generally, an EPC contract involves mobilization of a large number of workers. DFEM set up two power projects for West Bengal State Electricity Board: Sagardighi (600MW) and Durgapur (300MW), on an EPC basis. Both projects faced major issues, resulting in escalation of serious disputes between DFEM and the utility.
Confident about quality: DFEM does not see quality issues with its equipment. According to DFEM, problems faced at various projects were largely due to operational practices and with time, the issues were sorted out and some of the plants in India are operating at nearly 100% PLF. Chinese equipment has often been cited as consuming higher auxiliary power. DFEM stated that in its case, this was largely due to customers asking for higher rating auxiliaries such as motors. Chinese equipment manufacturers have played an important role in the Indian power market.
Chinese presence well established in India: Chinese players are expanding their presence in overseas markets, including India, given the stagnation in capacity addition in China. Chinese companies added over 20GW of capacity in India during the tenth and eleventh five-year plan periods and are executing about 40GW of power projects (excluding bulk orders of Reliance, Lanco and Abhijeet Group, which are still to start construction). Chinese players enjoy certain cost advantages like (1) cheap financing from Chinese banks and (2) higher operating leverage compared with their Indian competitors (each of the Chinese players operates at over 20GW annual capacity). Besides, some IPPs prefer Chinese players due to their relatively lower delivery schedules, resulting in lower project costs.
Several quality issues: Plants running on Chinese equipment face quality issues such as lower PLF, high auxiliary consumption, low heat rate and maintenance issues. For example, in case of equipment failure at the Durgapur plant, the equipment was sent back to China for repair, resulting in huge financial losses. Besides, it is alleged that Chinese equipment is not customized to the Indian environment (to handle Indian coal, for instance), which results in frequent breakdowns. There is no concrete evidence of this, but industry experts expressed concern about the likelihood of frequent breakdowns of Chinese sets, substantially increasing lifecycle costs of projects.
Recent proposal of duty on imports to help local players: Reportedly, at a recent meeting of government ministries and agencies, there was broad consensus to provide domestic manufacturers with a level playing field compared with foreign suppliers. The government is contemplating levying import duty of 5%, CVD of 10% (equivalent to excise duty for domestic companies) and 4% of SAD on mega power projects. Domestic players will have a 6% advantage if implemented, over imports, which we believe, is substantial, as Chinese companies have been quoting 10-20% less than Indian manufacturers like BHEL.
Outlook uncertain as demand slows: The Indian power equipment market seems to be going through a challenging phase with a double whammy of slow demand and increased competition. Lack of coal linkages, volatile merchant power prices and several other constraints like land availability adversely impacted new project awards over the past one year. We believe that while the situation will possibly improve in the remaining part of the year, with an order pipeline of over 20GW being awarded (led by PSUs like NTPC), the outlook for the following years is uncertain. We remain Neutral on the sector.