My notes on power sector – II

August 14, 2007

My notes on the power/capital goods and other suppliers

Capital goods suppliers

This sector is dominated by BHEL and ABB followed by several smaller players and Chinese manufacturers. BHEL accounts for almost 65% of capacity and market share. This sector has seen good growth in the last 3-4 years and should see continuing growth for the next couple of years. ABB has a smaller product range mainly for the power sector and industry automation. However it is more profitable company than BHEL and doing extremely well for the past few years.
The companies in this sector are characterized by high return on capital and good competitive advantages. The key competitive advantage is due to Scale, technology and an existing customer base. The companies in this sector are now investing in R&D and also targeting export markets as they increase in size.
This sector should see more competition due to the high demand from Chinese manufacturers, domestic OEM players and foreign players.The market recognizes the bright prospects of this sector and most of the companies in this sector seem to be fairly priced.

Other suppliers (power cable industry)

This industry is characterised by several players. The key ones are
KEI industries
Diamond cables
Universal and torrent

The industry was loosing money during the period 2001-2004. Several players had negative networth and the stronger ones such as KEI had very small profits. Since 2004 due to the boom in the power sector, industry, Oil and gas and real estate, demand has soared and this has resulted in a turnaround for all the companies in the sector. Several of them such diamond have wiped out accumulated losses and are now profitable. The stronger and aggressive players such as KEI have invested in additional capacities and are now growing rapidly. There is now a huge demand in the domestic market and some of the export markets. Several companies in this sector are tapping this demand and doing well.

The industry is however cyclical with almost 70% cost due to raw material. The key RM is copper, aluminum and steel the prices for which have increased in the last few years and fluctuate rapidly. The industry has weak competitive advantages and the key strengths come from scale of operation, customer relationship and operational efficiencies. As a result during the cyclical downturn several companies lose money heavily.

KEI industries and Torrent cables are currently the most profitable players with ROC in excess of 30%. At the same time the other companies in the industry have also turned around in performance due to the strong demand. KEI industry is growing rapidly through organic growth via capacity additions, product range extensions and export markets. It is also looking out for acquisitions abroad. Torrent cables is also doing well and has fairly good financials. These two companies seem to be good investment candidates in the sector

The other companies have had a turnaround in the last few years and hence it may not be easy to predict how they will fare during the next downturn.

To get a better understanding of the dynamics of the power cable industry, the AR for KEI industries is a good starting point.


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