Professional Documents
Culture Documents
Capital Goods
NTPC bulk tender - Emergence of true competition in BTG space
New pricing regime emerging; margins on future bids to be lower than the history
BGR Energy Systems has emerged as the lowest bidder (L1) for the boiler package of NTPC's bulk tender 1 (11x660MW) with a 15% lower quote than Doosan's bid for boiler package of bulk tender 2 (9x800MW). NTPC's bulk tenders have brought to fore the emerging competition in power BTG space in India. Bidders, apart from BHEL, have bagged 64% of the combined order value of bulk tender s 1 and 2. L&T is the key loser, even as BGR Energy ha s emerged as a promising ne w player. The bulk tenders have also set new pricing benchmarks, which are not predatory, but would generate lower margins than in the past. We remain cautious on the power equipment space.
NTPC's bulk tenders - the USD8b mega order: NTPC had invited bids for bulk supply of boilers-turbinegenerators (BTG) in early 2010. Bulk tender 1 (11x660MW) was worth INR192b and bulk tender 2 (9x800MW) was worth INR1,902b. Both tenders are for super-critical power plants to be set up across various states. The price bidding for these tenders went through number of litigations resulting in the award being delayed. The litigations ended recently with the opening of price bids for the boiler package pertaining to bulk tender 1 following the Supreme Court's verdict in favor of NTPC against the Ansaldo-Gammon India JV, which had challenged its disqualification by NTPC. NTPC's conditions favored companies having (or in process of setting up) manufacturing bases in India: To support domestic players and bring supercritical technology to the country, one of the pre-requisites to bid for the bulk tenders was for that companies or JVs should have an indigenous manufacturing base or must have acquired land for setting up a manufacturing facility at the time of bidding. While this eliminated Chinese companies from the bidding process, several Indian companies formed JVs with global players. South Korea's Doosan is the only foreign company (apart from JVs) which has bagged orders and is also setting up a manufacturing facility in India. With NTPC and other state utilities favoring domestic manufacturing, other players like Dongfang are also considering setting up manufacturing bases in India.
Who won, who lost? BGR Energy, the Alstom-Bharat Forge JV and Doosan are the key beneficiaries of NTPC's bulk tenders, garnering 25%, 11% and 11%, respectively, of the combined order value of around INR390b. BGR, which won both the boiler and turbine generator (TG) packages, bid aggressively. Its bids were lower by 15% (for boilers) and 25% (for TGs). As a result, concerns have emerged on the margins that it will make on these orders, though the management seems confident of generating EBITDA of 12-13% and net profit margin of 67%. Although BHEL, which was assured of bagging a minimum number of units got 36% share, the company is a definitely loser as it would now have to match the L1 prices for all bids, which are lower by 7-12%. The L&TMitsubishi Heavy Industries JV is the biggest loser as it failed to win any bid. This raises questions about the JV's cost-structure and its future as it would run out of orders once its existing order-book (around 10GW) is exhausted by FY14. Bulk tenders bring to fore emerging competition in power BTG space: NTPC's bulk tenders have been a key catalyst for the significant change in the Indian power BTG manufacturing space. Domestic BTG manufacturing capacity would increase to nearly 38GW per annum by FY14 from just 10GW per annum in FY08. The prices quoted by BGR Energy and Doosan, though not predatory, are competitive and would generate lower margins that those enjoyed in the past (particularly by BHEL and lately by L&T). We believe NTPC's bulk tenders have set new pricing benchmarks and expect similar pricing in future bids.
Dhirendra Tiwari (Dhirendra.Tiwari@MotilalOswal.com) +91 22 3982 5127 Deepak Narnolia (Deepak.Narnolia@MotilalOswal.com) +91 22 3982 5126
Bulk tender 1 - TG package: The price bids for bulk tender 1 TG package were opened in early 2011. Bharat Forge-Alstom, BHEL and Toshiba-JSW were declared L1 (INR12.5m/MW), L2 and L3, winning 5, 4 and 2 units, respectively. The TG package was to be split among three bidders, with BHEL being considered L2, if it is not L1, and would have to match L1 price to get orders. Bulk tender 1 (boiler package): In July 2011, NTPC invited price bids from BHEL, L&T and BGR Energy for its bulk tender 1 (boiler package) and disqualified Ansaldo on technical grounds. Subsequently, Ansaldo challenged the decision in Delhi High Court which ruled in favor of Ansaldo. NTPC then appealed in the Supreme Court which decided in favor of NTPC. Following the Supreme Court's decision, the price bids were opened recently. BGR Energy was L1, beating BHEL (L2) and L&T (L3). The company quoted a price (read-out price) of INR14m/MW (INR102b for 11 sets of boilers), which is 15% lower than the price quoted by Doosan for the boiler package of NTPC bulk tender 2 (9x800MW). The evaluated price quoted by BGR was INR111b. According to the tender, the boiler package was to be split between two bidders. While the L1 winner would get 3 projects (6 or 7 units of 660MW each), L2 would get the remaining two projects (4 or 5 units). BHEL will be treated as L2 if it is not L1 and would have to match L1 price. Thus, BGR Energy (in a JV with Hitachi) would get 6 or 7 units (INR 5.5b or INR6.5b) and BHEL would get 4 or 5 units (INR3.7b or INR4.6b). Bulk tender 2 (boiler package): In September 2011, NTPC opened the price bids for the boiler package (bulk tender 2) of the 11x800MW tender. On the basis of 'read-out' prices, Doosan was L1 (INR16.4m/MW), followed by L&T-MHI (L2, 5% higher)) and BHEL (L3, 6% higher). The BGR-Hitachi JV and Thermax quoted higher prices. Doosan would get 5 units (4GW, INR66b), while BHEL would get 4 units (3.2GW, INR53b) if it matches L1 price. The price quoted by Doosan was in-line with BHEL's bids related to Bajaj Hindustan at INR29m/MW for a BTG package, implying INR16m/MW for the boiler package. Bulk tender 2 (TG package): In the TG package, BGR Energy was L1 with a quoted price of INR10m/MW, 2% lower than L&T and Toshiba and 10% lower than BHEL. BGR Energy would get 4 units (INR30b), while BHEL (INR16b) and Toshiba (INR24b) would get 2 units and 3 units, respectively. The prices quoted by BGR Energy were over 20% lower than the TG bid for 11x660 MW bulk tender. NTPC is yet to issue the letter of awards to successful bidders for bulk tender 2.
2 March 2012
15.8
16.0
BHEL
BHEL
L&T
BGR
L&T
BGR
Al s tom
BHEL
Tos hi ba
BGR
BHEL
L&T
Note: These are approximate 'read out' prices based on inputs from the industry
2 March 2012
Thermax
Toshiba
Doosan
6 FY06
10 FY08
6 FY14 FY06
10 FY08
FY14
Note: These are approximate 'read out' prices based on inputs from the industry
BHEL 46%
Doos an 3%
L&T 9%
Note: These are approximate 'read out' prices based on inputs from the industry
2 March 2012
ABB# Neutral 3.5 813 3.0 BHEL Neutral 14.8 299 23.1 BGR Energy Neutral 0.5 350 44.7 Crompton Neutral 1.9 142 14.3 Cummins Buy 2.6 471 21.3 L&T Buy 15.5 1,278 69.7 Siemens## Neutral 5.4 810 25.1 Thermax Neutral 1.2 529 32.0 Havells Buy 1.4 534 22.0 # Year end December; ## Year end September
2 March 2012
Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Group/Directors ownership of the stock 3. Broking relationship with company covered 4. Investment Banking relationship with company covered Companies where there is interest None None None None
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
For U.K.
This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to which this document relates is only available to investment professionals and will be engaged in only with such persons.
For U.S.
MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.