China row favours thermal players
With limited domestic solar cell capacities, power tariffs may rise 25-30 paise a unit
Many industry and market experts see the India-china standoff as an opportunity for domestic power equipment and capital goods players. The curtailing of imports and lowering dependence on China can brighten the prospects of companies producing power equipment in India. The stocks of ABB, Siemens, Larsen & Toubro, Thermax, etc, thus, have seen smart gains of up to 25 per cent from June lows.
Experts, though, share a word of caution. While opportunities do open up for players with capabilities to compete against Chinese companies in the domestic and international arena, when it comes to components and equipment being imported, in certain segments, the options are limited and a sudden curtailment of imports can lead to disruption.
FY10 onwards, the significant addition of thermal power capacity in India had seen a substantial rise in the share of Chinese boiler, turbine and generator (BTG) equipment because they were economical and domestic players had limited BTG capacities. But, the era of significant thermal capacity addition is now behind, and current capacities of BHEL, L&T, etc, are sufficient to meet domestic demand, and therefore, imports in the segment can be easily curtailed by banning imports, feel experts.
Analysts say, while Chinese power equipment imports are about 10 per cent of the domestic industry, and the imports can be lowered, costs will increase initially because sourcing from other countries will see higher logistics expenses.
Umesh Raut of YES Securities says in a subdued demand environment, when the competition, too, is intense, rising costs may be difficult to pass on to customers. Raut feels benefits from order flows, however, can be seen in metro-rail projects, and the power transmission and distribution space, with Indian players being preferred to Chinese companies. In the international arena, too, players such as Thermax, and KEC International, can see better order inflows as other countries restrict Chinese exposure to their industries.
The bigger disruption, however, will be in solar projects, feels Sandeep Upadhyay, MD & CEO, Centrum Infrastructure Advisory. In the thermal space, there is not much private capex and only state-owned players, such as NTPC, are adding capacities. But for solar projects, the dependence on China will be more than 50 per cent, estimates Upadhyay.
The backward integration for manufacturing of solar modules and cell requires silicon wafers (the photovoltaic power generation system for converting solar energy to electrical energy). For manufacturing the same, cheap power and abundant water supply are required. Besides, China remains the leading supplier. In India, only a few investments have gone into manufacturing solar cells. Upadhyay says India will need to work on its integrated manufacturing capabilities.
For now, while India can look at some manufacturers in the US, Canada, Germany, and South Korea as alternatives, the cost of projects will rise leading to higher cost of solar power.
If domestic companies resort to sourcing equipment from countries other than China, says Rupesh Sankhe at Elara Capital, the cost of projects and, in turn, solar power can go up by about 25-30 paisa per unit. According to the CRISIL data, bid tariffs of ~2.36-2.46 per unit were seen in the latest auction of solar power this month.
Companies, such as Adani Power and Tata Power, however, do have some solar cell manufacturing capacities and can benefit from the shift away from China, and so can BHEL, which has started investing in solar equipment manufacturing. However, since there is no near-term capacity addition happening in coal-based power generation due to oversupply and availability of stressed asset of 30Gw, Sankhe does not expect any major benefits accruing to BHEL.
M S Unnikrishnan, MD & CEO of Thermax, says lowering dependence on China is a positive step. If Chinese imports had been curtailed a few years ago, domestic investments in thermal plant and equipment capacities would have benefitted. Even now, positives will accrue, but India needs to plan it properly looking at limited capacities and investments into solar cell manufacturing plants.
Attracting foreign investments in new solar cell capacities in India, however, will require assurance on land allocation, FDI, and also limited competition for a certain period, say experts.