The power transmission and distribution (T&D) sector has good secular
growth, but with volatile cycle atop. We are currently in a strong down-cycle
and a few quarters away from a trough. At some point the sector will be a
good investment but not now, particularly given steep valuations. That said,
we like Crompton Greaves for company specific factors.
■ Excess capacities globally are driving down prices for the high voltage
transformers and power systems business. Our supply chain checks suggest
price pressures will intensify. Three factors that could mark a trough for the
cycle are: 1) industrial capex recovery, 2) changes in the import content
regulations, and 3) an acceleration in the generation sector capex
■ The next upturn, however, will be a low beta one, as the previous one
had benefited from a low margin base. With sector margins peaking, growth
will be dictated by order inflows alone, suggesting slower earnings growth
and hence lower peak valuations.
■ Crompton Greaves (assume coverage with an OUTPERFORM) is our
favoured pick, due to its steep valuation discount despite the expected
relative earnings outperformance. Strong earnings are driven by the margin
resilience due to its focus on the product segment and improving cost
structure, which will drive market share gains. While we initiate coverage of
Areva T&D with an UNDERPERFORM, we maintain the same rating for
ABB given rich valuations and the risk of earnings downgrades. We maintain
a NEUTRAL rating on Siemens.
Table of contents
Cyclical pressures evident ................................................................................................... 6
More downside to consensus margin estimates ............................................................. 6
Sector prone to price pressures ...................................................................................... 6
Survey suggests concerns on pricing environment......................................................... 8
More pressure on the high voltage segment and the systems business ...................... 10
Edging closer to a trough................................................................................................... 11
Growth decelerating ...................................................................................................... 11
Slippages likely ............................................................................................................. 12
Moderate rebound likely................................................................................................ 12
Stocks are pricing-in a recovery ........................................................................................ 14
Sector performance and industry growth diverge ......................................................... 14
Sector valuations close to the high end of historical bands .......................................... 14
Sector performance mixed............................................................................................ 15
Our preferred picks ....................................................................................................... 15
Crompton Greaves Ltd .................................................................................................... 16
Areva T&D India Ltd ........................................................................................................ 33
ABB Ltd. ........................................................................................................................... 46
Siemens India .................................................................................................................. 55
Appendix I: Supply chain conversations............................................................................ 63
Appendix II: T&D 101......................................................................................................... 66