Most analysts believe that the power sector is showing signs of revival. Vinayak Chatterjee, Chairman, Feedback Infra says there are three major reasons behind it. One, there is revival in new power plants' business, which means orders for constructions and capital goods. Two, all leading discoms have increased tariffs and even on financial restructuring - many of the front-line states have actually succeeded in placing their state government guaranteed bonds for discom bailouts. Finally, there is news that the government may allow coal as a pass-through for older projects, make arrangements for imports and reset the power tariffs of Tata Power, Mundra. All this combined will give a big push to the sector, he says.
He also spoke about BHEL and the core sector at length. He does not think orders have dried up completely in the core sector.
Below is the verbatim transcript of Vinayak Chatterjee's interview on CNBC-TV18.
Q: Of late while we have seen some of the stocks in the power sector do well, but quite clearly the investment is still lacking. By when do you see any kind of turnaround in this particular space?
A: As you have rightly said the power sector is showing signs of a turnaround. Most analysts covering this sector are using the phrase that the worst is behind us and there are good reasons for that. Few things have happened simultaneously. One, there is revival in the new power plants' business, which means orders for constructions and capital goods. There are two Ultra Mega Power Projects (UMPP) for which the bids are out; another two are planned. There are states like Rajasthan, Madhya Pradesh and Tamil Nadu that are putting out state bids for new power plants, so there is eager anticipation from the capital goods sector that the orders from all of this will soon start impacting their order books positively. Point two, India has 54 distribution companies (discoms). Out of these the leading ones are doing two things - one they have significantly increased tariffs. There are major steps at the local level to take hard decisions on transmission and distribution losses and the other issue is that even on financial restructuring many of the front-line states have actually succeeded in placing their state government guaranteed bonds for discom bailouts, what is called Financial Restructuring Plan (FRP) package in terms with the banks and are getting their financials in order which means that the discoms will soon be in a position to buy far more power than they have demonstrated in the last few months because of their own cash flow and liquidity problems. Finally the government's view on allowing coal as a pass-through for older projects and consistently revising the bids that are coming out now that universally makes fuel as a pass-through, including arrangements for imports and hopefully resetting the power tariffs of Tata Power , Mundra, etc. all these positive messages have come from the government and finally we are seeing green shoots of the solution to the gas problem where the Power Ministry has floated a cabinet note for discussions on gas pooling of both imported and domestic glass. If you see Power Grid and other people's performance on transmission there is a huge activity that has happened in terms of linking of various transmission grids and the big one that we are expecting now is the linkage of the southern grid around July 2014. When you add up all of this you will find that they all add up to increasing a positive mood in the power sector.
Q: The point you have made is actually quite concurrent with what Bharat Heavy Electricals ( BHEL ) said yesterday as well. Despite the first half being so dismal they have guided for a second half which will be better in terms of order inflows. Would that be what we could expect and if in case that is what will come through in the second half will margins be affected because of extreme amount of bidding between private and public companies for the selective number of orders that could come through?
A: Both your points are correct. The fact that most capital goods manufacturers are looking forward along with BHEL to a revival of the order book, thanks to the spate of new plants likely to come through is certainly in the air. I remember, BHEL's financial performance that is being widely commented in the space today, I have tracked this sector over many years and come to the conclusion that it takes about two years for a downturn to hit the profit and loss account of these companies because of the momentum of carry over orders. It is now after two years after the slowdown that the momentum of carry forward orders has actually come down and therefore you cannot book revenue on that account anymore and you are looking for fresh orders. BHEL is not anymore in an envious position - of being virtually a sole supplier to the capital goods in the power sector because over the years significant high quality capacity has come in, whether it is L&T-Mitsubishi, BGR-Hitachi or Bharat Forge with its joint venture partner and many others who are in the market to supply capital goods and all of them universally have order books which are stressed. So when these spate of orders come in you are right in your observation that margins are likely to be wafer thin and we will once again have to wait for a larger pipeline of orders to come once most people's order books are once again back to normal levels. In the present, yes it will be a dogfight and margins are going to be wafer thin, but then people are right now concerned about getting their cash flows and their factories and their shop flows back coming again. That is really the expectation.
Q: What about the core infrastructure space? You spoke about BHEL. What has really surprised market over the last three months is L&T and the kind of numbers that they came out with. What do you think is happening in the core infrastructure space?
A: In the core infrastructure space it is not that orders have dried up completely. L&T is a very well diversified company. L&T's overall figures are a mix of various issues which is capital goods, regular engineering projects and domestic and international. So it is diversified enough to be able to take shocks that may hit one sector or the other and I think L&T is better off than many other capital goods companies wherein everybody is expecting a revival. So far as core sector is concerned we have just finished the discussions on power, road sector I must say that the momentum that one had expected to pick up before or around Diwali has still not happened, because we were expecting National Highways Authority of India (NHAI) to issue around this time close to about 4,000 kilometers of projects half on Build-Operate-Transfer (BOT) and half on Engineering, Procurement and Construction (EPC) and a few on annuity, but these projects are still to come out and while inside information is that they are almost ready and off the shelf ready to hit the bidding stage, but we have still not seen it, if that happens which I am expecting to happen in the next one or two months you may actually see over and above power the road sector once again also powering the mood uptick. Other than that there are fairly largish construction projects that are coming out from the dedicated freight corridor west and the beginnings of it from the dedicated freight corridor east - there are railway projects, there are urban metro projects. So it is not that the sector has dried up completely. What we are witnessing really is a public expenditure driven construction-led revival. That really sums up the mood in the infrastructure segment.
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