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Sector update: India Infrastructure - Infra Insight #1; Order inflow opportunities from FGD installations

Our first series on Infra Insight lays focus on ordering opportunities in meeting environment norms by 2022 in the infrastructure, power and capital goods sectors. Power equipment and related EPC sectors are expected to benefit from equipment ordering related to environment norms. While the deadline is looming large and we do expect ordering to pick up over the next few quarters, financial health of IPPs and state generation companies pose the biggest risks to these orders materialising. L&T (Outperformer), BHEL (Neutral), GE Power (Not rated) and Thermax (Neutral) remain key beneficiary.

q A brief background on environmental norm policies

• Dec 2015: In a bid to ease pollution, Ministry of Environment and Forests (MOEF) notifies new guidelines to tighten emission levels. These cover SOx, NOx particulate matter (PM) in flue gas and water consumption for coal-based thermal power plants with a deadline of Dec 2017 (Details in Exhibit 3).
• Sep 2017: Ministry of Power (MoP) and Ministry of Environment (MoE) post deliberations decide to relax the implementation and allow action plan submitted by MoP to be implemented before 2022.
• Dec 2017: MoE agrees to the revised implementation plan for flue gas desulfurization (FGD) installation/Electro static precipitators upgradation. The target date for environmental compliance in respect of thermal plant located in National Capital Region (NCR) is set for Dec 2019.

q Scope of opportunity for EPC players and OEMs

• To meet SOx norms: Being the most significant among all norms, SOx requires almost all power plants to set up FGD equipment at an outlay of Rs4-5m/MW. The industry is estimated at ~Rs1trn. Central Electricity Authority (CEA), has recommended phasing of FGD installations.
• • To meet NOx norms: While the new SOx norms enjoy a broad consensus, the industry is still contemplating ways to meet the new NOx norms by a) modification of boilers b) installation of selective non catalytic reduction (NSCR) and c) installation of selective catalytic reduction (SCR). However, we believe the order size may not be significant.
  • To meet particulate matter (PM) norms: CEA has listed about 64GW power plants that require ESP upgradation, which entail an investment of Rs1.3m/MW.

  q Ordering status

  • Of the total coal-based Thermal Power Stations installed base in India of 197GW as at end Mar 2018, FGD would be installed on 167GW, with 30GW not requiring FGD installation/already installed/with no space for installations. Another 40GW is under various stages of construction.
  • As a result, we estimate overall potential opportunity of about 210GW. Of this, total ordering for 22GW of operational power plants and 18GW of under construction power plants is already complete.
  • We expect NTPC, DVC and Central government companies with operational capacity of 53GW (20GW ordered) to meet the deadlines. However, we believe states and some IPPs could default on meeting the guidelines.

  q Beneficiaries and lessening competitive intensity

  • BHEL, GE Power and L&T have garnered 29%, 24% and 30% market share, respectively, in 38GW ordered till date.  Thermax, ISGEC and DUCON Infra are other significant players in the space. Note that the competition has reduced significantly in recent bids (from 10 bidders to six bidders).

  q Outlook and View

  We expect order inflow from FGD to gather pace over the next few quarters, especially driven by Central government companies. Of the 80GW of tenders issued for older power plants, merely 18GW have been finalised. To date, nearly ~Rs170bn of tenders have been ordered and we estimate another Rs300bn orders by end FY20E. Note that regulators have already issued the necessary regulations on completely recovering the cost of meeting environment norms. However, the funding of state generation companies and troubled IPPs will be crucial in meeting the deadline for emission norms. The opportunity basket could expand to Rs1trn, i.e., balance Rs700bn worth of orders could be awarded by mid FY21E. L&T, BHEL, GE Power are key beneficiaries of the order inflow from the FGD segment, in our view.

  Valuation matrix

  	CMP	Market Cap	Reco	EPS (Rs)		PE (x)		RoE (%)
  Companies	(Rs)	(Rs m)		FY20E	FY21E	FY20E	FY21E	FY20E	FY21E
  Under Coverage
  L&T	1,389	1,947,824	OP	66.6	78.4	20.6	17.5	12.9	13.5
  BHEL	62	215,192	N	4.2	4.4	14.5	13.9	4.6	4.6
  Thermax	1,111	132,359	N	31.3	37.7	35.4	29.3	11.9	13.1
  				FY19		FY19		FY19
  Uncovered
  GE Power	779	52,367	Not rated	11.2		69.3		8.8
  ISGEC	423	31,103	Not rated	19.6		21.6		9.9
  Ducon Infra*	7	686	Not rated	0.6		10.7		8.4

  Source: IDFC Securities Research; *While Ducon Infra has not won any orders, it has tied-up with Sterling & Wilson to bid jointly for the upcoming FGD orders