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MOSL: DIESEL GENSETS-Gradual recovery underway post a muted FY18

DIESEL GENSETS: Gradual recovery underway post a muted FY18; Price hikes imperative to offset cost pressures

 

We highlight key takeaways from our meetings with manufacturers, original equipment manufacturers (OEMs), and diesel genset (DG) dealers over the past few weeks.

Demand recovering post a weak FY18

Market growth in FY18 was weak (low-single-digit), primarily due to (a) GST-related disruption, which resulted in slower orders from the manufacturing and infrastructure sectors, and (b) RERA implementation, which impacted orders from the real estate sector. However, FY19 is likely to see high-single to low-double-digit growth, led by a revival in key segments like commercial real estate, roads, metros, data centers, hotels, pharma, educational institutions and manufacturing. Mid (400-650kVA) and high kVA (>750kVA) segments are expected to exhibit relatively higher growth than the low kVA (<200kVA segment, which primarily comprises telecom orders from Reliance Jio). Growth, however, might be restricted to some extent in the run-up to the general elections in May 2019.

Price hikes imperative to offset pressure from higher pig iron prices, INR depreciation

Given the rise in key raw material prices (Pig iron prices up ~20% YTD) and depreciation in the INR, we believe a price hike is needed to offset margin pressures. Recently, Kirloskar Oil Engines (KOEL) and Mahindra hiked prices by 3-5%, while Cummins and Perkins are yet to announce a price hike. To retain market share, Cummins had so far deferred raising prices. However, it may now raise prices to sustain margins.