Wednesday, January 25, 2012

Notes from Elecrama 2012

Last week, I spent some time at Elecrama 2012, an industry exhibition of power transmission and distribution (T&D) players, held at Nesco Exhibition Centre in Mumbai. Hundreds of companies, listed, unlisted, domestic and foreign had their stalls at the exhibition.

I often interact with a lot of industry people (who have no idea of finance/stock market) to understand the ground level realities of a sector/company. Visiting such exhibitions is even better, for two reasons:
1) You get to meet a lot of industry experts from varied sectors at one place.
2) Usually, the stalls are not manned by finance people, but by technical/marketing people. So the view we get from them is totally unbiased. They have nothing to say which can help the stock market price of their company! :-)
(In case you doubt my motives for going there, lemme tell you upfront that the food there is usually horrible!)

The exhibition was by players belonging to the power transmission and distribution industry. Transformers, switchgears, wires, various EPC players, etc were all present. Here are some notes I gathered from my interaction with various people representing various companies from various sectors over a period of 4-5 hours at the exhibition. These are not my own views.

Major problem is coal
Yes, there were no power generation companies there, only transmission and distribution ones. Still they rued about the non-availability of coal. Here's why; without proper coal availability and linkages, power generation capacities cannot come up as scheduled. The T&D work starts only when there is proper view on when the power generation will begin, so that there is seamless transmission of electricity. Without coal, generation is hampered. Without a view on when generation will begin, the down-stream T&D work comes to a standstill. Effectively, the entire process comes to a grinding halt. Coal India, THE supplier of coal in India is facing a tough time ramping up capacity. Proper coal linkages, therefore, are a critical value driver for the entire power-ancillary sector.

Working capital is proving to be a major strain
With overall liquidity in the system not at very great levels and with mounting losses and pressure on SEBs, recovery is proving to be a major problem. A lot of the players gave feedback that business is there, but we are not taking it because we do not know when the customer will pay up! 3-4 months has become a usual time for recovery in most cases. This puts strain on working capital. Companies will not sell more if they do not have working capital to support increased sales. This puts companies' topline in danger too!

Irrational competition is hurting
Competition has become fierce. Even the Koreans and the Chinese are trying to get into the Indian power ancillary market in a big way. (Although there are certain laws to protect Indian companies). Due to intense competition, a lot of companies are pricing their products at substantially lower margins, just to keep the topline going! The industry faces severe pressure on margins in the next future (at least a couple of quarters). This problem seemed more severe on the EPC side (transmission lines, sub-station erection, etc). Players do not expect pricing sanity to return very soon.

Solar is the next big thing
Surprise surprise!! Almost every industry person from varied sectors I spoke to said the same thing. Solar energy is going to be really big! But what about the very high cost of generating solar? What about rational pricing? What about financing for the same? Even the lowest cost for generation quoted recently (Rs.7/unit) is wayyyy higher than the cost of producing thermal power. Also, what about fast changing technology? Whatever solar power projects are being put up now, will they not become obsolete in maybe 5 years from now? So how can one say that solar is the next big thing? To alllll these questions, I got only one answer; solar will be big because the Government wants it to be big! Everybody admitted that there are some irrational things going on in solar power sector. Down the line, there will be huge growth, some players will burn their hands, unviable projects will go bust, sure! But the sector will become huge! Thats what they said! This also gives an opportunity to power-generation-battery makers like Exide. (Like they got a big boost in sales a few years ago during the telecom tower craze!)

Wheels are slowly turning, but even a snail would overtake!
The industry people reported that some improvements are happening. SEBs are being cleaned up, orders from Powergrid have resumed in decent volumes over the last two months and Government has recently started taking some serious steps to tackle the coal shortages. But the process will be slow and will cause pain to a lot of players till it catches on properly. Good old times are at least 2-3 quarters away, they say.

Well, there you have it. Some info about the power sector. I find this sector really interesting, inspite of majority of the players in it not making cash-flow and spending a bomb on working capital. Another interesting article from The Economist about the sector makes a nice read. Do go through the same.

Cheers and happy investing!!!

P.S. Came across something interesting recently. Its a book, which I do not think is released yet. Do check it out. The basic premise of the book seems very interesting, worth keeping tabs on the it.


sameer said...

Hi Neeraj,
One of the BH's reason for famous investment in BYD is solar energy future. Charlie Munger seems to be very optimistic on Solar energy.

Any views on how Amara raja trying to acquire market share from giant exide and is Amaron ***RELATIVELY*** better bet that exide???? Atleast market(considered as irrational in short term) prices of exide and amaron suggest that.

Neeraj Marathe said...

Hi Sameer,
Yes, BH's BYD investment has been highly talked about.
Regarding exide and amara, as far as i know, amara was spot-on in putting up fresh capacities in the last downturn, while exide didnt, helping amara to be in the market when demand increased.

Suhail said...

Good writeup Neeraj. I agree that attending such exhibits is really valuable*

I came to ask the same Qn. If you were to invest with a LT view between Exide and Amara Raja which you'd prefer or pick for further inspection? Also, NalandaCap has upped its stake in Exide to 5% in Dec-Jan

Regarding Solar: It's the next sunrise industry man! (which pretty much guarantees a sunset not too far away) So maybe it will go the way of LCD TV manufacturers, where none of the major players from Taiwan/China make any profit. Busy undercutting each others throats.

However even here, it can be good to start identifying the solar bubble and enjoy the ride with top 2-3 players, not be too greedy and get out without bothering to latch onto the top!

*ps:Except in cases where organisers keep free entry, like in Excon Bangalore, where I saw entire families(yes, including old granny) from nearby villages having a Sunday picnic collecting paper bags and brochures, kids marching in and asking with a straight face if we have any pens, notepads, anything! :-) I asked one kid ~ 6-7 years what he will do with these and he said they were collecting since it fetches a premium at the raddiwalah :-) and some of stuff makes him 'cool' amongst his friends (fancy pens, smiley balls etc). He estimated he'd collected a cool Rs 100-150+ worth of stuff and was beaming ear-to-ear. Not bad for a day-out!

Neeraj Marathe said...

Hi Suhail,
I havnt seen either of the two in detail, so wont be able to comment on it..
Solar took me by surprise too..but then thats what they said!
and regarding your experience at an industry meet, i think you just described an AGM too! :-D

Manish (KulMan) said...

Nice summary, Neeraj.

I was also there for couple of days and agree with your analysis. To identify winners in this industry is a challenge.

Neeraj Marathe said...

O cool..when were you there? we cud have gone together Kulmanji..nxt time..

Manish (KulMan) said...

19th & 20th Jan. It was too hectic. Still could not cover entire expo. This biennial event is also a kind of reunion for industry people like me.

We should meet up, sit in "Palkhi" sometime in near future...

Neeraj Marathe said...

O that works for me! done!

Joseph said...

Neeraj - If I am not mistaken the Bud Labitan book - Moats - has been available for quite some time now.


Neeraj Marathe said...


Manish (KulMan) said...

After looking at extravagant stalls of some companies at Elecrama, i remembered Munger: "Opulence at expo is often inversely related to the financial substance of the firm."

Neeraj Marathe said...


nirjhar said...

thanks neeraj....this was very helpful....

Neeraj Marathe said...

Most welcome Sir..