The growth of DG sets would be driven by higher volumes in the mid- or high-horse power (HP) segment with the revival of key markets such as infrastructure, commercial and manufacturing.
Growth in the diesel genset (DG) industry is linked to base power deficit and the Index of Industrial Production (IIP) growth. Both of these are reflections of the demand for industrial and residential power, and have been declining over the past five years. A revival in economic growth would drive up both manufacturing or IIP growth and power deficit, in turn resulting in a higher demand for DG sets.
After a subdued FY13-17, when industry volumes declined at a compounded annual rate of 5 per cent (primarily due to a sharp fall in sales for telecom towers), private players expected the industry to grow at a CAGR of 10 per cent in FY17-20. POWER TODAY highlights that less than 15 per cent of the demand for DG sets is for prime power and 85-90 per cent is for backup power. This implies that despite low power deficits, the need for DG sets would continue to grow.
Motilal Oswal estimates that 30,000 DG sets are sold annually by the unorganised sector accounting for 21 per cent of the industry's overall sales. The presence of the unorganised sector would be largely in the low horse power (LHP) (<160kva) segment. With GST expected to ensure better tax compliance and bring the unorganised segment into the tax net, analysts expect the price gap between the unorganised and organised players to narrow down. With this, organised players should gain share.
Road to recovery
For the last five years, DG industry volumes have been subdued. During FY13-17, volumes declined at 5 per cent CAGR, driven by lower power deficits, as demand forpower declined with macroeconomic slowdown, weak demand from key endmarkets-industrial and manufacturing, real estate and infrastructure, and collapse in demand from telecom towers.
One of the key reasons for the decline in DG industry volumes has been the sharp fall in demand from the telecom sector. From a peak of 100,000 DG sets in FY11, demand from the telecom sector declined to 30,000 in FY17. Mahindra, which has 60 per cent share in telecom industry DG sets, was the worst affected. Around 15-75kva DG sets are primarily used in telecom towers and constitute 55-60 per cent of the telecom sector demand. The share of 15-75kva DG sets, which was 78 per cent of overall DG set sales in FY10, fell to 56 per cent in FY17.
Experts are optimistic about the industry volume growth to revert to 10 per cent CAGR over FY17-20. Growth would be driven by higher volumes in the mid- or high-horse power (HP) segment; demand for low HP products is likely to remain subdued. Key end markets that are likely to see a revival are infrastructure (roads, metro rail, railways), commercial (IT/ITES, data centres, hotels, hospitals, educational institutions) and manufacturing (pharmaceuticals, automotive).
"The DG industry has matured," avers Gagan Chanana, Director, Jakson Group, "The country's dependence on power is so high that it cannot afford even a minute of power outage."
That usage of DG sets to generate power is expensive, is often presented as an argument against them. While the cost of power produced by renewable sources has declined to Rs 3 per unit and that produced using coal is Rs 4 per unit, power produced by using DG sets is Rs 15-17 per unit. However, demand for DG sets would continue, given that DG sets are used primarily for backup power and not prime power and the power distribution network is still patchy in India.
One of the key setbacks we have always faced from investors is that with a fall in power deficits, there would also be a fall in the requirement of diesel gensets. Motilal Oswal, in its report, mentioned that genset demand is driven by higher capacity building or capex in the economy, which in turn triggers a demand for backup power.
As in developed economies, India too is witnessing a shift in genset demand as backup power than standby, where approx. 85-90 per cent of genset usage is currently for backup.
Industry players believe that there are multiple drivers for the demand for DG sets to pick up, going forward. With over 85 per cent of DG sets being used for backup power, low power deficits do not directly translate into lower demand for DG sets. The bigger demand driver for DG sets is industrial, infrastructure and real estate capex. A revival in these three end markets is critical for recovery in DG demand.
The current government is focusing on pump priming the economy through increased infrastructure spending, especially on roads, metro rail and railways. That said, Sanjay Jadhav, CEO, Power Business, Sterling and Wilson, believes that India with Rs 80 billion genset market has a huge opportunity to tap.
The government intends to order 25,000 km of roads in FY18, and also take road construction to 41 km per day from 22 km per day in FY17. In FY17, there was a 40 per cent jump in road construction. During road construction, the need for DG sets is felt in remote locations, where availability of power is an issue. The Indian Railways is looking at installing or replacing the diesel generators used to power air conditioners in trains. Each generator car has two DG sets and the annual industry volumes are 500 units, implying a market size of Rs 2-2.5 billion. The key beneficiaries would be Cummins, KOEL, Volvo and Greaves Cotton.
Another big opportunity for DG sets over the next few years is in metro rail projects, with a new metro rail policy on the anvil and every large city (>1million population; 360 cities) in India looking to construct a metro rail network. Each metro station would need to have DG sets as a backup in case of power failure. The typical ratings used in a metro station vary from 500 kva to 1,000 kva. With 855 km of metro rail projects coming up in India over the next few years atan overall capex of Rs 3 trillion, the opportunity in this segmentis immense.
Data centres - a huge opportunity
Data centre is a facility composed of networked computers and storage that businesses or other organisations use to organise, process, store and disseminate large amounts of data. A large data centre uses as much electricity as a small town. Every data centre includes backup power supplies in the form of HHP DG sets. This power usually requires multiple 750kva-and-above DG sets. The key sectors looking at putting up data centres are BFSI, social media, entertainment, e-commerce and telecom.
According to a report by IAMAI (2016), the Indian data centre market shows promising growth over the next few years due to increased usage of data through smart phones, social networking platforms, e-commerce platforms and government projects. The Indian data centre infrastructure market was valued at $2.2 billion in CY16 and is expected to touch $4.5 billion by CY18. It is predicted that India would move to be the second largest market for data centres in the Asia Pacific by 2020, with investments reaching $7 billion or 4.5 per cent of the global investments.
Hospitality - new supply growth
For branded hotels in India, occupancy (in FY17) has risen to a nine-year high of 65 per cent. The growth in occupancy and tariff is projected to continue in FY18 and FY19, driven by macroeconomic growth, which has led to a rise in travel and accommodation needs. The last time Indian hotels saw their rooms this full wasin FY08.
Hotel room supply in India grew 7-8 per cent in FY17 and HVS expects growth to remain in this range for the next three years. However, demand is growing at 11-14 per cent. With demand outweighing supply and outlook for travel remaining positive, the upward trend in occupancy rate is likely to continue.
What buyers want
In the Indian DG market, while pricing is an important factor influencing the final purchase decision, it is not the foremost reason. The key drivers for selecting a particular manufacturer are brand, distribution reach, service and spare part availability, and product reliability and portfolio depth. Increasingly, customers are looking at the life cycle cost of owning a DG set, rather than just the initial capital cost while making the purchase decision. Capital cost constitutes only approx. 6 per cent of the overall cost of ownership.
PT compared the fuel consumption across brands for the most common nodes in the industry, namely 15, 62.5, 200, 750 and 2,000kva-rated DG sets based on the brochures available on company websites. PT find no noticeable difference between the fuel consumption of Indian and MNC brands - this is true across nodes. Clearly, fuel consumption is not the differentiating factor in a customer's decision to buy a DG set.
Product range - a key factor
Companies like Cummins and KOEL have a distinct advantage over their peers in terms of the product range offered. Cummins, which offers 44 nodes ranging from 7kva to 3,350 kva, has the most comprehensive portfolio. KOEL comes a distant second, with 27 nodes ranging from 3kva to 1,010kva. None of the other brands in the Indian market have offerings spanning across the LHP, MHP and HHP segments. That said, pricing is not the key determinant for the buying decision of a DG set.
While it plays a role in the overall purchase decision, various industry players indicate that pricing gets a low weightage. On comparing the price points of DG sets for manufacturers across nodes, in the higher kva nodes, KOEL products are priced at 2-4 per cent lesser than Cummins and Perkins, and in the low kva (<160kva) nodes, Cummins' products are 2-3 per cent more expensive than KOEL and Mahindra.
Cummins India and Perkins or Caterpillar have a distinct advantage over their Indian peers, as they have access to their parent technology and product portfolio, which can be replicated and localised for the Indian market. This helps them launch new products in the shortest time. Globally, it has been seen that every time there is an emission norm change, Cummins has taken the market share. This is because it is usually the first to adapt its engines to the new technology. Post the new emission norms in July 2014, Cummins India was among the first to get its DG sets certified.
It lost its market share in FY15 as the price hikes taken by it were ahead of peers, price rationalisation in FY16 helped Cummins to win the back market share.
Within the Indian DG sets market, the LHP (<160kva) segment is the most competitive, with the presence of 8-10 organised (primarily Indian) players along with Chinese and local players. Price is the key criterion for decision-making, and therefore, margins are also the lowest in this segment.
KOEL, Ashok Leyland and Mahindra have traditionally been very strong in the low and medium horse power DG set market. However, in a change of strategy from CY10, KOEL launched its DV Series (320-625kva) and this was followed bythe launch of its 750kva DG sets in FY16. In FY17, KOEL has also launched 910kva/1,010kva DG sets. It has taken a approx. 5 per cent share in the HHP segment, withsales of approx. 75 units in FY17. KOEL further intends to launch 1,250kva and 1,500kva DG sets over the next 24 months. The more than 750kva is dominated by Cummins India, which has historically had more than 50 per cent market share in this segment.
Perkins has recently started its plant to manufacture engines for the 4,000 series (>750kva) at Aurangabad. This would help reduce the cost of manufacturing the engines, which would have a greater proportion of localised components. In the second phase of expansion, Perkins intends to expand its range to manufacture smaller (>200kva) engines as well.
Competitive pressure intensifies
Low HP (15-75kva)
While this segment has traditionally been dominated by Mahindra, Ashok Leyland and KOEL, new players like Cooper Industries, FG Wilson, JCB India and Cummins India are also looking to make inroads and increase their share. This segment accounts for the highest volumes in the Indian DG market, but profitability is low due to intense competition, resulting in high pricing pressure for the incumbents.
While KOEL and Cummins are the dominant players in this segment, competition from Mahindra, FG Wilson, Cooper Corporation and Ashok Leyland is increasing. Mahindra is currently in the <200kva segment, but is also launching the 250/320kva nodes in the next two quarters - it has bought the technology from Navistar and is planning a commercial launch in 2QFY18. This would imply higher competition in this segment for Cummins and KOEL.
Perkins intends to start domestic manufacturing of its 2000 series (400-650kva) in CY18 at its Hosur plant. Currently, it is importing this range and is not competitive compared to its peers. With the start of production in Hosur, it intends to increase its presence in the MHP range over the next two years.
High HP (>750kva)
This is the most attractive segment in terms of profitability and per unit value is the highest in this segment. Traditionally, Cummins has been the dominant player in this segment, with more than 55-60 per cent market share, followed by Perkins and Caterpillar. New entrants in this range include KOEL (launched its 750kva node in FY16) and MTU India.
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