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Feature | May 2017

Consolidation in the offing?

Salil Garg, Director-Corporates, India Ratings & Research

Has the Indian boilers market scenario improved in the last few years?
The market scenario for boilers in India has been a mixed one. The largest Indian manufacturer of boilers still has a reasonable order book. However, the addition to the order book in FY16 (2015-16) came primarily from the state, and central government owned power producers, while the private sector is not a major participant in new power projects. As we know independent thermal power producers using coal and gas are the largest users of boilers whereas the captive power plants and industrial users are a smaller user segment. During the past ten years, the large and chronic power deficits have driven the demand for capacity addition in the power sector.

(Independent Power Producers (IPPs) from the private sector were major drivers of this capacity addition programme. But the programme faced execution and financing issues leading to muted returns on capital and withdrawal of the private sector. That is also why the large boiler manufacturers are saddled with slow moving orders from the private IPPs as well as state government entities. Now the power generation capacity appears to be more than adequate, but the distribution entities are unable to successfully channel the same to the end consumers, thus further subduing fresh investments in thermal power and thus demand for boilers.

What will be the effect on the equipment manufacturers if there is no thermal capacity addition between 2022 and 2027?
Given the thoughts I have shared above, the capacity addition in the thermal power segment and the order book of boiler manufacturers are limited to FY2022. Some of the smaller equipment manufacturers could thus exit the market as the market size shrinks. The larger ones could also face revenue and profitability pressures whereas the diversified equipment manufacturers could look forward to mitigating the impact through the focus on other products and geographies.Overall it will be not be a rosy situation, if the demand slumps.

What are the major challenges faced by the Indian manufacturers?
The Indian manufacturers are facing two major challenges. A part of the existing order book is slow moving due to issues at the end of consumers. The consumers are either unable to secure financing or regulatory approvals or both. Further, some players had entered the power sector without relevant core competencies and thus fail to face the execution challenges. As a result, the Indian manufacturers are unable to drive the expected revenues. Secondly, the growth of the order book is muted today given the low plant load factor (PLFs) of the existing thermal power capacity, low investor interest in the sector and emergence of renewables as an alternative source of energy. Additionally, there are challenges in the form of access to efficient technologies and rising concerns over the use of coal as a dominant source of fuel for electricity generation.

What according to you can revive the segment?
In the immediate term, the revival will be helped on resolving the execution issues in the existing order book. Here, the IPPs, banks, and governments would have to make concerted efforts to ensure timely execution of stuck projects. Over the longer term, the revival of the segment will be primarily driven by the industry’s development of technologies that address concerns on cost competitiveness and environment. The capital cost of setting up renewable power has been coming down whereas the cost of thermal power plants has not seen similar reduction thus making renewables inching closer to the grid parity without subsidies. In case the industry can invest in research and development to complete with renewables, revival is possible.

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