The Indian Electrical Equipment (IEE) industry, which includes power generation and transmission & distribution (T&D) equipment, is estimated to be worth Rs.1.40 trillion in FY15 (FY refers to the period April 1 to March 31). The transformers sub-segment comprises around 10% of the total IEE industry and had an aggregate installed capacity of around 4.20 lakh mega volt ampere (MVA) as on March 31, 2015.
Over the past few years till FY14, Indian transformer manufacturers exhibited subdued financial performance due to surplus transformer manufacturing capacity in the industry, reduction in order inflows, surge in imports and increase in raw material costs and working capital borrowings. This also had an adverse impact on the credit quality of transformer manufacturers.
However, an improvement was witnessed in FY15 in the industry performance, led by pick-up in order inflows and moderation in raw material prices.
In the near to medium term, CARE Ratings expects the credit quality of Indian transformer manufacturers to remain stable with a stable outlook on industry.
Based on investments planned in the power sector, replacement demand of transformers and export potential, CARE Ratings expects the demand for transformers to sustain in near to medium term with an expected annual transformer order flow of around Rs.140 billion. Reducing interest rate scenario may help improve profitability.
CARE Ratings believes that no incremental long-term debt would be required, considering the present surplus manufacturing capacity; however, the extent of working capital borrowings would depend on timeliness of payments from state power utilities and private players.
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