New Delhi: Sales of the domestic electric transformer industry are set to cross the Rs 40,000 crore mark, growing at an estimated 10-11 per cent annually to the next fiscal, compared to sales of around Rs 33,000 crore in the last fiscal, a report said on Tuesday.
“The sales growth will lift the capacity utilisation of manufacturers well above 80 per cent, leading to an increase in working capital requirement and capital expenditure, which would be funded through incremental debt,” Crisil Ratings said in its report.
According to the report, the development will be on the back of significant investments in transmission and distribution (T&D) infrastructure to meet surging electricity demand.
Despite the higher debt, credit profiles will remain stable because of improving cash flows and healthy balance sheets.
“Significant investments in the power transmission and distribution infrastructure are spawning a cumulative revenue opportunity of Rs 70-75,000 crore for the transformer sector through this and next fiscal,” said Rahul Guha, Senior Director, Crisil Ratings.
The consequent strong demand will drive up orders equivalent to more than a year’s sales, compared with nine months now, leading to high sales visibility, Guha added.
The demand for transformers is being driven by two factors.
One is the addition of electricity generation capacity, as well as increasing demand, necessitating robust electricity distribution infrastructure.
The installed generation capacity is expected to increase from the existing 485 GW (gigawatt) to 570-580 GW, while peak power demand is seen up more than 20 per cent from the current level to 296 GW2 in the next fiscal, underscoring the need to augment the installed capacity of transformers, the report stated.
According to the report, the National Electricity Plan envisages the installed capacity of transformers increasing by 776,330 MVA (megavolt ampere) to 1,847,280 MVA over five fiscal years till 2027.
And two, given the average life of transformers is 25 years, the ones installed over fiscal 2000-2005 need replacement.
As per reports, given the strong order books, transformer companies are not expected to bid aggressively for projects; therefore, they should be able to sustain operating margins at 8-10 per cent over the medium term.
Efficiency in working capital management is critical because, typically, transformer manufacturing and sales operations keep cycles stretched beyond 250 days.
Order execution takes 90-120 days on average, and companies must maintain adequate inventory to mitigate pricing risk and protect operating profitability. This leads to elevated inventory levels, the report noted.
“Transformer companies are expected to contract debt to fund their working capital requirement and capex. They are likely to incur a capex of Rs 200 crore by next fiscal,” said Nitin Kansal, Director, Crisil Ratings.
(IANS)
