The Ministry of Environment and Forests (MOEF) had in December 2015, notified new emission control norms for air and water with a two year deadline in place. While the deadline has now expired, very little progress was actually made in this aspect till date. However, a revised five-year timeline, in agreement with MOEF, was worked out by the Central Electricity Authority (CEA) under which power plants will have to install the requisite emission control equipment by to December 2022.
Motilal Oswal, a leading broker and wealth manager, have estimated the likely order size for this equipment to stand at ~INR1.3t over the next three years, which translates to an annual ordering opportunity of ~INR400b. Also, Motilal expects participation from roughly 10-12 players in this niche segment, which translates to an estimated order opportunity of INR 4000cr (simplistic estimate) for each of these players. While this amount is not significant for listed giants such as L&T and BHEL, it can have a significant impact on the financial well being of smaller and relatively hidden companies such as Ducon Infratechnologies, whose current market cap is less than INR230 cr.
Industry experts have indicated that Ducon has reportedly bid for orders totaling INR 27,000cr; assuming a general big winning probability of ~15%, Ducon can have a potential company order book of INR 4,000cr. However, it is noted that smaller companies like Ducon may have some issues to bid for all orders due to the requirement of bank guarantees, which requires corresponding cash collateral; however the management seems to be confident to arrange the necessary bank guarantees.
A major positive for the company is also the fact that premier rating agency Crisil has recently upgraded Ducon Technologies India Private Limited’s (an associate entity) long term rating to CRISIL B/Stable from CRISIL D reflecting its healthy market position in the pollution control segment along with comfortable net-worth and debt protection metrics. The stock used to trade as high as INR 56 per share, but has now cooled down to ~INR 28 a share on the back of recent market corrections. If Ducon is able to translate these significant potential orders towards its order book, then the stock may again reach its previous highs. While the stock is currently hidden from market limelight, it nevertheless shows significant promise over the medium-term as a rewarding stock.
Separately, the Government of India recently announced that its target of 100% rural electrification was achieved, 12 days ahead of its 1000 day deadline. While this is a commendable achievement, there is still a long way to go, as the government considers a village to be electrified if 10% of its households can access power, and public infrastructure in these villages, such as schools and hospitals are electrified. India cannot afford to let the remaining 90% continue to remain in the dark, and thus must continue to invest in the energy sector. A bulk of India’s electricity requirements (almost 60% as on April 2018) is met through coal based power plants, which is inherently a highly polluting source of energy. Thus, there is significant potential for revenue visibility for the emission control Industry as a whole.
