The Hindu Business Line : BHEL: Generating better times

BHEL, the power equipment industry major, is looking forward to some exciting times. Never mind the change in the government, BHEL's top honchos brush aside the worries and are gearing up for the capacity-addition programme that would be unveiled in the Government's Eleventh Plan in a couple of years.

Having over 70 per cent of the share in the power equipment industry, BHEL's growth would primarily hinge on the government's capacity addition programme in the generation segment. The contribution from the industry segment, services business and exports are emerging as significant growth drivers.

Power sector: Opportunities ahead

The Government had envisaged a capacity addition of one lakh MW by 2012, of which 41,000 MW was to be commissioned in 2002-07 (the Tenth Plan period). Sixty seven per cent of this capacity is under construction and projects for only 8,000 MW are yet be implemented and, that too, is in the advanced stages of finalisation. Therefore, the impact of any delay in awarding new contracts, if any, by the new Government, should not be significant. Anyway, BHEL has sufficient orders on hand to be executed. It would be difficult for the company to match the record order inflow of 2003-04 (Rs 16,469 crore).

A number of projects were bunched up last year to fast track the implementation process. This, however, would not have an impact on the revenues in the near-to-medium term as the execution of orders on hand will smoothen out any delay in Government decision-making.

From a long-term perspective, the power sector outlay and the capacity addition envisaged in the Eleventh Plan would assume significance. If the Government is able to stick to its commitment of one lakh MW capacity addition by 2012, then close to 60,000 MW of capacity has to be added in 2007-2012. This should throw up immense opportunities for BHEL.

Power segment: Well-positioned

Hydro/Thermal mix: BHEL derives its revenues predominantly from the generation equipment segment. It has been and still is a monopoly player in the thermal equipment segment. Given that power generation capacities in India are, by and large, thermal, BHEL enjoys a clear advantage. Of late, there has been a shift towards hydro- and gas-based projects. The mix would, however, be in favour of thermal and hydro projects, given the abundant natural resources (coal and hydro potential) that India has. BHEL has a good presence in the hydro segment too, which constitutes 40 per cent of the business in the power segment.

Competition: There are only two players — BHEL and Alstom — that have a local manufacturing base for generation equipment. The only competition for BHEL is from international players such as Siemens, GE and some Chinese manufacturers, which import equipment. Alstom too imports most of its equipment such as turbines.

BHEL has a clear cost advantage vis-à-vis multinationals due to its vintage plants.

The local availability of spares is an added advantage for BHEL's equipment. Not only are imported spares expensive, they might also result in delays in procurement, which could lead to losses. The need for continuous service support, the competitive cost structure and the flexibility offered by BHEL in payment terms give it the edge when bidding for projects. BHEL avers that its technological partners, Siemens and GE, would be more comfortable bidding for projects along with BHEL rather than on their own. Cost is definitely a strong reason. Also, multinationals may not want to take the risk of dealing with State electricity boards. The multinationals supply critical components and technology and get a steady risk-free revenue (royalty income) from BHEL, which handles equipment supply and execution.

Technology glitches: BHEL has technology tie-ups with MNCs such as Siemens and GE. In the power segment, BHEL has the capacity to produce equipment up to 1000 MW. At present, only equipment up 500 MW capacity are produced as there was no demand for higher capacity equipment. BHEL has tie-ups with the MNCs for the latest technology.

The new projects lined up by NTPC are for the 660 MW super critical technology. BHEL lost out the first project to be commissioned under super critical technology to a Russian company.

According to BHEL, the issues relating to the technology tie-up with its partner, Siemens, and the disagreements on the commercial aspects between NTPC and BHEL, have been sorted out. The company is refurbishing its plants at Hardwar to cater to the 660 MW super critical range.

Gas-based plants: A few private players have shown interest in gas-based plants. However, due to the high variable costs (fuel costs) and the availability glitches, gas-based power plants would continue to account for a small proportion of the total generating capacity created in the country. The MNCs have a relatively stronger presence in this segment.

A diversified revenue stream

BHEL's dependence on orders in the power segment has decreased over the years, thanks to the growth in alternative revenue streams such as the industry segment, services business and exports. As of 2003-04, exports contributed 24 per cent of the turnover, and services close to 10 per cent. The revenues from the industry segment too have been picking up.

The industry segment contributed close to 35 per cent of the turnover in 2003-04 against 31 per cent in 2001-02. Apart from these segments, BHEL is constantly widening its product portfolio in other related areas such as pollution control and water managements systems. These businesses are at a nascent stage. However, they offer the benefit of diversification.

Industry segment: Highly competitive

The industry segment, particularly the captive power segment, is very competitive with a number of players such as Thermax and Wartsila (India) having a presence. In 2003-04, BHEL bagged captive power plant orders worth Rs 2,000 crore, close to 13 per cent of all such projects announced. In the industry segment, including products such as industrial boilers, compressors, equipment for the oil segment and so on, BHEL has a success rate of close to 60 per cent.

Services: A lucrative business

Services provide a lucrative business opportunity. According to the Central Electricity Authority, at least 20 per cent of the existing utilities, constituting around 25,000 MW, including imported sets, have outlived the life span of 20 years.

Renovation and modernisation can substantially increase the efficiency at just 14-15 per cent of the cost of setting up a new plant and takes less than one-third the time of setting up a new plant. This presents a business opportunity of Rs 10,000-15,000 crore. The margins in the business are lucrative at close to 15 per cent.

This segment was so far unexplored as the SEBs were cash-strapped and could not afford to spend on renovation. They could not even afford to shut the plant for maintenance, as it would lead to revenue loss.

With the cash position of the SEBs improving, this segment is set to see some action. BHEL has received orders worth Rs 950 crore for services, a 26 per cent growth against the previous year. BHEL has entered into joint ventures with Siemens, GE and NTPC for targeting the renovation and modernisation segment.

Exports: Exploring new areas

West Asia is a key market, where the company has executed a number of gas-based projects. When bidding for projects abroad, international bidders also offer to finance the projects, say, for instance, through equity participation.

BHEL is yet to take on financing schemes aggressively. Mr C. Srinivasan, Director (Finance) suggests that the country's foreign exchanges reserves can be put to good use, if they are lent to players such as BHEL to fund projects abroad.

The overseas markets also have good scope for services such as renovation, repairs and modernisation. The services business offers good potential for growth in these markets. Export orders have, however, been erratic.

The export turnover for 2003-04 was substantially higher due to a large order bagged from Libya. Exports do provide a long-term growth strategy. This year, however, they could slow down as the export order book, as on March 2004, was lower than the previous year.

Improving cash position

BHEL's cash position has been consistently improving from Rs 477 crore in 2001-02 to about Rs 2,600 crore in 2003-04. The company generates free cash of Rs 600 crore per annum.

The improvement in collection cycles and better cash collection from State electricity boards improved its financials. With a capex programme of just Rs 235 crore and a zero debt status, dividend payments is the only commitment.

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