• How BHEL stands to gain from the power ministry’s new equipment advisory

    There appear to be sunny days ahead for India’s largest power equipment manufacturer Bharat Heavy Electricals Ltd (BHEL) which has been struggling with a broader slowdown in new orders for long. The power ministry has just extended an existing advisory that mandates state-run generators to insist on phased domestic manufacturing plan from supercritical equipment suppliers.

    Experts say the new guideline on indigenous manufacturing of supercritical equipment that also includes doing away with the Deed of Joint Undertaking (DJU) in case certain conditions are met is a major positive for the domestic Boiler-Turbine-Generator (BTG) manufacturers. “This advisory will have a trickle down benefit on the profitability of BTG manufacturers with a lag of around 1.5-2.5 years as the order execution cycle for BHEL is 36-48 months,” Vivek Jain, Associate Director at research firm India Ratings told ETEnergyWorld.

    The Cental Electricity Authority (CEA), the power ministry’s technical planning wing, has extended the earlier advisory for three years through October 2018. The advisory is applicable only to central and state utilities and the private sector firms are free to choose from the BTG suppliers. Analysts say the private sector’s participation will remain muted since they have been hit the most owing to muted demand and lack of Power Purchase Agreements (PPAs).

    Not surprisingly, the Plant Load Factor (PLF) of private sector coal-based plants has slumped to 56.3 per cent in the nine months ended December 2016 from 83.9 per cent in 2009-10. Therefore at a time when bulk of the fresh capacity orders will come from the central and state utilities, such an extension in the timelines is positive for BTG manufacturers, experts say.

    The benefit does not end here. The CEA advisory also stipulates the BTG manufacturers will not have to furnish a Declaration of Joint Undertaking (DJU) if they meet three conditions — eight supercritical boilers manufactured or supplied in India by the company have achieved commercial operation; four such boilers should have achieved commercial operation for a duration of at-least one year; and performance guarantee tests have been successfully completed by any two boilers.

    Under the DJU clause, the domestic manufacturer has to furnish a guarantee from one of its collaborators, generally a large international technology company. In order to provide guarantees, collaborators take a higher share of the orders, impacting the gross margins of BTG manufacturers. As of October 2016, BHEL commissioned 12 sets of supercritical boilers and 10 sets of supercritical turbine generators.

    BHEL’s gross margins have historically been stable due to the company’s indigenization efforts but declined to 36.6 per cent in April-December period current fiscal from 37.7 per cent in the corresponding period previous fiscal on account of higher share of contracts executed under DJU clause as the order book shifted towards supercritical projects. “The order book of BHEL now has supercritical set contracts with DJU clauses and thus the gross margin expansion is some time away. The execution of the new projects without DJU clause will begin to reflect in the gross margins only once BHEL wins new projects,” Jain said.

    Other experts were cautiously optimistic about the impact of the new guidelines. According to Sabyasachi Majumdar, Senior Vice President at ratings agency ICRA, the CEA advisory will result in increased market share for domestic BTG manufacturers and easing of competitive pressure from low-cost Chinese suppliers in the long run. “However, the real benefit could take 2-3 years to materialize because of other factors including the pace of demand pickup in the sector which will determine PLFs and also the impact of the new emission norms being worked upon,” he said.

    BHEL reported a net profit of Rs 93 crore for the quarter ended December 2016 as compared to a net loss of Rs 1,101 crore recorded in the corresponding quarter previous fiscal. Total income of the company rose 17.5 per cent to Rs 6,461 crore during the quarter from Rs 5,496 crore in the corresponding quarter. The company’s order book position has shrunk 11 per cent to Rs 98,400 crore at the end of December 2016 from Rs 110,730 crore in March 2016. Kyle Brodziak Womens Jersey

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