"The recently issued CEA advisory with regard to indigenous manufacturing of supercritical equipment and doing away of the deed of joint undertaking (DJU) in case certain conditions are met is positive for the domestic Boiler-Turbine-Generator (BTG) manufacturers", said India Ratings and Research in a statement.
India Ratings believes the effect of the advisory will have a trickle down benefit on the profitability of the BTG manufacturers with a lag of around 1.5-2.5 years, as the order execution cycle for Bharat Heavy Electricals Limited is 36-48 months.
The earlier advisory had asked the BTG procurers (central and state power generating entities) to incorporate the condition of setting up of phased indigenous manufacturing facilities in the bids to be invited for supercritical projects by them.
The advisory is only applicable to the central and state utilities and is only an advisory which cannot be enforced on the procurers. However, India Ratings notes that most central and state utilities tend to fall in line with the advisory.
India Ratings believes that private sector participation will remain muted since they have been hit the most on account of muted demand and lack of power purchase agreements.
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, it added.
India Ratings believes that these conditions will be
fulfilled by BHEL and hence in its future orders, it will not need to furnish DJU which is likely to increase its gross margins.
Under the DJU clause, the domestic manufacturer has to furnish a guarantee from one of the collaborators, a large international technology company such as Siemens AG/Alstom.
In order to provide guarantees, collaborators have been taking a higher share of the orders, thus 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.
India Ratings notes that through this advisory, BHEL's gross margins in future projects can expand. However, the overhang of slow moving order book, high employee cost, lower ordering activity given the subdued PLFs, limited participation from the private sector and stretched working capital cycle will continue to weigh on the overall financial profile of the company.
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