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In January, state-owned Bharat Heavy Electricals Ltd (BHEL) said it was looking for partners to manufacture mounted gun systems for the armed forces. The Indian Army is expected to hand out a contract for such guns in the near future, and BHEL needs a technology partner to participate in the bid. The order is expected to be worth Rs 50,000 crore. A month earlier, it had formed a consortium with two other state-owned companies, Mishra Dhatu Nigam and Hindustan Shipyard, to build submarines indigenously. The consortium plans to jointly bid for the proposed P-75 (I) project of the Indian Navy, under which six submarnies will be built at an Indian shipyard at a total cost of Rs 51,000 crore.
Set up in 1964 and accorded the "Maharatna" status in 2013, this is an interesting diversification for the country's largest manufacturer of power plant equipment, especially as it comes after the National Democratic Alliance's call for "Make in India" and emphasis on locally produced defence equipment. Defence could very well trigger the next wave of manufacturing activity in the country, and that's why business groups like the Munjals of Hero, Kalyanis of Bharat Forge, Mahindra and Anil Ambani have shown interest in the sector. BHEL, which embodies everything what the Make In India stands for, too wants a share of this pie.
Some observers say BHEL wants to diversify into defence because its core business of power equipment is under severe pressure. One, the uncertainty over coal supplies has dogged the sector for too long. As a result, several projects have become un-bankable and investments have got stuck. Two, greater competition from China and new domestic players pose a challenge for BHEL even as some protection to the domestic companies has been given in the form of 21 per cent import duty on power equipment.
The power business contributes over 70 per cent of BHEL's revenue. The stress in power has begun to show in the company's financial performance. In 2013-14, its consolidated income at Rs 39,569 crore was 19 per cent less than the Rs 48,915 crore it had recorded in 2012-13. Even this year, so far its performance has been dismal: net profit at Rs 212.6 crore for the quarter ended December 2014 fell 69 per cent from Rs 694.8 crore in the same period of the previous year, primarily on lower revenue and operating income. Total income dipped 27 per cent to Rs 6,472 crore from Rs 8,926 crore during the period.
With the recent auction of coal mines, it is believed the logjam in power would get removed and the stuck projects would start to move once again, which could result in more orders for BHEL. "Once the coal issue is sorted out, (the situation) should improve. There is a realisation that power generation has to happen, otherwise Make in India and all these things will not happen. Particularly, the manufacturing focus of the country needs more power," BHEL Chairman BP Rao said in an investor conference earlier.
That might be true, but, by all indications, the company is not banking on the revival in power alone to boost its performance. That's why BHEL has forayed into non-power businesses like defence. The opportunity sure is huge: between the mounted guns systems and submarines, the orders could be over Rs 100,000 crore. To put it in perspective, BHEL's order book stood at Rs 103,700 crore at the end of the September-ended quarter and moved only marginally up to Rs 103,900 crore in the quarter ended December. Around 85 per cent of its orders come from the power sector, with the remaining coming equally from its non-power businesses and international operations.
Not new to the field
To be sure, BHEL is not a total stranger to the defence sector. It has been a supplier to the Indian defence and paramilitary forces for over 20 years now. It has a large infrastructure, including dedicated engineering and manufacturing facilities, at many locations to manufacture various types of equipment.
Apart from defence, the nuclear power sector too could provide an opportunity for the company to grow, even though not much has moved on the ground.
It also plans to leverage its contacts abroad for business. All told, BHEL has sold machinery and equipment in as many as 76 countries over the years. This includes, according to the company, its entire range of products and services, covering thermal, hydro and gas-based turnkey power projects, substation and rehabilitation projects, besides a wide variety transformers, compressors, valves and oilfield equipment, electrostatic precipitators, photovoltaic equipment, insulators, heat exchangers, switchgear, castings and forgings.
Another strategy being pursued by the company is to take equity to the extent of 26 per cent in some power projects, which will help it get orders. It has done this in Karnataka for two units of 800 Mw at Raichur owned by Karnataka Power Corporation. The company has made similar proposals to other states like Andhra Pradesh, Gujarat, Uttar Pradesh and Pondicherry. While investing directly in power projects, BHEL is, however, cautious that it should not be in competition to its own customers like state-owned NTPC.
According to the company, capital goods manufacturing being a late-cycle business, it will see some visible improvement only after few quarters despite the process of faster clearances set in motion by the government.
After three years of continuous declines in profitability, and the current year too turning out to be not good, the next year may be challenging for the company, especially since it may require investment in new businesses even as a steady flow of orders from the power sector may still prove elusive.
