A dominant player in the power equipment business, Bharat Heavy Electricals (BHEL) has been a major beneficiary of the growing investments in the power sector, which is clearly reflecting in its huge order book. However, off late, there have been concerns building up with regards the slowdown in new order inflow and rising competition.
Also, margins have come down in the third quarter, on account of higher raw material prices and wage provisions, which are seen impacting earnings in 2008-09. In light of these events, Jitendra Kumar Gupta spoke to K Ravi Kumar, chairman and managing director, BHEL about his views on the same and the company’s future strategy.
Will the planned capacity addition of 78,000 mw for the 11th plan be achieved?
As per the planning commission report it will be about 60,000 mw and, as far as our orders are concerned we have about 40,000 mw.
What is the current order book and the average execution time? And, what sales growth is expected over the next two years?
Our current order book is Rs 1,25,000 crore with average execution cycle of 36 months.
In 2008-09, we are expecting sales growth of 25-30 per cent.
Out of the total orders, power accounts for about 80 per cent and, rest comes from the industrial sector where we want to enter into private sector transmission and transportation business in a big way. Going forward, the share of industrial sector will rise to 30 per cent. So far, demand has been good but, next year we will have to wait and see.
What is the status of capacity addition plan? And, what synergies will emerge apart from higher volumes?
The plan is on schedule. We will have manufacturing capacity of 15,000 mw by December 2009 and 20,000 mw by 2011. We are also investing in the supply chain, which will start showing by Q1FY10. Overall, along with the scale and advantage of supply chain, we will definitely have some cost advantages.
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We will ourselves manufacture casting and forging products, ramp up capacity for the seamless steel plant and will increase the number of vendors in other areas as well.
We have seen order inflow slowing. What is the current status?
This year we are closing 20 per cent higher than FY08, so I do not think there is any kind of slowdown in the power sector. Because there is a demand-supply gap of about 13 per cent and power is a political subject, everybody wants to provide power to the masses.
So, you cannot overlook the power sector and there is lot of demand coming from the rural sector for new connections. Even from the private sector, demand is not slowing down as we are still getting orders.
We have seen companies blaming the supply side for the slippages in power generation capacity? What is your view?
What is happening is people expect that once the foundation is given to us, the next day we should compress our activities at the site and try to reduce the delays made during the construction (basic structure) phase. But today, we are not able to do that, because the number of projects have increased, there is dearth of welders and technicians. Even the number of vendors is very less. So, we are feeling the pinch.
The delay is not limited to BHEL. We are not taking the credit, we are delaying, but the delays are much more in the case of other players. At least, we know the ground realities, but foreign vendors are finding it more difficult.
Can you elaborate on your execution cycle, how it has been in the past and how it would move in future?
The execution cycle depends on the size of the project. For 250 mw, we are able to complete in 32 months and for 500 mw in 39 months. In the last six years, our execution cycle has improved from 55 to 39 months currently. People are now expecting it to further come down to 36 months. But, considering the transport bottleneck and inadequate manpower we are finding it difficult.
One should also consider that out of the total 30,000-40,000 items required for a project, even if a particular item is not available sequentially we cannot continue with the construction. Also, suppose there are 50 vendors, even if one vendor fails it could lead to a delay. This is also a reason that we are now increasing our vendor base and making our policies flexible so that we can shift to other vendors.
Have the orders for the 12th plan started coming in?
Yes, so far, about 10,000-15,000 mw has already been announced. We have seen recently that NTPC’s tender was accepted and state governments are also going for super critical projects. The 12th plan will have more of super critical projects than subcritical projects. And, the work should start flowing in the next year in a big way.
What is your view regarding the emerging competition from import of Chinese equipments as well as domestic players?
As far as Chinese competition is concerned, for the sub-critical segment we are now in a comfortable position. Within the 600 mw and 300 mw models, there was a problem for a short period of time. But now, also since the quality of the equipment is not suited to the Indian conditions there is not much sub-critical work.
But, there is one sub-660 mw range where the Chinese are operating, let’s see how to beat that competition also. We are not a monopoly, but we have about 60-65 per cent of the market share, which is reasonable for us. Let them close their projects and run it and we will know the difference between our equipments and the Chinese equipments. In our case, the PLF itself, for 15-year old plant, is more than 100 per cent.
This is also a reason that people are now coming back to us. Regards domestic competition, I do not think anybody can become a 20,000 mw player (capacity wise) or can even establish the supply chain to become our competitor. Once we have the capacity of 30,000 mw along with latest technology and good supply chain, it would be difficult to compete with us, I would not say impossible. After all, we are interested in maintaining our market share of 60 per cent; let them address the rest of the market.
During Q3FY09, EBIDTA margins were down. What trend do you see in margins going forward?
Ours is a longer cycle – from raw material to finished goods, it takes about 9-10 months. July 2008 was the highest in terms of procurement of the raw material. So, that effect will be there, but it will come down. Our raw material price is coming down every month, so I think going forward we should be able to improve our margins. Also, the wage revision and gratuity provision will be provided in 2008-09.
How much wage provisioning is pending?
This year, we are providing about Rs 1,300 crore and so far, we have already provided Rs 650-700 crore. In FY10, we will not have such provisions. So, the employee cost in FY10 will be lower and commodity prices have come down. So, FY10 should be better. Also, by end of FY09, we will fully liquidate our inventory losses.
Any updates regarding Reliance Power (Krishnapatnam UMPP) and TNEB JV (super critical technology) projects?
Talks are still on with Reliance Power. For TNEB, we are now investing and have made the project report. We are acquiring land and REC has agreed to provide finance. We will be completing this project in 48 months.
