The Central Electricity Authority (CEA) advisory on indigenous manufacturing of supercritical equipment could lift profitability of domestic boiler turbine generator manufacturers, according to India Ratings.
"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 advisory is positive for BTG manufacturers in two aspects. First, CEA has extended the advisory dated February 2, 2010 for three years to October 2018 from October 2015.
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.
The private sector is free to choose the BTG supplier, it said.
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.
CEA has also advised that in the event a BTG manufacturer meets three conditions then there will be no need to furnish a DJU.
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.
The three conditions that need to be fulfilled include eight supercritical boilers manufactured/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 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.
The order book of BHEL now has supercritical set contracts with DJU clauses, thus the gross margin expansion in India Rating's opinion 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, it said.
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.
