Challenging times ahead for BHEL

Written by Subhash Narayan | Updated: Feb 6 2014, 08:50am hrs
Revenues at Bharat Heavy Electricals Limited (BHEL) could slip to less than R40,000 crore in FY14 from R48,400 crore in FY13 with net profits estimated to fall to less than R3,800 crore from R6,500 crore. Order inflows have been sluggishtill

December, 2013, the PSU had hit just R11,500 crore or about a fifth of the target for the year. This comes on the back of a 35% fall in the order-book over the last two yearsstanding now at a little over R1 lakh crore. BHEL has also piled up huge receivables as power projects are slowing down or not taking off. Chairman and managing director B Prasada Rao tells Subhash Narayan that BHEL might continue to have a poor run for a couple of years.

BHEL is seeing poor order inflows as generation projects are not just getting delayed but also shelved as promoters no longer want to set them up...

We get business if there is investment and if there is no investment, there's no business. But it is not only power that has been impacted, there is no capacity expansion in steel or cement and road construction has slowed down, as has construction. We foresee the current year and the next one as challenging for BHEL but we will have to go through this period of pain. However, we are using this time to see that our internal processes becomes stronger and that we become more cost competitive. We are also trying to reduce the cycle time so that when business resumes and new orders come in, we are able deliver faster than we are doing now.

Sluggish order booking seems to be coinciding with a time of high outstandings estimated at close to R40,000 crore.

It is true that receivables are still a problem because banks are not releasing funds for projects. The high outstanding receivables situation is a challenge that has forced us to look at all projects, on a daily basis, and evaluate whether customers are able to pay. We are applying pressure on our customers to pay quickly and have stopped work on projects where outstanding payment has reached a certain limit. We are also evaluating the cash position of companies beforehand to schedule deliveries. Both private and public sector companies are facing payment problems as banks have become cautious about releasing money. There are very few developers who have deliberately delayed our payments. One solution could be that banks start paying us directly while releasing the loan to a project developer. While the Power Finance Corporation (PFC) and the Rural Electrification Corporation (REC) have started doing this on a case-to-case basis, State Bank of India (SBI) is still reluctant to start this mode of payment.

Do you feel that the number of infrastructure projects cleared by the Cabinet Committee on Investment (CCI) could help reverse the fortunes of companies like BHEL

The decisions taken by the CCI will take some time to show actual results on the ground, which is why I have said that the next two years, too, shall be challenging. We expect that bids for about 10,000 MW of capacity would materialise soon. In addition, equipment ordering for two ultra mega power projects in Odisha and Tamil Nadu could also come in 2014.

Could some of these materialise in the current quarter and shore up company's revenues which seem likely to miss the target

Decisions are getting postponed. So, I would not like to guess by when these orders could materialise. It is true that this year will probably be the lowest in terms of orders. In 2010-11, orders worth 25,000 MW were finalised and we got 17,000 MW of it. But overall, orders fell to 4,000 MW in 2011-12 of which BHEL got 2,800 MW. In 2012-13, orders increased to 11,000 MW and we got 8,000 MW. This year, we have so far got orders from only Neyveli and have recently emerged as topmost bidder for NTPC's 2,000 MW North Karanpura project where BHEL will be doing engineering, procurement and construction (EPC). If this order is finalised soon, we could end the year 2013-14 with orders worth 3,000 MW.

There seems to be a lack of demand for power from states. This is serious as states' refusal to buy power would put a question mark on several proposed power projects and ultimately hit BHEL badly...

This is a momentary problem as it is imperative for India to achieve 7-8% growth levels and, to achieve this, power is required in plenty. We have to understand at what cost the state utilities are not buying power. There are power cuts in some states of upto 12 hours a day. Industries in Tamil Nadu are suffering and face closure due to power-related issues. The question is whether will that situation sustain and for how long. We need to create jobs and for that, we need industries and adequate power supplies.

Is BHEL diversifying to prevent a bad run in the power sector from impacting its operations in the long run

I feel that transportation is the next growth area for company and it is here that we are working extensively with the railways to meet all their requirements of electrics, control systems and EMU coaches. We are also expanding the capacity of our Jhansi plant. The company has also embarked on new initiatives on the renewable energy side. We are getting into manufacturing of raw material (solar wafers) that aid production of solar cells with viability gap funding support from the Clean Energy Fund. We are also heavily investing in R&D with an investment of R1,258 crore last year which is 2.5% of our sales. The company is also expanding its portfolio of defence products.