BHEL: Down But Not Out

"Instead of parallel planning we went on a serial planning mode in power sector"

State of Indian economy is not a secret any more as in last 2-3 years GDP growth has dropped from whooping 9 per cent in 2010-11 to just around 5 per cent in FY13 and this fiscal it is slated to drop further to under  5 per cent. One of the worst hit sectors by this situation is the capital goods segment, which is facing acute crisis in terms of order inflow, liquidity crunch, demand subduedness, increasing competition and above all rising interest cost. Situation for Capital goods is so bad that profitability of big players in the market has gone down heavily. Public Sector major Bharat Heavy Electricals or BHEL is one such company, whose net profit in FY13 declined for the first time since 2000-01. The seriousness of the situation can be gauged from the fact that BHEL’s CMD B P Rao has been given ‘strategically important’ extension of 2 years by the government as nobody wanted to take any risk in the current global downturn. Importantly this is for the first time any CMD has been given such extension but as Company presently moving on the path of diversification, Rao is considered as a best brain to steer the turbine major through this troubling times. To assess the situation and how BHEL is gearing up to face the challenges, DSIJ decided to do a deep dive into company’s disaster management plan. 

Power Sector is a major concern

If we talk about the total revenue of the company then BHEL earns major chunk of its topline from the power equipment category, which ranges from 70-75 per cent share in the revenue while industry segment contributes the rest 25-30 per cent. In a flamboyant situation where GDP is rising and demand for power is robust, this usually translates to strong performance, be it topline, bottom line and order inflows as happened in 2010-11, which was the best year for BHEL. “During FY11 order inflows from power equipment category was to the tune of 25000 MW per year and out of this BHEL received orders worth 17000 MW but due to sluggishness in the economy order inflows came to 8000 MW in FY13,” informed Rao. “Current situation is that upto 2nd quarter in the current fiscal no project got finalized,” he added.  

This situation is taking its toll on the company’s performance as it has build large capacities in last 5 years and jacked up its capacity to 20000 MW by FY12 from the earlier capacity of just 6000 MW. Now due to less order flows coupled with bleak demand and liquidity crisis this strength became the weakness for the company. Till Q2 BHEL had an order booking of 102000 MW order inflows, which is a cause of concern for the company. 

Dream run came to a sudden halt due to various problems related to fuel supplies, environmental clearances, land acquisitions for the projects, stalled projects and last but not the least sluggishness in the demand for power from the industry. This has really dented the demand of equipments from power sector, putting the capital goods companies into soup. Rao critically defined the current situation saying, “We have to understand that when GDP growth goes down the first sector gets affected is capital goods and again it will be the last sector that gets revive when GDP growth comes up to positive territory as growth in the other sectors like consumer goods, power, automobile etc. becomes the demand for capital goods.” 

What is the way out regarding the current scenario of company?

Current situation certainly seems serious for the capital goods category but there exists’ a silver lining in the dark clouds in terms new projects coming up and new initiatives taken by the government to pass stalled projects. Creation of CCI is a positive development and it has cleared some of the projects both from the perspective of environmental clearance and block allocations. This is making some movement in the power sector in terms of projects as NTPC has come out with North Karanpura power project, that was held up for so long and it was cleared by CCI in its first meeting. “Going forward I can see that many of the projects will come now as CCI has set the ball rolling, but when will it come back to the FY11 levels is very difficult to say. It needs lots of reforms in the power sector like distribution reforms where tariffs are in line with the cost as well as solutions to the environmental and land acquisition issues,” informed Rao optimistically.

Also if India has to grow and want to become financial powerhouse then it certainly needs power. As per the integrated energy policy also we would need 8 lakh MW of power by 2030 and for that we need to put 1.5 lakh MW capacities in five years time. Experts also believe that if India wants to grow at 8-9 per cent then power sector has to grow, as without power we can’t grow to those levels. In fact if we look at the contribution services sector to the economic growth then around 60 per cent growth came from services and manufacturing remained laggard. “We have to understand that for future growth manufacturing has to start contributing now and for this we need power,” informed Rao. In fact manufacturing policy of government also aims at bringing manufacturing contribution to GDP from 16 per cent to 25 per cent of GDP by 2025. So if that has to happen you need lot of power.
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The way things are placed it seems that new government at the centre can bring a sea change in the situation and as more demand for power would be there power sector is slated to grow again at 7-8 per cent but it in may take 2-3 years as infra projects usually takes long time to get commissioned. “Infrastructure is not such segment where you do stimulation today and you will see results tomorrow. It is not possible in infra as it takes long period,” quipped Rao. 

Diversification is the key

It seems that BHEL is using this testing time to prepare itself for future. For this company is seriously focusing on diversification into new segments, gaining more expertise in terms of equipments manufacturing and improving upon quality. Company has chalked out a plan for diversification into sectors like Transportation, Renewable, Transmission, water related equipment and Defence. Currently 25-30 per cent revenue comes from industry segment but company wants to develop its capabilities to jack its contribution. 

Firstly company has big plans for transportation. For this company has signed a JV with Railways to set up Bhilwara factory for producing MEMUs. It is also increasing its capacity in Jhansi facility for electrical modules. “Though we are a major player in transportation and 8-9 per cent of our revenue comes from it, we want to take our performance to higher levels and we are gearing up for that,” quoted Rao. Second major thrust area would be Renewable energy and company is all set to become a major player in that. In line with Jawaharlal Nehru Solar Mission to establish 1 lakh MW of solar energy capacity by 2030, company has erected a one of its kind plant in the country to produce Photovoltaic Systems that can produce Polysilicon wafers. Along with Hindustan Salts, BHEL is also participating as a developer (with a minimum equity of 26 per cent) in an ultra mega power project of solar energy. “BHEL has conceived a project 4000MW and we are ready to do the first phase of 1000 MW along with 5-6 partners, including Solar Energy Corporation, Power grid and SJVNL,” informed Rao. Already 16000 acres land has been designated and project can come by FY17. Company is also aggressively focusing on Defence equipments as this sector is now opened up for domestic vendors. All in all diversification exercise is going in full swing and company may see increasing revenues coming from segments other than power in coming years.

Demand for power is the real worry

Of late the latest and biggest worry for capital goods segment, which evolved is the subdued demand of power due to sluggishness of economic growth and nobody in the sector has foreseen it. Current power demand in the country is at 4 per cent due to slackening in the industrial activity. As industries are shut down and distribution companies became bankrupt, nobody is there to buy power. Even states now prefer to go without power. Demand levels came down so drastically that even the existing capacities are backed down; Generators like NTPC is now saying that 8-10 per cent of their capacities are idle. “This is an irony that on one side we don’t have power in many cities and 12-13 hours power cut is there and on other side you don’t have demand for power,” stated Rao.

Demand is very crucial as unless GDP growth revives and existing capacities get utilised, only then new capacities would be asked for. This is applicable to any industry be it power, cement, steel etc. “If you see the demand situation is also impacting the investment scenario as investors are now shying away from the power sector as they are concerned about future revenue,” Rao added.