After taking into account a tight macro-economic environment, Bharat Heavy Electrical Ltd (BHEL) has given conservative order inflow guidance at 14,000-15,000 megawatt (MW) for financial year 2012-13.
The state run company had missed its FY12 order guidance by 64% to Rs 22,096, registering the biggest drop in ten years.
The company's, chairman and managing director B Prasada Rao, however says that he expects the NTPC's 800 MW order within a month. Rao is confident of being able to face competition from China and has been able to offer competitive prices competition from Chinese manufacturers.
However, going ahead, key concerns like slowing order inflow, heightened competition, and margin erosion due to inflationary pressure remain for the company.
Meanwhile, earlier this week, the company has reported 21%, year-on-year rise in the March quarter net profit to Rs 3,380 crore Net sales increased 7.5% to Rs 19,259 crore, YoY mainly due to increased capacities. EBITDA margin improved at 25.2% for the quarter as against 23.4% in a year ago period. Other income too went up to Rs 399 crore from Rs 368 crore YoY.
Below is the edited transcript of Rao’s interview with CNBC-TV18. Also watch the accompanying video.
Q: Let’s start with your order flow guidance for FY13. What are you expecting and guiding?
A: See the target what we have for this year is about 14000-15000 megawatts and most of these projects are coming from last year. In fact last year they should have got finalized but they didn’t get finalized. They are mostly in the central and state sectors. If you look at last year, only 4,000 megawatts were finalized.
Therefore, we are expecting all these projects could get finalized this year unless otherwise a major event happens, like it happened in Rajasthan, the cancellation of the tender itself, which was totally unexpected.
Q: Your FY12 order inflow was quite tepid. When do you see a serious pick up in investment activity and order flow inflows picking up for BHEL?
A: I am seeing that there are reforms happening particularly if you look at the distribution companies. In South India for example, the distribution companies have revised their tariffs. In North India also some of the states are already fixing revised tariffs. On the coal linkage side also the prime ministers office is taking interest to see that the coal linkage is given. Once all these factors are in place, the demand starts happening again.
I believe that if the country has to grow at 7-8%, power is an important segment. Today we have only 200,000 megawatts and the integrated energy policy predicted that we should have 8 lakh megawatts by 2030 if we have to grow at 7-8% GDP. All this will not happen if power does not happen. So, these reforms will therefore be a necessity and need of the day.
I am sure the government is giving enough attention to it. We expect things should happen, maybe this year it will pick up over last year and in next two-three years time we should come back to the normalcy of 2009-2010 levels where 24,000 megawatts per year was happening.
Q: Can you give us some update on the Rs 12,000 crore Rajasthan SEB order?
A: No actually I don’t have any information on that as to why the tender has been cancelled really. We are trying to understand why is it so. We feel the requirement is there, the coal linkage has happened; environment clearance has been given, so I don’t expect the project to be dropped. The project will happen. Probably there will be a re-bidding. We are trying to se what is the real reason for this.
Q: There is also talk about a potential delay in the awarding of NTPC’s 800 megawatt tender. Are you expecting any kind of delay? Have you heard from them?
A: They are now waiting for environment clearances. For example, the two projects which we are getting in Orissa, Gajmara and Dalipalli, I am expecting to get clearances within a month or so.
Q: L1 orders on NTPC tenders have been very aggressive. Do you think BHEL’s margins from NTPC might be under severe strain whenever the orders flow in?
A: This has been the case always. There is always a competitive price in the market. NTPC bid is not a unique thing. We have been facing this kind of market and competition and we have been winning orders against competition. Margins are always driven by market prices.
We have always worked towards optimization of cost, whether its material sourcing, whether it is material consumption or engineering optimization, localization of imported. These are all continuous initiatives in the company. We keep continuing to do that and that’s how we have been able to maintain the margins what you have seen in last four-five years. We hope to maintain that in future.
Q: What is BHEL’s competitive positioning in the market now vis-à-vis Chinese imports given that the rupee has depreciated about 20% versus the Yuan and the yen in the last one year?
A: Of course there is a difference in the Chinese prices and our prices because of the advantages they enjoy which is not very clear. However, we have been able to give very competitive prices like the NTPC bulk tender prices are very much in competition with Chinese prices. In fact Chinese prices are even more than that for the bulk enterprise. We have come to a level where the volume game is going up. About 20,000 megawatt capacity is also there with us and we are able to address the whole value chain.
We are also trying to enter EPC. We will be able to successfully face the competition particularly with respect to the performance of the equipment. Most of the customers have seen that if they compare the long term life cost, it is just not the initial cost. Many of the customers who are having Chinese equipment have come to us to help them come out of the situation they are in today because of the Chinese equipment.
So that way there is a realization and they are factoring in the valuation of the bids. Therefore, we will be able to effectively face the competition. On the side, we have also been working with the government to impress upon them that the import duties have to be there because that creates a level playing field. Domestic equipment manufacturing industry needs a level playing field with respect to the advantages what foreign companies have.
Q: What’s going on with the import duties? There was expectation in the budget of some protection for companies like your, that never came through. Is it still under consideration?
A: Well I can’t answer that question. You have to ask the government for that. However it has come to a stage where all the stakeholders have agreed that it is required - Power Minister, Commerce Minister, Ministry of Heavy Industries, Finance Ministry everybody has agreed, planning commission is more than agreed. With all these things it is only expected in the last minute that the budget probably didn’t happen and we are pursuing it.
Q: The market and analyst seem to be very circumspect about BHEL’s prospects going forward. In fact many of the analysts who cover your company think that you may not see any growth in the next two-three years. How do you address these concerns?
A: If we all believe that India’s GDP is going to come down then this kind of situation would happen. But I don’t believe that. We have integrated energy policy talking about 8lakh megawatts and it is needed for the country and to get that 7-8% growth. We are only at 2 lakh thousand megawatts today.
There are some issues within the environment for the power sector those needs to be sorted out. One must understand that in order for development of the country you need power. Therefore, power has a future always and we will see at what point this turnaround will happen.
My own belief is that we have come out of the bottom most point which was last year. This year will be better and next to next year should be better than 2012-2013. I believe in that and we will come back to normalcy. We will come back to the 2009-2010 levels in about two-three years time.