Capital goods cos must focus on exports: BHEL

Capital goods companies have of late started focusing more on exports than domestic sales. The reason behind this is the low demand in Indian markets, says K Ravi Kumar, former chairman, BHEL.

There is more demand for gas turbines, heat recovery steam generators, etc abroad than there is in India. Furthermore, demand is unlikely to come from the domestic space in the two quarters too, Kumar explains.

“Last year's order book position itself is a good challenging proposition, but as far as exports are concerned, there is a huge market abroad, especially in Africa, West Asia and Indonesia, Philippines,” he adds.

Hence, capital good companies like BHEL, Larsen & Toubro and BGR should concentrate more on exports now.

Also read: See L&T's margin dipping in FY14; Rs 970 tgt price: Kotak

Below is the edited transcript of Kumar’s interview to CNBC-TV18.

Q: How has there been a complete change in trend within the capital goods space considering that there is a lot of focus on export orders versus domestic orders? We have seen that happen with Larsen and Toubro (L&T), we have seen that happen with BGR Energy also who spoke to us a couple of days earlier. What is the sense that you are getting and why is there a complete shift towards the exports versus the domestic business?

A: As far as the capital goods sector is concerned, the export sector holds lot of promise. It expands volumes. If one sees the size of Dongfang Electric or Shanghai Electric in China, they manufacture close to 40,000 MW of power. So, it is necessary that we export to other countries.

If you see, there is a very good export potential as far as the Middle East is concerned. Gas turbines are in good demand. Gas turbines are being imported and there is a lot of potential for heat recovery steam generators (HRSG), steam turbine in the downstream cycle, civil and other works

In Africa there is a demand for small rating sets. Upto 200 MW, there is a big advantage there, that is why there is a 46 percent rise in exports for L&T compared to 27 percent overall order growth.

In Iraq, BHEL had done four units and BGR has got an order for four units, but there is a very high potential which is now being almost taken by Chinese companies. So, it is necessary that capital goods equipment manufacturers like BGR, BHEL and L&T should concentrate on exports in a big way because this year I do not find much orders coming in the domestic sector.

Q: Why have the domestic investments not taken off? There has been Cabinet Committee on Investment (CCI). Even after that we have not see too many investments especially in power sector and why do you think that will continue to be the case over the next 6-12 months?

A: What is happening is that there are a lot of measures which have been taken. A Rs 2 lakh crore restructuring package has been done for discoms. There is a tariff revision by various state boards. Coal pass-through has been given and two Ultra Mega Power Projects (UMPP) have been advertised. There is a rupee depreciation to the extent of about atleast 15 percent and a five percent custom duty.

Now, domestic equipment has also been made mandatory for UMPPs. So, these are good signs, but I do not think that this will materialise into order in the next two quarters as they are going to be very tough for indigenous companies. Last year's order book position itself is a good challenging proposition, but as far as exports are concerned, there is a huge market abroad, especially in Africa, West Asia and Indonesia, Philippines.

We can also export power to Bangladesh. There is a demand in Bangladesh for gas turbines and similar is the case with Sri Lanka. So, I think they should use this opportunity.

The Solapur Raichur line is ready, but still a lot of power can flow from western grid to southern grid. There is a very high demand in southern grid. All these things will happen in the next financial year. Probably 2014-15 will be a good year for capital goods industry as far as the incremental orders are concerned.

As of today, the big companies are having enough orders for this year, so they should consider export orders for next two quarters and then come back to indigenous equipment for the next financial year.

Q: If in case there is more concentration on the export front versus the domestic orders how much of a compromise do you think the companies have to take on margins? L&T did hint that they could face increased employee costs going forward because of high deputation costs etc. and that international orders do definitely work on a lower margin versus domestic orders. How much for margin crunch would you expect if in case this trend does continue?

A: The company is sourcing globally. The revenues are also on the dollar side. You have to have competition and you must have enough vendors. The location of vendors to work in Iraq, Libya are extremely difficult.

These are all tough markets. It is not like Europe and US where it is very clean and people want to work with civil contractors. If one sees the countries where L&T or BGR or BHEL is getting orders, they are all tough markets for example, Libya, Iraq, Indonesia and all such places.

It is necessary that there must be enough civil contractors. There has to be good port connectivity, location of civil contractors, location of cement, steel, etc. It has to be seen in a very big way. So, there is going to be a challenge. It is not that easy to execute orders abroad, but at the same time, I feel the Indian companies should concentrate on exports, especially on the gas turbine side, because in India there is not much gas.

The gas turbine orders have almost dried up and small power stations are also not coming up in India, because it is not economical to have a 135-150 MW in India, but these are very economical in South-East Asia and also in Africa.

I think there is a segment available in Africa, west Asia, Indonesia, Bangladesh and all that. So, we should use this segment. In India we should concentrate on big projects, 500-660 MW. Furthermore, I am expecting that two UMPPs will be ordered in first quarter of next year. It takes about 9 months to get the orders and it will come in first or second quarter.

Solar energy, wind energy is catching up in a big way in India. These will be from western region, so there will be some demand for electricity also. As far as India is concerned the power developers are faced with problems of clearances and also land acquisition and coal linkage, though coal prices have come down little to take coal to the site is a real problem in India.

We need ports, connectivity and all that. There are few developers who have bid in fixed price contracts for 25 years, they have executed the PPA and if they do not get a revision they are not interested and there are very few players in the power sector, then it is very difficult for private investment to come in power sector in this financial year.

In the next year probably private sector investment will come. This year investments may come from State Electricity Boards and also from National Thermal Power Corporation (NTPC) and Damodar Valley Corporation (DVC).

I think the indigenous manufacturers should concentrate on government orders, public utility orders and then concentrate on these private sector orders next financial year.