Bharat Heavy Electricals plans project financing arm - Immediate mandate would be to cater to project financing needs of its customers

Bharat Heavy Electricals Ltd plans to leverage its balance sheet and reserves to expand its role beyond equipment supplies to enter the financial services sector.Amid increasing competition in its core area of equipment supplies, the Rs 34,500-crore equipment major plans to set up a financing arm in the form of an NBFC (non-banking finance company) through a joint venture with a financial sector partner.

It will offer financing options to customers that place equipment orders with the state-owned firm, which had reserves of Rs 15,400 crore at end-March, 2010. BHEL has started the process to identify a strategic partner for the proposed venture. The immediate mandate would be restricted to addressing project financing requirements of state-owned firm's customers. The proposal for a dedicated financing arm hopes to build on a move already initiated by BHEL to pick up minority stakes in generation projects, especially those being set up by state-sector power utilities, where it is assured of equipment deals.

“With increasing focus on making BHEL a global giant, the NBFC can also play a major role in facilitating orders from overseas customers requiring equipment along with financing as well as the necessary financial advisory,” a company official said.

Groundwork under way

As a step in the direction of project financing, BHEL has committed up to 26-per-cent equity participation in thermal projects using supercritical sets in Tamil Nadu, Karnataka and Maharashtra and plans to follow the model in Gujarat and Madhya Pradesh. BHEL's dialogue with the States comes in the wake of lack of progress in talks with its largest customer, NTPC, for placement of bulk orders for its upcoming supercritical technology-based projects. BHEL has signed pacts with Karnataka Power Corporation Ltd, the Tamil Nadu Electricity Board and Maharashtra State Power Generation Company Ltd for setting up seven units of 660-800 MW for supercritical thermal power plants. Another four units of similar sizes are being planned in Gujarat and Madhya Pradesh.

The projects, requiring investments of over Rs 50,000 crore, are being financed on an 80:20 debt-equity ratio. While 26 per cent of the equity portion is being financed by BHEL, another 26 per cent will come from the State entities.

The move comes in the wake of BHEL's aggressive manufacturing capacity expansion plan that is under way, aimed at increasing its current annual equipment manufacturing capacity of 10,000 MW to 15,000 MW. Further, annual manufacturing capacity expansion to 20,000 MW is expected to be realised by March 2012. BHEL booked orders for supply and installation of generating equipment worth over Rs 59,000 crore during 2009-10.The company's total order book stood at around Rs 1,44,000 crore at the end of the last financial year.