BHEL starts new payment mode to plug into private sector orders

Bharat Heavy Electricals Ltd (BHEL) has introduced a payment mode specifically targeted at private power project developers.

The newly introduced ‘Usance' letter of credit (LC) allows project developers a grace period for payment to BHEL against equipment orders.

The new payment term offers better comfort to private players, who have been responsible for boosting BHEL's order books in the last couple of years and are scheduled to execute well over half the projects slated to come up in the next Five-Year period (Twelfth Plan). The move is being seen a counter to Chinese equipment suppliers, who have an advantage in terms of offering payment support to customers through low-cost China EXIM funding.

“We have introduced the Usance LC, which offers better comfort to project developers. There's been a positive response from the industry,” BHEL's Chairman and Managing Director, Mr B.P. Rao, told Business Line.

An LC, usually used in overseas shipments, is a bank guarantee issued on behalf of the buyer that the seller will receive payment on time.

For big contracts such as those executed by BHEL, an LC is an industry prerequisite for domestic orders too. A Usance LC is a deferred payment undertaking that is paid for a fixed number of days after loading of the consignment or presentation of prescribed documents.

For BHEL, there has been a sharp surge in orders from private firms in recent times, coming amid an increase in the private sector's contribution to the power capacity addition effort in the country.

In 2009-10, BHEL had secured its highest order book tally from private power utilities at Rs 33,787 crore — an over three-fold increase over the previous year. In 2010-11, in its utilities business, BHEL's private sector share was over 51 per cent. This would be even higher if its industry business segment was also taken into account.

Increasing competition for private sector orders, especially from Chinese vendors, is seen as a problem in the short term, especially in light of the funding option offered by them and lower upfront costs. Analysts, however, point out that BHEL would score over competition on account of its long-term structural business strength, especially in terms of lower lifecycle costs for its equipment.

This is buttressed by Bank of America Merrill Lynch's January report, which states that the “technical and commercial superiority of BHEL plants leads to its customer deriving 10 per cent higher free cash-flow to equity versus a Chinese power plant, even after factoring in 150 basis points lower funding cost of Chinese plants from Chinese EXIM.” The report points to there being “very little difference” between BHEL and Chinese delivery times, based on an analysis of deliveries of 40 plants of BHEL.

A recent JM Financial report has suggested that secondary fuel oil consumption of Chinese sets is 12 times more than the BHEL sets.

Despite an estimated 15 per cent initial savings on capital costs, the lifecycle cost is lower for BHEL equipment due to lower operational costs, better plant load factor and lower downtime, it states.