BHEL puts up good show despite order concerns

A healthy set of numbers from BHEL for the September quarter belied concerns of any near-term slowdown in the power equipment maker's earnings growth.

Aided by strong execution in the industrial segment, sales and net profits for the quarter expanded 24 per cent each over a year ago. Order book at Rs 1.6 lakh crore covered revenue in the financial year 2011 four times over.

BHEL's industrial segment — which makes capital equipment for sectors such as oil and gas, renewable energy and power transmission — buttressed growth. The segment's sales grew at a scorching 78 per cent over the previous year even as profits more than doubled, indicating high margins.

Delay in power projects as a result of coal linkages, poor merchant power rates and difficulty in financial closure of projects are the key issues afflicting all power equipment players today. BHEL has a few other concerns as well.

Aggressive pricing policies adopted by new domestic players as well as Chinese and Korean players have neatly coincided with independent power producers spending less on purchases.

Market share

As a result, BHEL's market share in the power-equipment business declined to 52 per cent in financial year 2011 from 59 per cent in financial year 2007.

It may remain tough for BHEL to hold on to market share due to four reasons: one, technology, once inaccessible to local players is now more readily available, thanks to tie-ups by domestic players with foreign companies. Two, the readiness of Chinese banks to fund equipment-sale transactions may mean cash-strapped power developers preferring Chinese equipment. Three, BHEL's equipment prices are reportedly 10-15 per cent higher than other domestic players, with the latter using aggressive pricing. BHEL losing out to smaller players such as BGR Energy Systems is evidence to this. Four, BHEL is set to lose its preferential status as supplier to the largest power producer NTPC and would soon have to bid competitively.

Is losing market share such a bad thing for a player which controls half the boiler turbine generator market? It could be.

Losing market share would mean losing some of the largest and most lucrative clients. And this would mean a possible deterioration in the order-book quality and a consequent hit on profit margins, besides concerns over getting paid on time.

That said, BHEL has been making a conscious attempt to expand to other segments. The industrial segment's growth demonstrates this.

Accounting for close to a third of revenues now, traction in this segment could be key to BHEL's growth and profitability in the coming quarters. In the power-equipment business, the dust has to settle to see whether quality reigns over pricing.