Higher import content hits Bhel's margins

Bharat Heavy Electricals (Bhel), the country’s largest power equipment manufacturer, is working on low margins when bidding to supply super-critical equipment for the upcoming ultra mega power projects (UMPPs) as it has to import a substantial amount of components from Europe.

Foreign competitors, especially from China, who have better economies of scale, offer higher flexibility while bidding for such projects. This competition has forced the state-owned entity to operate on low profit margins to take on the foreign bidders. Bhel said it will take another 10 to 12 rounds of bidding for the super-critical equipment to indigenise the import content.

“In ultra mega projects, we have a problem. The import content is quite high and the import is from Europe, where costs are higher,” said K Ravi Kumar, the chairman and managing director of Bhel, which has more than 50 per cent of the domestic market share.

The import content of a typical super-critical project accounts for about 35 per cent of the total material procurement and determines, to a large extent, the economic feasibility of any mega power project.

“Definitely, there is going to be some margin dip in the initial 10-12 projects, unless we totally indigenise the whole equipment. Though the manufacturing is the same as in the case of sub-critical segment, in the super-critical segment, I am working on lower margins, maybe 15 per cent gross margin against 22 per cent in the sub-critical segment,” he said.

The power ministry also believes that Bhel may not be competitive while bidding for super-critical equipment. “It is difficult for Bhel to compete for UMPPs because of the Chinese pressure,” said Jairam Ramesh, the minister of state for power. Domestic manufacturers like Bhel and L&T have been facing tough competition from Chinese manufacturers, who have been steadily eating into their market share.

So far, the two orders for supplying super-critical equipment to UMPPs have gone to foreign companies — Doosan of Korea and Shanghai Electric Power Company of China.

Industry experts also believe Bhel’s chances of gaining super-critical orders in the near future are bleak. “Two major constraints that will limit Bhel’s participation in the UMPP programme are its higher delivery timeframe and non-competitive quotes,” said a senior analyst of an accounting and consultancy firm.

When asked if the government is contemplating steps to help Bhel, Jairam Ramesh said, “We can’t do anything about it. Already, for the Sasan project, Reliance is importing equipment from China.”

For the Krishnapattnam ultra mega power project, Reliance has chosen a foreign company. “That (equipment supply contract with Reliance) is not taking place. We have other things to think about,” Ravi Kumar confirmed.

The government is planning to commission a total of 13 UMPPs in the current five-year plan period ending March 2012. It has already awarded three UMPPs in Mundra (Gujarat), Sasan (Madhya Pradesh) and Krishnapattnam (Andhra Pradesh). The Mundra project has been bagged by Tata Power, while the other two projects by Reliance Power.

The owner of the fourth UMPP, coming up in Tilaiya, Jharkhand, will be decided in December this year.