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BHEL looking at promising future

A. Srikanth

IN the engineering sector, the stocks belonging to the electrical and power equipment industry have posted the largest gains over the last fifteen trading days. BHEL and ABB have gone up by Rs. 41.05 and Rs. 28.90 respectively over the last fifteen tradi ng days.

Though the general engineering industry is still sluggish, liberalisation of the power sector is expected to result in Central power generating companies and IPPs enhancing their generating capacities. The Ninth Plan estimates a capacity addition of 40,0 00 MW in the public as well as the private sectors. This augurs well for the medium to long-term growth of power equipment producers. And going by the current valuations, the BHEL stock appears well set to reap the benefits.

The company's 1999-2000 performance has been lacklustre, with turnover declining marginally by 0.28 per cent to Rs. 6,902.90 crores and post-tax earnings falling by 7.85 per cent to Rs. 587.38 crores. The recent first quarter performance too has not been very encouraging. While the turnover has declined by 24.14 per cent to Rs. 931.11 crores, the post-tax earnings have gone down by 87.57 per cent to Rs. 2.02 crores.

The company is the largest power equipment manufacturer catering to both the utility as well as the non-utility sectors. The company's power division supplies equipment to both State electricity boards and Central power generating companies like NTPC, Na tional Hydro Electric Power Corporation and so on, apart from various IPPs.

The company has been able to maintain its order book position in the face of stiff competition from international players through its efficient cost structure and price preference. The company, along with Siemens (through Power Plant Performance Improvem ent) and with GE (through BHEL-GE Gas Turbine Services) provides services to modernise and maintain the power plants supplied by BHEL in the past.

The international players were able to exert pressure on BHEL as they offered extended credit and took up stake in the IPPs. Though BHEL is yet to take any concrete decision on picking up stakes in the IPPs to which it supplies equipment, it has started offering extended credit. The increase in overall competition, however, has had an adverse impact on the margins of BHEL.

During 1999-2000, while the operating profit margins declined from 16 per cent to 15.15 per cent, the net profit margins went up from 7.90 per cent to 8.50 per cent.

The sluggishness in the general engineering sector has resulted in a slow-down in the accumulation of new orders for BHEL. The share of equipment for the general engineering industry to the total turnover of BHEL has declined during 1998-99. With 1999-20 00 being no different, it is likely that the proportion would decline further.

BHEL's southern division executed the Rs. 1,545-crore Raichur fifth and sixth units (420 MW) of the Karnataka Power Corporation in record time. This was funded totally by non-Plan resources and without any foreign assistance.

This is the first project of its kind to be structured on the lines of independent power projects with totally Indian funding, technology and equipment. Till now, BHEL has provided supplier's credit of over Rs. 2,000 crores to a number of

projects in the country. Given the bright prospects for the company, investors can hold on to the stock.