Bharat Forge Limited Plans Investment of $10.82 Billion in India's Power Sector

---

Researched by Industrial Info Resources (Sugar Land, Texas)--India's leading auto components manufacturer Bharat Forge Limited (BSE:500493) (Pune, Maharashtra), part of the $2.4 billion Kalyani Group (Pune), has announced plans to enter the domestic power sector. The company is likely to make investments of $10.82 billion within the next decade to set up facilities that will generate 10,000 megawatts (MW) of power. Bharat Forge, which manufactures machine and forged components, has identified locations in coastal Andhra Pradesh, Maharashtra, Tamil Nadu and Gujarat. Sources indicate that the Kalyani Group is focusing on reducing the company's reliance on its automotive components business. The proposed investment is part of the company's de-risking strategy. The total investment has been arrived at based on the average cost of $1.08 million per MW of power generated.

Company officials have stated that the first power project is expected to begin operations within a year. The plant is likely to be located in Maharashtra or Gujarat. A decision about the location is expected to be announced shortly. Bharat Forge, which plans to develop this project through a subsidiary, is expected to release an initial public offering (IPO) to fund the project. The company is also exploring the possibility of identifying a strategic partner.

For the September quarter, Bharat Forge and its subsidiaries, excluding Chinese operations, posted a total profit of $8.81 million, a decline from the $9.98 million posted in the previous quarter. The group has been undertaking a restructuring and resizing program at a cost of about $16.2 million. The company has identified the Indian power sector as a priority area for investments. Bharat Forge has 12 manufacturing facilities in six countries, including two plants in China, three in Germany, four production units in India and one each in the United States, Sweden and Scotland.

In a related development, Bharat Forge signed a joint venture agreement with Alstom SA (EPA:ALO) (Levallois-Perret, France) to participate in the second round of bidding for an equipment supply contract tender floated by power company NTPC Limited (BSE:532555) (New Delhi). NTPC invited bids for a bulk global tender worth $5.41 billion for thermal power plant projects in four Indian states. Bharat Forge is optimistic of securing orders of at least $757.5 million.

Earlier, Bharat Forge entered into a joint venture with Areva SA (EPA:CEI) (Paris, France) to produce equipment and components for Pressurized Heavy Water Reactors. The $216.4 million joint venture has identified sites in Mundra and Dahej in Gujarat to set up the production facility. The proposed 14,000-ton-per-year facility, which will also include a steelmaking unit and a forging press, will cater to the needs of thermal and nuclear power plants.

In the recent past, the Indian power sector has been attracting investments from domestic and international private sector companies and private equity investors. Experts have observed that this industry is burgeoning from a nascent market to a developing, maturing sector. India's power sector is becoming a key destination for private investments, with infrastructure funds of about $1 billion expected to be launched shortly. Industry analysts are bullish about growth in this sector. Exponential growth in power demand in India and the central government's continuous expansion and investment program have been cited as primary investment drivers.

Respondents in the recently published study conducted by the Associated Chambers of Commerce & Industry of India (ASSOCHAM) (New Delhi) and Ernst & Young (London, England) have rated the Indian power sector as the "Most Sought After Segment" for investment. Opportunities arising out of the demand-supply dynamics have made this industry very attractive for investments. The recent policy amendment by India's Central Electricity Regulatory Commission (CERC) (New Delhi), which allows private captive power producers to sell power through an open-access method, is also garnering interest from private players. However, CERC has made it mandatory that a captive power plant operator use at least 25% of the power generated for its own use. Investments in captive power projects are also increasing, as the cost of generating power is 25% to 80% lower than the costs involved in purchasing electricity from the national or a state grid.

Experts have indicated that despite several power projects facing delays because of environmental clearances and an acute shortage of coal linkages, the power sector is receiving domestic and global attention. Sustained fuel supply seems to be the biggest challenge in this sector. Sources have stated that while several private players have entered the power-generating sector, huge investments and timely execution of power plants are critical. Several projects that were allocated coal blocks have not attained financial closure or been commissioned. Recently, the government announced that it would resort to cancellation of coal blocks if companies failed to begin operations as per the stipulated schedule. By 2014, India is forecast to face a coal deficit of about 250 million tons per year.

In the next eight to nine years, India is estimated to require $250 billion in energy infrastructure investments. Through 2017, this sector is expected to witness average annual growth of 7.5% to 8%. Presently, the country has a supply deficit of 8% to 9%, with peak period deficits reaching 12% to 15%. The power industry is also facing hurdles in the areas of transmission and distribution, financing and manpower. According to the Manufacturing Association of Information Technology (New Delhi), in 2008-09, Indian industries had to incur losses worth $9.52 billion because of power outages. This loss accounted for about 5% of the nation's GDP.

Despite these challenges, many private sector players have shown interest in investing in the Indian power sector. There are more than 300 million people in the country without access to electricity. India's per capita power consumption is about 700 kilowatt-hours (kWh) per year, while the world's average world consumption is 1,000 kWh per month. During the Eleventh Five-Year Plan (2007-12), the government proposes to add 78,000 MW of new power generation capacity. During 2012-17, power-generating capacity in the country is expected to increase by 110,000 MW to 120,000 MW. Private sector investment will become critical for India to reach these targets.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy related markets. For more than 26 years, Industrial Info has provided plant and project opportunity databases, market forecasts, high resolution maps, and daily industry news.