India's BHEL Considers Floating of Subsidiary to Manage Power Generation Business

---

Researched by Industrial Info Resources (Sugar Land, Texas)--As part of its diversification plans, India's largest power equipment manufacturing company, Bharat Heavy Electricals Limited (BSE:500103) (BHEL) (New Delhi), is considering the floating of a subsidiary company that will manage power generation projects. The purpose of taking such a step is to consolidate the equity investments the company has made in power generation projects, equivalent to about 8,800 megawatts (MW), in different states in India.

According to K Ravi Kumar, former chief managing director of BHEL, the company has invested in 11 units of 660 to 800 MW each; once the company's capacity reaches 10,000 MW, it could set up a power subsidiary company. Ravi Kumar is confident that, given BHEL's size and experience, it will be able to run a power company efficiently, since many small-sized companies are successfully setting up power plants.

Industry experts, however, do not support the idea in its totality, since the entry of a state-owned power equipment supplier into the generation sector could affect the competitive bidding process that is usually followed while procuring equipment for the projects. A senior analyst from an accounting and consulting firm disapproves of BHEL's plan, as the development likely means that all equipment orders will be awarded to BHEL without an international competitive bidding (ICB) process. Such a step does not bode well for the power sector. He added that the states concerned should question whether such a step would benefit them, and should ask whether awarding a supply contract to a joint venture partner is in their best interest. Awarding the orders to BHEL without following an ICB process would create a conflict of interest.

In May 2009, BHEL announced plans to invest more than $2.5 billion over the next four years and pick up equity in various power projects, besides increasing manufacturing capacity to an equivalent of 20,000 MW of power generation capacity. The company intended to source the required finances from internal accruals. In January 2009, the company announced plans to make an entry in the power distribution sector, as well as position itself as an independent power producer in a few global markets.

Since then, the company has committed to an equity participation of 26% in different supercritical thermal power projects in Karnataka, Maharashtra and Tamil Nadu, and plans to pick up similar stakes in projects in Gujarat and Madhya Pradesh. BHEL signed separate joint venture agreements with state-run Karnataka Power Corporation Limited (Bangalore, Karnataka) and Tamil Nadu Electricity Board (Chennai, Tamil Nadu), and a memorandum of understanding with Maharashtra State Power Generation Company Limited (Mahagenco) (Mumbai), under which the partnerships will set up seven 660- to 800-MW supercritical units on a build-own-operate basis. Land for the projects in Karnataka and Tamil Nadu already has been acquired, and applications for coal blocks have been made. Five of the seven units are in advanced stages of completion. Four similar, but smaller, units are being planned for Gujarat and Madhya Pradesh.

The projects envisage a total investment of more than $10 billion, of which 80% will be financed by debt and 20% by equity. BHEL and each state will be investing more than $578 million, while the remainder will be sourced from financial institutions.

Another reason driving BHEL's decision to enter the power generation sector could be the fact that it is facing intense competition from private suppliers. According to statistics released by the Central Electricity Authority (CEA) (New Delhi), BHEL is involved in only 59% of the thermal power capacity commissioned, or expected to be commissioned, during the ongoing 11th five-year plan period, 2007-12. During the 10th plan period, BHEL had a share of close to 80% of the supply market. Private suppliers, which include Chinese businesses, are accounting for a 41% share of the supply market.

It has been observed that private power-producing companies, as well as state-owned developers, are awarding equipment supply contracts to private players after following the requisite ICB procedures. This is a far cry from earlier days, when BHEL almost monopolized the power equipment supply market in India. While BHEL is expanding its capacity, private players are following suit and competing strongly with the state-run company. Of the 40,000 MW of power equipment that will be manufactured during the next four to five years, BHEL will be accounting for only about 5,000 MW. The private sector will be supplying 35,000 MW.

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.