L&T Eyes Annual Revenues of $750 Million Through India's Nuclear Program of 40,000 Megawatts by 2020

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Researched by Industrial Info Resources (Sugar Land, Texas)--A.M. Naik, Chairman of Larsen & Toubro Limited (BSE:500510) (L&T) (Mumbai), said in an interview that the firm is targeting annual revenues of about $750 million or more from projects in the nuclear sector. India's nuclear program is reportedly targeting an addition of 40,000 megawatts (MW) of nuclear power generation capacity by 2020. With 25% of the requisite technology and equipment likely to be imported, the total cost of implementing the massive program is estimated at $75 billion to $85 billion. Naik estimated the opportunity for the Indian industry at $53 billion to $63 billion over a period of 12 to 15 years, amounting to $3 billion to $4 billion annually. L&T is targeting 25% to 30% of this estimate, which amounts to $750 million to $1.2 billion in annual revenues. The firm's nuclear power business division currently contributes to 3% of its total turnover, and the company expects to raise this to 7% in the coming years.

India is aiming for an installed power generation capacity of 700,000 MW by 2032 with nuclear power accounting for 63,000 MW of installed capacity. Inflow of nuclear fuel and technology would first address the needs of existing nuclear power stations that are currently operating at less than 50% of their full capacities because of the nonavailability of fuel. India's 40,000-MW nuclear power program would be implemented subsequently and is rumored to comprise 10,000 MW of heavy water-based nuclear power projects and 30,000 MW based on other technologies. However, Naik said that it would take a fair amount of time to secure agreements with fuel and technology providers. International leaders in the nuclear sector including Westinghouse Electric Company (Monroeville, Pennsylvania), General Electric (NYSE:GE) (Fairfield, Connecticut), AtomStroyExport (Moscow, Russia) and Areva (EPA:CEI) (Paris) have been in talks with domestic companies, including L&T, and are bidding for developing nuclear reactors for the country's proposed nuclear power program.

Naik said the role of the Nuclear Power Corporation of India Limited (NPCIL) (Mumbai) will also need to be clarified upfront. It is yet to be decided whether NPCIL will have an active role to play in program management or whether it will only function as the future owner of nuclear power plants once they are operational. NPCIL is likely to open the bidding process for the nuclear program shortly. The firm has also announced plans to invest $14 billion to develop nuclear reactors.

Another issue that is likely to hinder the rapid implementation of the nuclear program is the cost factor. Naik estimates the cost of nuclear power at 1.7 times the current cost of thermal power. The capital cost of thermal power is currently about $1.25 million per MW of electricity. However, coal is available primarily in the eastern regions of India such as Orissa and, to a much lesser extent, in Beradi, Karnataka, whereas nickel lignite is available in Kutch, Gujarat. Upcoming coal-based thermal power plants are clustered mainly in these locations. At other sites, especially in the southern and western regions of India, thermal power projects are not economically feasible on account of costs incurred in transporting coal over long distances of 1,500 kilometers to 2,000 kilometers. In such cases, nuclear power projects have an edge over thermal power plants and are likely to be able to provide additional power to the national and regional grids at viable costs.

Naik also pointed out that the huge amount of capital investment required in nuclear power projects will make it inevitable for the Indian government to open up the arena to private-sector players. State-run firms are likely to be able to address only about 25% of India's nuclear power needs. This calls for an amendment of the Atomic Energy Act of 1962, which allows only those companies in which the Indian government has a stake of at least 51% to participate in projects in the nuclear power sector.

However, even as leading private sector players are gearing up to foray into the nuclear sector, there are several issues that need to be ironed out first. India will first need to firm up a policy of corporate liability to handle events such as accidents. This remains a sensitive issue in the country especially in the aftermath of the 1984 Union Carbide disaster in Bhopal, Madhya Pradesh. The government will also need to work on the tariff rates of nuclear power and not burden consumers with high electricity costs to compensate for the high costs of setting up nuclear power projects.

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