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Power equipments: Some hope at last? - Views on News from Equitymaster
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  • Jun 5, 2008

    Power equipments: Some hope at last?

    As was reported recently, engineering and construction major, L&T has outbid power equipment heavyweight BHEL for Andhra Pradesh Generation Company's (APGenco) Krishnapatnam power project. The company has put in a bid of around Rs 15 bn for supplying turbine generator set to the 1,600 MW plant (2 units of 800 MW each) whereas BHEL's bid was around Rs 20 bn. The total cost of the project is Rs 84 bn (Rs 53 m per MW). The tender is for supply of turbine and generator set for the supercritical thermal power project, which was planned to be the first supercritical thermal project to be commissioned in India.

    Incidentally, APGenco had invited bids last year for which BHEL was the sole bidder and none of the other players showed any interest due to capacity constraints. Subsequently, the former cancelled the bidding process on the ground that it might end up paying a higher price to the latter. The company decided to go for re- tendering. This time, it decided to issue three separate tenders for supply of the boiler, turbine and balance-of-the plant (BoP, which includes all the engineering and supply of subsystems - excluding the turbine and generator - required for efficient operation of a power plant). This was in departure from its earlier strategy to award a turnkey contract to a single vendor for the project. The bids for turbine generator set were submitted on Tuesday, where L&T emerged as the winner.

    India's first supercritical project
    The Krishnapatnam project would be the first contract given to a non-BHEL domestic manufacturing company. We believe that it is a very significant development, which would kick-start L&T's power equipment manufacturing programme. Also, in a scenario where almost all the big power equipment players are booked for next 3-4 years, having one more manufacturer will help to keep the government's power capacity addition programme on track.

    Why equipment supplies shortage?
    Companies like Siemens are booked till FY12. BHEL's order book at the end of March 2008 was almost 3.5 times its full year FY08 sales, the highest ever. Also international suppliers like Dongfang and Shanghai Electric are booked for the next 2-3 years. They are also seeing the highest order book levels ever. There appears to be worldwide shortage in the generation equipment capacity. The demand for power equipment in China, India and other parts of Asia has raised the total demand for new equipments to about 120,000 MW per year. Also there is a replacement demand of about 40,000 to 50,000 MW per year. With the global capacity of power equipments at around 180,000 MW, manufacturers are likely to find their order books full at least in the medium-term.

    As far as India is concerned, over the past two years, there have been talks of promoting one more equipment manufacturer besides BHEL, and L&T was chosen to be the one. The company is coming up with generation equipment capacity of 3,000 MW per year to start with, and has formed a joint venture with Mitsubishi Heavy Industries (Japan) for manufacturing of supercritical generation equipments (boilers, steam turbines and generators).

    With BHEL also expanding capacity to 15,000 MW per year by 2009, there is hope that the country is likely to see some acceleration in the generation capacity addition. This will be a big positive for the overall power scenario.



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