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Divestment is the key... - Views on News from Equitymaster

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Divestment is the key...

Jun 10, 2000

What would you call a company operating 12 manufacturing facilities across the country manufacturing transformers, traction motors, thermal sets, locomotives, gas turbines, boilers and boiler auxiliaries, wind mills, heat exchangers, insulators, capacitors, compressors, oil field equipment, power devices, defence equipment, control gears, light aircrafts..? Whew! A behemoth, a super company, a giant. Simply put, the company in question is Bharat Heavy Electricals Limited or BHEL, India's largest engineering enterprise and one of the major power plant equipment manufacturers in the world. Consider BHEL's FY2000 performance. Highest ever order inflow, at Rs 72 billion, despite depleted market and operating under intense competitive pressure in domestic and international markets. This comprised single largest order for main equipment for 4x500 MW Talcher thermal power project, bagged against international competitive bidding. Seventh consecutive order for a 120 MW unit for expansion of NALCO's captive power plant at Angul. India's largest capacity AFBC Boiler (2x165 tonnes/hour) order for a captive power plant in Madhya Pradesh.

Key pointers
Rs million FY99 FY00
Orders Inflow 58,350 72,140
Turnover 67,946 66,200
PAT 5,446 5,250
NAV per share (Rs) 126 135
Generating capacity added (MW) 2,754 MW 3,582 MW

Its overseas business comprised of largest ever export order for 2x159 MW ISO gas turbine generating units from Iraq, turnkey orders for large size gas turbine based power plants (124 MW) from Oman and Bangladesh, so far the forte of a few companies from the developed world. That's not all. A maiden entry in Azerbaijan, with an order for a hydro generator package and highest rating hydro sets (with Pelton turbines) order for 6x170 MW Tala - the largest hydro power project of Bhutan added to the feathers in its cap.

To top it all, BHEL bagged the top exporter award for outstanding export performance for the 11th year in succession from amongst public and private sector companies in India.

Based on all this, one would have expected the company to be a darling of investors and fund managers. Instead, the stock has been hammered to it lowest ever lows in the recent months. The company has reported staid earnings of Rs 5.3 billion on a turnover of Rs 66.2 billion in FY2000. This is marginally lower than its FY99 earnings of Rs 5.4 billion on a turnover of Rs 67.9 billion. Earnings Per Share (EPS) during the year was Rs 21.4 (22.0 in FY99). The only shining star in its FY2000 results was physical exports, which jumped to Rs 3,300 million from Rs 710 Million in FY99. It currently trades at a price to earnings (P/E) multiple of 6.1 (14.4 times in FY99).

Being a Public Sector Unit (PSU), the company is subject to various rules and regulations, which act as a hindrance in its efforts in becoming a dominant player in the world markets. Its employee productivity is low due to its bloated workforce of 60,000 employees. Being a PSU, it cannot easily retrench these employees, thus making it lose its competitive edge. In FY2000, employee costs constituted almost 21 percent of its turnover and about 23 percent of its total expenditure.

In the wake of all this, BHEL finds it increasingly difficult to maintain market share in the face of competition from international majors like Siemens, ABB, Cogentrix etc. who have global experience and access to large technical and financial resources.

While no one doubts the technical capabilities of BHEL, investors feel that the company has spread its wings too wide. BHEL currently manufactures almost all the components for power generation and transmission equipment in house. The company is thus unable to exploit the cost savings that would arise on outsourcing components, while it could concentrate on assembly and design, which will add more value to its bottomline.

BHEL is the leading equipment supplier for power generation in India. It has so far supplied generating equipment for 65% of India's total generating capacity. It was expected that with the initiation of power sector reforms in India, there would be substantial jump in investments into this sector, which will benefit BHEL. This has yet to happen, mainly due to the regulatory hurdles and the weak financial health of the state electricity boards, which has adversely affected growth of the company.

All said and done, it does not imply that all is over for this engineering behemoth. BHEL is taking steps to improve overall efficiency and productivity. The company through its voluntary retirement scheme has been able to shed about 8,000 workers in FY2000. Moreover, the company has entered into technical tie-ups with various international companies like Babcock Borsig Power GmbH, Germany - one of the technology leaders in once through boilers and also with Apparatebau Rothemuehle Brandt + Kritzler Gmbh, Germany, for the manufacture of state-of-the-art pollution control equipment called 'Fabric Filters'. It has also tied up with Siemens to carry out renovation and modernisation of power plants in India. This business has large scope in India, given the existence of a large number of old plants and the generally low capacity utilisation levels due to technological constraints.

Divestment by the government is also in the offing. Once that goes through, there will be nothing stopping this Indian engineering wonder.

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