Bhel disinvestment: A pipe dream? - Views on News from Equitymaster

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Bhel disinvestment: A pipe dream?

Nov 17, 2000

India’s No.1 engineering and power generation equipment company, Bharat Heavy Electricals Limited (Bhel), has had a string of negatives in the past one year. For the half year ended September 2000, the company recorded one of its worst performances in recent times. Its profits fell by 90% during this period. As a result, the company’s stock touched its all time lows of around Rs 89. However, in the past one month the stock has moved up by around 25%. One of the reasons for this is that Bhel is expected to put in a much better performance in the second half of FY01. There could be however, another reason for this improvement: Disinvestment.

The government has recently announced a string of disinvestment propositions. These include cutting stakes in MTNL, VSNL and more recently, public sector banks. This time the government does sound like that it means business. Why Bhel comes to mind is because, it was in the original list of disinvestment hopefuls. So for all practical reasons, the government is likely to give Bhel’s divestment a serious thought.

However, unlike other PSUs, Bhel’s disinvestment will not be easy. The company operates from 15 manufacturing plants across India and manufactures everything from compressors to light aircraft. It is precisely this width of operations that might give its divestment plans a hitch. There is no company atleast in India, which can be looked at to become Bhel’s strategic partner. If the government does decide to divest stake to the public, it will in no way enhance shareholder value.

What is plaguing the company’s profitability is its sheer size. It’s present in so many different segments, that its business strategy looks unfocussed. It needs to cut flab in terms of employees and exit businesses, which are at the lower end of its earnings. All this can only come if the government gives away management control to a strategic partner. The government has set the trend by allowing international companies to bid for the oil PSU, IBP. This can probably happen for Bhel too.

Another roadblock in its divestment is that the company manufactures defence equipment for the government. Many policy makers will not feel comfortable to divest stake in Bhel, purely from security related issues. The way out seems to be breaking of Bhel into strategic and non-strategic businesses. Strategic businesses can include defence sensitive divisions and can continue to remain in government control. Non-strategic businesses can be put up on the block for disinvestment to a strategic partner.

How the government goes about tackling this issue remains to be seen. However, it is true that the government is seriously looking at achieving the Rs 100 bn disinvestment target. Hence, Bhel is one proposition that might come up in the near term.

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