Aggression plus vision are its hallmarks… - Views on News from Equitymaster

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Aggression plus vision are its hallmarks…

Dec 9, 2000

Power generation in Mumbai for decades has been associated with the Tata Group. But in the 1990’s, one of the largest consumers of Tata Electric decided to change that equation. This company put up a state of the art 500 MW (mega watt) plant in Dahanu, near Mumbai in a record time of 3 years. As a result, the company is now generating around 50% of its power requirements in-house. It was a rare display of aggression and foresightedness unheard of in those days. Since then aggressiveness has become the second name of the company - BSES Limited.

Before getting into generation, BSES made a name for itself as one of the most efficient power distributors in the country. It holds the licence to distribute power to the northern suburbs of Mumbai up to 2011. The company provides electricity to more than 2.7 m customers, 55 percent of whom are retail. While the rest of India suffers power cuts every now and then, BSES’s distribution ensures continuous power supply to the nation’s financial capital. In fact, its distribution losses are amongst the lowest in India at 11.5% in fiscal year 2000.

Given such a background, the company’s management is highly regarded for its vision and proactive nature. Not the one to rest on its laurels BSES set about expanding its business outside its Mumbai licence area. It is currently setting up a 169 MW plant in Kerala and a 200 MW plant in Andhra Pradesh on an IPP (Independent Power Purchase) basis. BSES’s aggression came to the fore again when recently it bagged 3 out of 4 distribution zones in Orissa, outbidding archrival TEC. Orissa being the first state to look at privatizing its distribution network, this was an important achievement for BSES, making it the frontrunner to bag more projects in the rest of India.

BSES was among the first Indian companies to realise the synergies that exist between power, telecom and the Internet. It set up a 100% subsidiary BSES Telecom in 1995-96. This subsidiary launched its Internet services in Mumbai in March 2000. Here also, BSES has decided to integrate backwards and support the Internet services through its own optical fibre cable network. The company has already finished half of this network and will finish the entire primary and secondary network by the year end. BSES hopes to leverage on the higher bandwidth advantage to expand its Internet service provider (ISP) business.

In addition to the ISP business, BSES Telecom is also looking at expanding its retail presence. For this it has tied up with Sriven Multitech to set up touchscreen kiosks and cyber cafes in the city of Mumbai. Services on the touchscreen will include information on the city, on hotels, on air and rail reservations, on the shopping malls, on the country and video on demand. It was perhaps this business plan that attracted India’s leading conglomerate, Reliance Industries to hike its stake in the company to 26.5 percent.

But in the last one year or so, clouds have begun emerge on BSES’s horizons. There is a standby charges dispute with TEC, which refuses to go away. TEC has claimed Rs 1.8 billion (US$ 39 million) as standby charges, which BSES has disputed. However, a recent court ruling on this was in favour of TEC. BSES, on the contrary, continues to steadfastly maintain its ground. The issue has snowballed into a major controversy with the concerned state electricity board threatening to revoke both the concerned parties licences if the issue is not resolved soon enough. If BSES finally has to pay up the said dues, it will be forced to hike tariffs and pass on the dues to its consumers. This has come at a time when BSES is trying to reduce tariffs in the Mumbai circle to ward off a rejuvenated TEC. The later is trying to lure away BSES' high-value industrial consumers.

Though Reliance taking up a controlling stake in the company gives BSES access to its technical and financial acumen, but there are also concerns that the conglomerate might take away the aggressiveness and the proactive vision, which BSES is reputed for. Till now, it has operated in the lucrative circle of Mumbai, where it has the necessary infrastructure in place. In places like Orissa, BSES may find it difficult to charge rates comparable to Mumbai. Also, it may have to break the lackadaisical attitude of the electricity board employees.

Notwithstanding these hurdles, BSES has unfurled an ambitious corporate plan, which sees 6000 MW of capacity being added in ten years time. On the distribution front, in the next 10 years BSES plans to control six more locations (states) in addition to Orissa. BSES has also entered into an arrangement with National Grid of UK to participate in the development of power transmission projects. With power supply is still way behind the potential demand, BSES could be trusted to achieve the targets, which it has set for itself and play a dominant role in the power sector in India.

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