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Cash-strapped West Asian firms seek to renegotiate Bhel orders

Cash-strapped West Asian firms seek to renegotiate Bhel orders
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First Published: Mon, Mar 23 2009. 09 25 PM IST
Updated: Mon, Mar 23 2009. 09 25 PM IST
New Delhi: State-owned Bharat Heavy Electricals Ltd (Bhel) says some cash-strapped power project developers based in West Asia are seeking to renegotiate prices before confirming orders, potentially worth a combined Rs500 crore.
Bhel, India’s biggest seller of power equipment, and the potential customers had already agreed on the price, and the New Delhi-based company had been waiting for them to place firm orders. A sharp decline in the price of crude oil has hurt the funding ability of some West Asian firms.
“Some clients are definitely asking for renegotiations,” K. Ravi Kumar, chairman and managing director of Bhel, said. “However, rate contracts are not taken as orders. Unless we get firm orders, we do not include it in the order books.”
In addition, a few clients have asked Bhel to defer deliveries on orders worth a combined Rs300 crore, said another Bhel executive, who didn’t want to be named.
The price of crude oil, the economic mainstay of West Asian countries such as Saudi Arabia, Iran, Iraq, the United Arab Emirates and Kuwait, has fallen to around $53 per barrel now from the peak of $147 it reached in July, causing funding availability to tighten.
Of Bhel’s order book position of Rs1.25 trillion, international orders account for around Rs7,500 crore. West Asia, Africa and Central Asia are the primary international markets for Bhel, which plans to raise exports to Rs10,300 crore by 2012.
Higher exports would help Bhel hedge against exchange-rate fluctuations as a depreciating rupee pushes up the cost of raw material imports. “While the commodity prices have declined, engineering and allied service costs are yet to come down,” the Bhel executive said.
The firm is planning to set up manufacturing or servicing facilities in Oman and Saudi Arabia and also a joint venture (JV) in West Asia with a local partner to make valves and other equipment to cater to the oil and gas exploration and production markets in the region, as reported by Mint on 8 November. It also plans to start a JV in Saudi Arabia to service and repair transformers and is searching for partners.
“The value ascribed to the international orders is not a significant portion of the valuation that Bhel derives. But this can have an impact to the long-term plans of the company as it plans to increase the industrial portion (oil and gas sector) to around 30% of the order intakes,” said Madanagopal R., an equity research analyst at Mumbai-based Centrum Broking Pvt. Ltd.
Despite the slowdown in domestic economic growth, expected to decline to 7.1% in the year ending March from an average of 8.9% in the past four years, and global recession, Bhel is confident of tiding over the downturn because of a substantial cash surplus of Rs8,000 crore and its healthy order book.
“We have been saved a major impact of the downturn as we hardly have orders from the independent power producers (IPPs) and most of our orders have been placed by government utilities,” the Bhel executive added.
Bhel posted a net profit of Rs2,859 crore on revenue of Rs21,401 crore in fiscal 2008. It has generated orders worth Rs24,000 crore in the current fiscal and aims to become a $10 billion-plus firm by FY12.
Bhel has the capacity to manufacture power equipment capable of generating an annual 10,000MW, which it plans to raise to 15,000MW by December.
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First Published: Mon, Mar 23 2009. 09 25 PM IST