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Power play: Bhel gains while L&T loses sheen in new orders

Power play: Bhel gains while L&T loses sheen in new orders
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First Published: Thu, Sep 15 2011. 11 17 PM IST
Updated: Thu, Sep 15 2011. 11 17 PM IST
After a lull of several months, the last two days saw action in the capital goods industry. State-owned power producer NTPC Ltd’s price bid opening for bulk tenders in the super critical power equipment space will impact the order book contours of the bidders.
But the spotlight is on the two titans—Bharat Heavy Electricals Ltd (Bhel) and Larsen and Toubro Ltd (L&T).
While the former takes home orders worth around Rs7,000 crore (according to media reports of the lowest price bid, which Bhel would have to match), the latter seems to have lost out in the game.
Also See | Competition pressure (Graphic)
After a lacklustre performance in the June quarter on the order front, Bhel is gaining ground on order build-up—a key for revenue visibility in the future, which impacts stock valuation. Recently, another mega order came its way from state-owned Singareni Collieries Co. Ltd .
With this, Bhel’s order inflows from April till date are close to one-fourth the forecast of order inflows for the current year—10% higher than last year’s order inflows of around Rs60,000 crore.
But analysts are divided on Bhel’s ability to meet its forecast, which is certainly an uphill task, given that there aren’t many major announcements expected in the public sector domain, and given the sluggish state of private sector ordering.
Meanwhile, according to analysts’ reports, L&T gathered only two orders for turbine generators (TG) and none in the boiler segment, where Bhel got four. In both boiler and TG tenders, other players get the orders only if they match the price quoted by the lowest bidder.
The development raises two questions about L&T: one, will it be able to meet its estimated guidance of 15% growth in the order book during the current year?
Two, will this weigh on the financial performance of its power equipment manufacturing joint venture, which analysts expect to break even at the net profit level by fiscal 2013?
But the writing on the wall is now clear.
The much-feared competition from Asian rivals is now turning into a threat. South Korean Doosan Heavy Industries and Construction Co. Ltd, which made inroads into the Indian corporate sector earlier, emerged as the lowest bidder, walking away with five of the nine boiler orders in the NTPC tender.
Again, the entry of new players, including a joint venture between BGR Energy Systems Ltd and Hitachi Power Europe GmbH (the lowest bidder, which bagged five TG orders from NTPC), will increase competition. Evidently, higher competition would tell on future profit margins of both Bhel and L&T. Perhaps, that is why the Bhel counter on the bourse did not cheer the victory. In fact, the stock closed marginally lower at Rs1,710.
Motilal Oswal Securities Ltd said in a report: “We believe the growth plans of some of the Indian players (BGR-Hitachi, Thermax-Babcock Wilcox, JSW-Toshiba) recently entered in the space, will be challenged if they are not able to secure orders in the near term.”
The sector is certainly in for more challenging times—inflation, higher cost of capital and now increasing competition, which, despite “rational pricing” as stated by analysts, could lower profit margins in the near future.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Thu, Sep 15 2011. 11 17 PM IST