Bhel defers plan for finance firm on poor sector health

Bhel defers plan for finance firm on poor sector health

New Delhi: Uncertainty over policies on land acquisition and fuel allocation, and the poor financial health of state-owned electricity distributors has forced the country’s largest power equipment maker Bharat Heavy Electricals Ltd (Bhel) to defer a plan to promote a finance company that will fund power projects.

“We have postponed our finance business plans. The board wanted to take a relook (at it) in great detail," said a top Bhel executive, who did not want to be identified.

“There are no good projects in the market. We may look at it again after we see some policy movement, which is expected at the end of the year," added this person, explaining why the company has deferred plans to start a non-banking financial company (NBFC).

India has an installed power generation capacity of 181,000 megawatts (MW), but still faces a shortage of 9.8% during the peak hours between 5pm and 11pm. Power companies have to deal with land acquisition problems, fuel supply constraints, increasing environmental activism and the deteriorating health of state electricity boards.

“Crisil has already made the report. The market situation is very bad. For the time being we are putting the NBFC plans on hold. Once the situation improves, we will review the plans," said a second senior Bhel executive, who also did not want to be named, referring to a report by credit rating firm Crisil Ltd, which the state-owned firm had appointed as a consultant. “There is no clarity on policy and there are problems with coal linkages and environmental clearances. Tariffs have also dipped."

Analysts agree with that assessment.

“The power sector has slowed due to multiple factors such as substantial losses at distribution companies (state electricity boards), lack of fuel availability on coal and gas, and a decline in merchant tariffs... Industrial orders are not being awarded as capex-incurring industries are adopting a wait-and-watch policy," said a 30 September report from UBS Investment Research, which has a “buy" rating on Bhel.

The original plan, approved by the company’s board, called for Bhel to promote an NBFC along with a strategic partner. The company, which has cash reserves of around Rs10,000 crore, was preparing to apply for an NBFC licence from the Reserve Bank of India (RBI). Bhel posted a net profit of Rs6,011 crore on revenue of Rs43,337 crore in the financial year ended 31 March.

Currently, state-owned Rural Electrification Corp. Ltd and Power Finance Corp. Ltd together account for 60% of the money lent to power companies in India. They loan money to develop new power projects and also finance the restructuring of power distribution utilities. Asset-liability mismatches and loan exposure limits to specific sectors set by RBI have made it difficult for banks to provide long-term funding. Indian banks have also been burned in the past and some of them face the risk of power companies defaulting on loans, largely because they have been unable to recover money (for power generated) from loss-making state electricity boards.

The 11th Plan (2007-12) has set a target of adding 78,577MW of power generation capacity, requiring, at current estimates, some Rs10.31 trillion of investment. According to the power ministry, the government expects a Rs4.51 trillion funding shortfall. The sector, which is struggling with inadequate funding, will also need an additional $400 billion investment in the 12th Plan starting April 2012.

Bhel has an order book position of at least Rs1.64 trillion and an annual capacity of 15,000MW. It aims to become a $10 billion-plus company (by revenue) by 2012. India has a power generation capacity of 181,000MW and expects to add an additional 62,000MW by 2012. Of this, orders for a capacity of 42,431.58MW have been placed with Bhel.