BHEL is on right track, but a slow one

While the JV is a win-win situation for both the partners, a deeper look at the contours of the deal suggests that benefits will accrue only gradually.

BHEL will hold a 49% stake in a JV that will set up an ammonium nitrate manufacturing plant. The plant will have a capacity of 2,000 tonnes per day, or 6.6 lakh tonnes per annum. BHEL will monetize its surface gas technology, which will enable production of ammonium nitrate from 13 lakh tonnes of coal per annum to be supplied by CIL. 

Ammonium nitrate is a major ingredient in manufacturing of bulk explosives. It is a key raw material for CIL as the explosives are used for blasting before undertaking the open-cast mining operations. This will act as backward integration for CIL and reduce its import dependence.

However, this JV with CIL is also unlikely to move the needle much in terms of growth in the near-term owing to the gestation period of at least two years before commissioning.

The profit potential of the JV can be estimated using the financials of ammonium nitrate business of Deepak Fertilizers and Petrochemicals (DFPL). DFPL, which makes ammonium nitrate from liquefied natural gas, had a turnover of ₹4,300 crore in FY23 from the sale of 5 lakh tonnes of ammonium nitrate with an average selling price at ₹86,000 per tonne. 

Assuming 75% capacity utilization for the JV of BHEL-CIL, it should give almost the same sales value and profit of nearly ₹1,500 crore at an optimistic net profit margin of 40%.

BHEL’s bottom line could increase by around ₹750 crore as it has 49% share in the JV. Even so, a turnaround in the earnings per share growth with the number of shares at 3.48 billion is unlikely.

This is not the first attempt by BHEL to diversify away from its thermal power business. For instance, the company’s share in the Vande Bharat order is at ₹13,500 crore, which was won in consortium with Titagarh Wagons in June 2023. The order is for supplying 80 trainsets and servicing them for 35 years thereafter. 

Further, BHEL is also going to supply 20 super rapid naval guns worth ₹3,800 crore to the Indian Navy and expects another similar-size order in the near-term.

That said, these diversification initiatives have not yielded any significant results in terms of changing the composition of the order backlog as the power segment continues to have a lion’s share at 70%. 

Though the company’s power segment could benefit further from the renewed focus on thermal power generation, it is unlikely to match its peak performance in the past. 

The company’s financial performance peaked out in FY13 when it reported operating income of around ₹49,000 crore and Ebitda margin of 19%. After a decade, the corresponding numbers stood at ₹23,000 core and 3% in FY23. There is no noteworthy improvement in the financial performance for the first nine months of FY24.

Meanwhile, the Central Electricity Authority (CEA) has projected ~263 GW coal-based installed capacity by 2032 which translates into new ordering for coal-based power plants of ~20 GW expected in the next five years.

Even if BHEL manages 50% winning rate in tenders at ₹8 crore per MW, it translates into new orders of about ₹80,000 crore taking the potential order book to ₹2 trillion over a period from around ₹1.2 trillion at present. Given that these orders will be executed over the next seven years or so, it is unlikely to result in any substantial growth on an annual basis.