BHEL, Larsen & Toubro woes mean little hope for economy

 

ANIL SASI: NEW DELHI, JUL 11 2013, 00:49 IST

For an economy desperate for signs that the slowdown in growth has bottomed out, the worsening plight of Bharat Heavy Electricals Ltd (BHEL) and Larsen & Toubro (L&T) — flag bearers of the crucial capital goods sector — spells bad news.

The country's top two equipment manufacturers are facing strong headwinds, with BHEL struggling with a sharp drop in annual order inflows to Rs 32,000 crore from around Rs 60,000 crore just two years back. L&T has been forced to cut its order book by Rs 17,000 crore last quarter on concerns over potential cancellations as mounting industrial sector woes continue to take a toll on the broader investment outlook.

Analysts point out that orders booked now by the capital goods sector — considered a proxy for investment sentiment — would come on stream only over the next 5-7 years. A subdued outlook now, therefore, diminishes the possibility of a pick-up in the near future.

For BHEL, its a double blow of sorts, since the firm has worked hard to ramp up its mainstay power equipment manufacturing capacity from 6,000 MW five years back to a peak capacity of 20,000 MW now, even as order inflows have slumped to nearly half. Besides, there are payment problems, as customers refuse advances and fall back on final payments before taking delivery. At a recent deposition before the Parliamentary Standing Committee on Industry when the demand for grants was being discussed, the Department of Heavy Industries and the top brass of BHEL arelearnt to have informed the panel that the power sector scenario presented "a bleak picture", due to which Bushel's order book "was expected to diminish in the next two to three years".

Plus the problem with payments continue to fester, with BHEL being forced to write-off around Rs 280 crore last quarter for which it had done provisioning earlier. The company, officials said, kept pursuing with the customer and finally deemed the amount as "totally non-recoverable".

"Three years back, the question put to BHEL was that even as the order book backlog was increasing, why are you not able to deliver? Now that the company can deliver more, the orders have vanished," an official involved with the company said. The signs of stress are clearly showing up. BHEL has been forced to withhold despatches of finished equipment to a number of project developers during the last two quarters of the last fiscal in a desperate bid to pressure them to pay, a move that has dented the topline of the state-owned firm.

L&T was forced to write-off orders worth Rs 17,000 crore — over 10 per cent of its order book — last quarter as a "prudent practice" on concerns over delays or potential cancellations. Even as the firm added a disclaimer that these projects have not been canceled by customers and may be written back later, it is worried that orders worth another Rs 6,000 crore — around 4 per cent of the order book may "move slowly".

Going forward too, company officials have cited a "challenging environment in India and a highly competitive environment abroad".

Capital goods sector under stress

The country's top two equipment makers are facing strong headwinds, with BHEL struggling with a sharp drop in annual order inflows and L&T being forced to cut its order book last quarter

Analysts point out that orders booked now by the capital goods sector — considered a proxy for investment sentiment — would come on stream only over the next 5-7 years.