Power generation equipment makers are losing out in global markets to competition offering friendlier financing Utpal Bhaskar Description: Mail Me
First Published: Fri, Aug 09 2013. 12 24 AM IST
Description: The government's move last year to raise import duty on power generation equipment to 21% from 5% hasn't helped much. The government's move last year to raise import duty on power generation equipment to 21% from 5% hasn't helped much.
Updated: Fri, Aug 09 2013. 12 28 AM IST
The government's move last year to raise import duty on power generation equipment to 21% from 5% hasn't helped much.
New Delhi: State-owned Bharat Heavy Electricals Ltd (Bhel) isn't just struggling with orders drying up in India, it's losing out to competition in overseas markets as well, especially in Africa and to Chinese power generation equipment manufacturers such as Dongfang Electric Corp. and Shanghai Electric Power Co. Ltd offering friendlier financing.
In the domestic market, the Indian government's move last year to increase the import duty on power generation equipment to 21% from 5% earlier to thwart competition from Chinese manufacturers hasn't helped much.
"In the overseas markets, everyone is asking for financing. The Chinese are doing it in a big way. But the Indian government is not keen to fund big projects. They are funding small projects," said a Bhel executive, requesting anonymity.
Bhel is looking abroad for contracts over fears its domestic market share may decline given the hurdles faced by domestic power projects.
The company's orders dropped to Rs.31,528 crore in the year ended March from Rs.60,507 crore in 2010-11, although it's an improvement over Rs.22,096 crore in 2011-12.
In the quarter ended June, Bhel lost overseas orders worth an estimated Rs.1,200 crore, according to Credit Suisse India Research. Chinese power generation equipment manufacturers have been awarded contracts in Sudan, Uganda and elsewhere.
A case in point is a project near Khartoum, for which Bhel had signed a memorandum of understanding (MoU). Due to delays in finalizing the financing by the Indian government, the project was awarded to the Chinese. In compensation, Bhel was given the contract for the Kosti thermal project, 300km from the capital.
India and China are locked in a race to access mineral resources in Africa to fuel their growing economies, and both have extended lines of credit to build infrastructure in energy-rich African countries.
At the India-Africa Forum Summit in 2008, New Delhi announced credit lines of around $5.4 billion by 2012 to African countries. A line of credit is a specified amount of money a borrower may obtain without special checks, and includes concessional loans. It's been used by governments around the world to shore up influence.
But "in our scheme of things, we can't offer them this quick facility (loans at time of tenders) as first we have to have a line of credit with that particular country and follow the due process wherein the particular country needs to come up with a project specific request. No country is willing to wait that long," said the Bhel executive cited above.
The problem "has become acute because the Chinese manufacturers have become very aggressive, particularly in Africa. While we have been offering discounts, it is very difficult to compete with them on the pricing and the financing," he added.
Another Bhel executive, who also requested anonymity, admitted that competitive financing vis-à-vis the Chinese was becoming a problem. "We are trying to manage," he said.
A Bhel spokesperson didn't respond to queries emailed on Tuesday evening.
India's focus on Africa stems from the continent accounting for 9.5% (132 billion barrels) of the world's proven oil reserves and 12% (478 million tonnes per annum) of the world's oil production.
According to analysts, competitive financing may hold the key to overseas orders, particularly in Africa.
"Chinese equipment exports to Africa are backed by aggressive financing, which is not only low interest rates, but with very relaxed covenants," said Debasish Mishra, a senior director at Deloitte Touche Tohmatsu India Pvt. Ltd, an audit and consultancy firm.
"Realizing that the Chinese are taking a huge march over US equipment exporters to Africa, President (Barack) Obama announced a Power Africa plan during his recent visit to Africa. It's interesting to note that $5 billion of the $7 billion Obama power plan is intended to support US exports to Africa in the next five years," he added.
Indian equipment suppliers such as Bhel get no such backing, he said. With the rupee's recent steep depreciation, "ideally Bhel equipment would have become competitive in Africa. But without good financing support they don't stand a chance," Mishra said. Guy Scott, vice-president of Zambia, said in an interview in March that India hadn't been able to match Chinese efforts to tap the resource-rich African continent.
"While we have been concerned over the domestic order book being at risk, cancellation of a Rs.12 billion overseas order in 1Q14 (April-June quarter) adds to our concerns," Credit Suisse India Research said in a 5 August report on Bhel.
In the domestic market, slowing economic growth, high borrowing costs and delays in securing regulatory approvals have hit many infrastructure projects, including power plants, hurting the ability of their promoters to repay creditors and vendors.
Power project developers have also been struggling with interlinked issues such as fuel shortages, delays in signing fuel supply agreements and long-term power purchase agreements. This has forced Bhel to review its target of achieving Rs.1 trillion in revenue by 2017.
"Out of Rs.190 billion (Rs.19,000 crore) of debtors which are due for collections, Rs.70 billion are outstanding over 12 months which is concerning," Credit Suisse said in its report.
Bhel's net profit fell 49.5% to Rs.465.4 crore in the April-June quarter from Rs.920 crore a year earlier. Also, the government shelved plans to sell a 5% stake in the equipment manufacturer
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