Stock price of BHEL is out of power. It is around its multi-year
lows. So many friends are asking for a view as many are at losses and some
wants to invest.
I am a proud employee of BHEL. Our company is in tough weather…I
am using the word weather because weather is mostly “imposed” on us; it is not the
result of our actions. Power sector in india is grappled with double whammy,
there is surplus capacity and still huge unmet demand. So we can see that
problems are structural not commercial. Distribution losses are huge due to
erratic and shabby state power distributors (I remember BSNL) whose poor health
refrain them from supplying the power to the consumption points. Power plants
are financed by banks which have short term focus…we should finance these with
long term infrastructure bonds which are tradable. Moreover everybody jumped
into building power plants; even newspaper wala was trying to make a story out
of it although COAL is never suited for writing but ink. As these
inexperienced players were building power plants with no expertise in running a
power plant, no financial strength to withstand any variability instead they were
heavily loaded with high cost debt so
they were bound to falter which they did and now they are selling their
incomplete power plants for which there are not many takers.
Aggressive bidding even by some established
players further aggravated the situation. Some of them even made their
calculation of bidding at low per unit costs on the basis of imported
Indonesian coal where they never factored for a possible rise in the cost of
coal. They even left the
possible fall in rupee which could even out any fall in the global coal prices.
There was no plan B. But Indonesia raised the prices of exported coal which
resulted in the first assault which severed the base. And when coal prices fell globally, fall in
the value of rupee even out any possible benefit out of the fall in coal
prices.
This is further impacted by the not so fast growth in
manufacturing in india as compared to the growth in capacities in power sector.
Indian power sector also witnessed unbalanced investments with heavy
investments into generation but very less in transmission and distribution. Building
one megawatt of transmission and distribution capacities costs as much as of
building production capacity of one megawatt. But grid capacity in india is
very inadequate and unreliable. So there are situations when North india is deficient
of power and there is surplus power in south and western india but it is of no
use for North india as there is no transmission Grid.
So we see here our power sector inflicted by multifaceted
issues. I have always felt that slowdown or recessions are mostly the results
of misallocation of productive resources. To repair this misallocation, we need
to bear the pain of fall of some of pillars of a royal palace as too many
pillars hinder the free movement. So some pillars will eventually fall in our
power sector.
This is consolidation phase in power sector
where big and mighty will survive; inefficient players are going to disappear
in this survival game. First
margin will disappear in a last attempt to breathe. Right now we are in this
margin phase as everybody is bidding low for new orders. Even the margins of
BHEL are down heavily and may down even further. But after this correction,
only the efficient ones will remain. In power generation, NTPC and Tata power
will emerge as leaders with Reliance, Adani distant seconds. BHEL will remain the
leader among power producers. It is still capturing around 70% of the orders
every year even in these difficult times although at lower margins. But this is
part of the game.
Recessions are always helpful in eliminating
the unnecessary additions; they bring out the best in the efficient who then focus on sharpening
their skills and shedding the heavy unproductive fat. BHEL is not just a power
producer but is a significant player in indian defence, transmission and
transport sector which account for around 20% of its turnover and these are the
other areas which BHEL is going to focus on in its current resurrection.
Not many may be aware of this but BHEL is the
main supplier of solar panels and Lithium ion Cell batteries for the satellites
of ISRO. These require
very advanced technical expertise. BHEL is doing this for ISRO in its
Bangalore unit from 2002 for solar panels and from 2005 for batteries. BHEL can
garner bigger share in indian defence sector due to its inherent but unused technological
strength. Like BHEL is supplying naval guns to Indian Navy and now it is
looking for some technology partner for making even bigger guns. BHEL has also formed a consortium with two
other PSUs, Mishra Dhatu Nigam and Hindustan Shipyard, to build submarines
indigenously. They are planning for bidding for submarine order, the order
value of which will be around 50000 cr. One can imagine the possible scale.
BHEL was also having big investment plans ( may
be around 2000 cr) for solar business but I think they may have to shelve the same due to Chinese
onslaught and lower demand for solar power but situation is changing now. As I have
explained in my post on Gujarat Borosils about solar power that at present
there is no solar manufacturing capacity in india, there is only low value
assembly capacity and BHEL is best suited to start the solar cell and panel
manufacturing in india as it is already doing it albeit at lower scale.
In railways BHEL provides electrical
propulsion system and its controls and accounts for more than 40% of electric
locomotives in operation by Indian Railways. As we know Railway is another face
of india which needs big makeover and we will see huge investments in the
sector in the near future.
BHEL is spending around 3% of its
turnover on R&D which is the highest in its kind of industry in india. BHEL
has around 1400 patents to its credit and has world class technology giants as
its business partners.
So I don’t think that time is over
for BHEL, in fact it is time for making one more relevant and efficient. BHEL is debt free with around 10000 cr cash; it can speed up its pace and build up muscles anytime.
No doubt BHEL is wounded because its
war time. So only those should invest here who like to witness a war and have
the will power to withstand some wounds.
(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and not holding the stock discussed in this Post)