Bharat Heavy Electricals Ltd (Bhel), India’s largest maker of power equipment, cut prices by at least 15% in the past year to stem a slide in orders that threatens to send profit lower for a second straight year.
“Electricity producers are scaling back investment because of a shortage of fuel, hurting manufacturers of equipment such as boilers, turbines and generators,” said P.K. Bajpai, finance director at the state-owned company. “Pending projects aren’t yielding orders as Asia’s third-largest economy expands at the slowest pace in a decade, according to Bajpai.”
“We are trying to bid as aggressively as possible, but there’s overcapacity in the market,” Bajpai said in an interview. “We’ve corrected our prices in line with the market. We can only wait for things to improve as they will take time to get sorted.”
Shares of the New Delhi-based company have tumbled 33% this year, the fifth-worst performer on the benchmark 30-stock BSE Sensex, after net income fell for the first time in 12 years. The South Asian nation plans to add 118 gigawatts of generation projects in the five years through March 2017 after falling 31% short of its capacity addition target of 80 gigawatts in the previous period.
Bhel, scheduled to report on 3 August its performance for the quarter ended 30 June, may say net income declined 14% from a year earlier to Rs.793 crore, according to the median of 38 analysts’ estimates compiled by Bloomberg.
Of the 58 analysts who track the stock, 32 recommend selling it, while eight favour buying it, according to data compiled by Bloomberg. Shares of Bhel dropped 2.8% to Rs.152.55 on Tuesday in Mumbai, 74% down from a peak of Rs.586 reached in November 2007.
A shortage of coal and natural gas, fuels used to generate power, and the inability of indebted state distribution utilities to pay have reduced generation projects. Plans by power producers to invest as much as $43 billion have been shelved as the $1.8 trillion economy expanded 5% last year, the least since 2003.
Environmental concerns and delays in land acquisition are also stalling investments.
Tata Power Co. Ltd, India’s second-largest and third-most indebted generator, is struggling to turn around the nation’s biggest power plant by allowing it to seek higher tariffs and find cheaper fuels as it negotiates with lenders to waive penalties for failing to meet some loan conditions.
“Producers, including Reliance Power Ltd, Adani Power Ltd and state-run NTPC Ltd have together shelved more than 50 gigawatts of projects, citing fuel shortages. Projects with a generation capacity of 7 gigawatts were stranded without coal,” B.K. Chaturvedi, member-energy at the Planning Commission said in February.
Bhel’s sales in the 12 months ended 31 March grew less than 1% to Rs.47,620 crore, slowing from an average 25% in the previous four years, while net income declined 6% to Rs.6,610 crore.
“At the moment, nothing seems to be going in favour of the company,” said Anubhav Gupta, an analyst at Kim Eng Securities Pvt. in Mumbai. “For Bhel’s fortunes to revive, the government has to take some special measures for the power sector.”
“Bharat Heavy’s profit is set to drop in the current fiscal year and next,” said Gupta and Chirag Muchhala, an analyst at Nirmal Bang Equities Pvt. in Mumbai. “Average annual orders won by the equipment maker more than halved in the two years through March 2013 from an average Rs.59,700 crore over the previous three years.”
“Demand for the machinery may increase during the nation’s 13th Five-Year Plan that starts April 2017, when the government prepares an expenditure outlay, benefiting Bhel,” Satish Kumar and Jay Kakkad, analysts at Standard Chartered Securities India Ltd, wrote in a 18 July report.
“The company also expects to cut costs by manufacturing some components locally and as 12,000 workers retire in the next five years,” they wrote.
Besides an economic slowdown and fuel-supply bottlenecks, local competitors and cheaper imports from China have also hurt Bhel. The company’s share of orders have fallen to 41% in the current five-year plan from 49% in the prior period, Bhel said in a presentation in November.