IIFL on BHEL : Upstaged by an upstart

BHEL : Upstaged by an upstart
Media reports suggest that the Bharat Forge-Alstom (BFA) JV has emerged as the lowest bidder (L1)
to supply supercritical turbine-generators for the 7.2GW (11x660MW) NTPC-DVC contract, edging out
BHEL. As L2, BHEL will not lose out on volumes, because it still gets four sets as compared to five
sets for L1. The JSW-Toshiba JV as L3 gets two sets. But, the price point is determined by the
need to match L1 and not by internal margin thresholds. The 3.3GW order provides BFA
reasonable volumes to kick-start operations. Industry sources indicate that BFA would continue
to bid competitively. Domestic competition in supercritical turbines would only increase, as L&T
might bid for new projects more aggressively to make up for the lost opportunity in this tender.
New entrant sets pricing: With L&T disqualified for bidding for this tender on narrow technical grounds, it
was widely expected that BHEL would emerge as L1. However, the bid results confirm BFA’s earlier
assertions of being competitive vis-à-vis larger competitors, BHEL and L&T. Price points in turbines could
shift lower than what the incumbent is comfortable with. Competition in boilers would similarly intensify
from the next round of bulk tendering, when players such as Thermax, Cethar Vessels, Gammon-Ansaldo,
and BGR Energy have pre-qualification requirements in place.
Margins to trend down, as operating leverage wears off post FY12: Prima-facie, the L1 pricing does
not seem aggressive at Rs13m/MW. Both BHEL and L&T have earlier won turbine orders at lower prices.
Given differing specifications across tenders, it is difficult to make an apple-to-apple comparison. In the
current order, BHEL’s margins would be lower than its own expectations, as it has to match L1. EBITDA
margins post FY12 would be largely determined by gross margins, as growth decelerates and fixed costs
move in line with revenues.