The effect could be far reaching. Indian Government made tariff-based competitive bidding compulsory for all the power players including the PSUs in early January. The decision would further increase competition in the category of equipment manufacturers and change the dynamics of the business forever. In this context, InfralineEnergy's Chhavi Tyagi spoke to Rao to understand the impact of the policy on the domestic equipment manufacturers in general and the steps that BHEL has incorporated to stay on the top.
How is tariff-based competitive bidding going to impact the power equipment manufacturing sector of the country?
The introduction of the tariff-based competitive bidding will make everybody look into the total life cycle cost for calculating the tariff. It would be more accurate. At present, some of the developers consider only the initial cost of the project whereas others take into account the operating and maintenance cost of the project to arrive at the figure.
The tariff-based bidding augurs well for BHEL, as our equipments perform well in the market considering the superior plant load factor (PLF) and the operating availability. Almost 64 percent of the total capacity in India is installed by BHEL. This contributes to around 74 percent of the power produced in the country. When this extra power gets factored into the tariff, it becomes more competitive. In fact, our reduced auxiliary power consumption, increased PLF and higher operating availability results into around 10 percent of extra power generation. In fact, some of the utilities like NTPC and BSES (which is now Reliance Power) run our sets at 90 percent plus PLF. Thus, tariff based bidding will factor in all these aspects which would yield better returns for the developer. We have been advocating for a while to the developers for factoring in life cycle cost of equipments while purchasing equipments.
What about competition from the foreign players?
It is understood that power plants in China run at a PLF of around 75 percent. When it comes to auxiliary power consumption, Chinese equipments consume four and a half percent, while BHEL equipments have a consumption of two and a half percent. This translates into a saving of two percent of power in case of BHEL sets.
"The execution capabilities of various companies are causing problems, such as balance of plant equipment and civil works. The contractors are unable to deploy skilled manpower required for construction of the plant. The quality of the balance of plant equipment is also very low."
To produce power, you need power and if you consume more power within the generation itself, you are left with lesser power for actual use. We would further improve our cost competitiveness, which has always been our focus right from the mid-1970s, when international competition in the form of International Competitive Bidding (ICB) was introduced.
BHEL has proposed an increase in its capacity by a third of what it is today. What is the timeline for it and how are you going to achieve it?
We have already placed our orders for taking the capacity addition to 20,000 MW. Out of 250 equipments which form part of the 20,000 MW plan, 30 to 40 percent of equipments have already been commissioned by us. By end of 2011-12, we will commission the balance of the equipments. Consequently, by March 2012, we expect to have 20,000 MW.
Why BHEL has often been blamed for most of the power sector's problems?
There shouldn't be any reason for any complaints as we are competitively winning orders in the market even under the ICBs. One has to understand that in most of the power projects BHEL executes only BTG (boiler-turbine-generator) portion (approx 50-55 percent of total power projects) and BoP (Balance of Plant). The civil component is being executed by agencies appointed by the customer directly. We have ramped up our capacity from 6,000 MW about four years ago to 15,000 MW by March 2010. The ramping up to 20,000 MW is under progress.
The execution capabilities of various companies are causing problems, such as balance of plant equipment and civil works. The contractors are unable to deploy skilled manpower required for construction of the plant. The quality of the balance of plant equipment is also very low.
So you are blamed for other's follies. Is there any government policy that is becoming a hurdle too?
BHEL's job is to manufacture power equipments and transport them to wherever they are required. But then there have to be adequate infrastructure to facilitate it.
The restriction on transporting anything above 100 tonnes on the national highways is a hurdle. Hydraulic trailers are yet to be legally permitted in the country. These issues have been taken up with the government. Similarly, BHEL has some restrictions on transportation of imported equipment to be executed only through Shipping Corporation of India (SCI), which restricts competition and many times results in delays. On the other hand, our competitors can use other service providers as well. During the Commonwealth Games, our consignments were stuck in Mumbai for about four months. We have taken up this issue with the government and asked for exemption from TRANSCHART. The project execution delays arise out of these constraints.
Is BHEL facing any problems in procuring materials?
There are constraints when it comes to procuring material as well. For example, special steel (CRGO) is not produced in this country and there are only a few suppliers who dictate the deliveries making you dependent on them and their prices.
How do you plan to overcome these glitches?
For instance, in the case of castings and forgings, we have tied up with the UK's Sheffield Forgemasters to get the technology. While we do produce certain castings and forgings locally, we have taken this initiative to increase the capacity of our own plant and thus, improve our recovery rates.
"We have brought to the notice of the government the unequal advantage to some of the foreign players on the basis of the subsidies they enjoy, the exchange rate of their currency and the kind of advantages they enjoy with respect to the interest cost in their country. We are ready to compete but then it should be an equal competition."
We also plan to set up a joint venture with SAIL and Vizag Steel Plant with 26 percent equity for putting up a plant because BHEL is a captive consumer for CRGO steel. This strategy would help us secure our supplies. Similarly, for high pressure pipes, which are called P91 steel, we are trying to talk to Vizag steel plant to set up a plant where BHEL will also put in some equity. Thus, we are deploying our resources in joint ventures with some of the state generation companies where we not only bring in the equity but also credibility to the project.
How does BHEL plan to augment its transmission manufacturing units so that it could help India build more efficient transmission facilities?
We have already increased our transmission equipment manufacturing capacity from 20,000 to 45,000 MVA. In the past year, we commissioned a new transformer manufacturing facility at Bhopal which is going to be a major centre. Along with that, we have entered into an arrangement with Toshiba for high-voltage segment, which will produce equipments belonging to the 765 KV to 1,000 KV segment.
What about your own R&D?
We are also putting our own R&D efforts to produce a 765 KV transformer, which has been successfully tested and is now undergoing field trials. We have also developed the insulators required for 800 KV, both for AC and DC transmission. All these initiatives are already in place for growth in transmission.
Do you plan to manufacture renewable power equipments?
We have been in the solar PV equipment business for more than three decades with a current capacity of eight MW per annum. We have received orders worth eight MW during 2010-11. Under the JNNSM (Jawaharlal Nehru National Solar Mission), projects to the tune of 180 MW have been sanctioned for solar PV. We are also targeting a big chunk of solar thermal for which we have tied up with Abengoa Spain for this segment of renewable energy and are jointly bidding for projects with them.
Since the launch of the JNNSM, we have initiated steps to increase our solar PV manufacturing capacity and are now working at a vertically integrated 250 MW capability. We have even produced the poly silicon required to produce the solar cells earlier. As the wind energy equipment market is flourishing, we are talking to a number of players and soon we will have a good strategic alliance plan.
How far BHEL's R&D has been effective in developing new technology or optimising costs?
We have recently been judged as the highest patent filers in the country by an independent consultant Thomson Reuters. The government has also recognised us by giving an award.
We spend two and a half percent of our sales on the R&D expenses, which is the second highest by any Indian company, apart from the pharmaceutical companies. Going forward, we have major plans in R&D. We are a part of the Ninth Technology Mission of the Government of India for the development of the ultra super critical technology along with IGCAR (Indira Gandhi Centre for Atomic Research) and NTPC. We will be developing a technology, which is under development in some of the advanced nations. The design development would be completed within two and a half years. We will then try to manufacture and set up the plant within a period of seven years. This is going to be a big initiative in addition to other initiatives that we are working on.
Another area is the coal gasification (IGCC) on which we have already worked and its pilot plant is running at Trichy plant. We are scaling it up and taking it to 180MW. We have also tied up with APGENCO and a project is being set up in Vijaywada for this.
"It is not sufficient that only BHEL is ready for deliveries, along with BHEL all these things also have to be ready. While proactive steps are being taken within the company, we are also trying to influence others as well to take action. The issues are being flagged at various platforms and a number of issues have been taken with the government."
We manufacture 180 products and our research is going on simultaneously on all of these products. We have a corporate R&D group based in Hyderabad, which has seven centres of excellence in various fields. We continuously work on this having realised that none of the foreign companies are going to share any technology with any Indian company. Even in the case of foreign companies getting into JVs with domestic companies, there is no transfer of technology to the domestic company. We expect our R&D expenses to further go up. We are already growing at 20 percent per annum on the top line itself and to sustain this two and a half per cent, we have to go up by more than 20 percent per annum in R&D.
What is a bigger problem for BHEL - manpower problems or competition from cheap Chinese power equipments? What steps are you taking to resolve both the problems?
Nothing is a problem but an opportunity to improve. However, we have brought to the notice of the government the unequal advantage to some of the foreign players on the basis of the subsidies they enjoy, the exchange rate of their currency and the kind of advantages they enjoy with respect to the interest cost in their country. We are ready to compete but then it should be an equal competition. In our country we have a zero custom duty on power equipment for mega projects. The Planning Commission conducted a study and has found that there is an unequal field for domestic power plant equipment manufacturers vis-à-vis foreign players. The committee has made some recommendations and we are waiting for its implementation.
What are your plans regarding cycle time reduction?
Cycle time reduction has been a continuous process for us. To give you a little background on that, when we initially used to produce 500MW sets in mid-eighties, it used to take us 60 months and from there it has come down to 36 months today. It is a gradual improvement over a period of time. However, it is constrained by factors I have already mentioned like importing material such as castings and forgings, CRGO steel, etc. Once these facilities are available within the country, it can further come down. We have cut down our own cycle time by introducing new CNC machines in the plants and recruited 15,000 people in the company and increased our vendor base. The company has 25,000 registered vendors and every year adds about 1000 vendors. We are broad basing our material procurement along with increased outsourcing. Therefore, within the company all possible initiatives are being taken.
"We are increasing our capacity to 20,000 MW in 2012. In addition, the private sector is also coming up with 20,000 MW capacity. Thus, in 2012 we will have a total of 40,000MW capacity in the country. Therefore, the manufacturing capacity is already there and it is not correct to say that domestic manufacturers will not be able to meet the requirement. In fact, domestic capacity could be in excess."
Another reason because of which our execution is getting delayed is the skill deficit in the country. In-house resources like Welding Research Institute are being used where people are trained and contractors are asked to recruit them for the sites. It is not sufficient that only BHEL is ready for deliveries, along with BHEL all these things also have to be ready. While proactive steps are being taken within the company, we are also trying to influence others as well to take action. The issues are being flagged at various platforms and a number of issues have been taken with the government. For instance, earlier it used to take six months to get clearance to transport a generator on a wagon but now the cabinet secretariat has taken a decision to put a single point clearance.
When domestic power equipment makers are not capable of handling the country's rising demand for power equipments, why are they asking for curbs against Chinese companies which are filling that gap?
There is a misnomer. BHEL's equipment capacity is 15,000 MW per annum. Last year, we manufactured nearly 16,000 MW of equipment and this year it's going to be more. Now, on the ground this capacity is not getting commissioned due to the reasons I mentioned earlier. Therefore, these things need to be fixed. Importing is not the answer for this. In addition to BHEL's capacity, the private sector is also coming up with 20,000 MW capacity. L&T has already come up with 5,000 MW and other players like JSW-Toshiba, BGR-Hitachi, Bharat Forge- Alstom all these players are coming in with another 14,000MW. Thus, in 2012 we will have a total of 40,000MW capacity in the country. We ourselves are increasing the capacity from 15,000 MW to 20,000MW by 2012. During this plan period, the capacity addition target is about 75-78,000 MW and in the next plan period, the target which is being talked about is 1 lakh MW, which is 20,000 MW every year. Therefore, the manufacturing capacity is already there and it is not correct to say that domestic manufacturers will not be able to meet the requirement. In fact, domestic capacity could be in excess.
What steps have been taken to your plans of floating a non-banking financial company to finance power projects?
We have brought in a consultant to formulate a scheme for us. We are formulating proposals which we will discuss with the board and then decide what needs to be done. It will take two and a half months for all the approval processes to be completed.
Last year seems to have been bad for power project developers, who have been struggling with fuel shortages, delays in signing fuel supply agreements, projects stuck for want of clearances besides other issues. To what extent was BHEL impacted?
Yes it is true that power sector in India is witnessing a slowdown since the past few years. The sector has been impacted by a host of issues including issues at fuel supply side, land acquisition and fund constraints. The cumulative problems have resulted in non-finalization of new projects. Things were not as bad in the public sector as they are in the private sector; some of the ongoing projects are on a slow execution path.
Due to increased finance cost and other issues, companies were not able to pay us money and in some cases it was not possible to work (for customers) if the cash was not coming. Last year was a difficult year, payments had not been forthcoming.
The figure of Rs 40,000 crore as outstanding payment is huge. How difficult is it to work with that kind of outstanding payment and by when do you expect to recover the same?
All of Rs 40,000 crore due cannot be counted as outstanding payments. About 50 per cent of it is dues, which are yet to mature as they are milestone linked payments, and we should receive the same on completion of those milestones. The rest Rs 20,000 crore should be recovered soon as we have clearly told our clients that it would not be possible to deliver equipment if the payments are not made. Clients who do not make payments automatically slip in the priority list and equipment supplies (to them) might be delayed.
Can you name the companies which have delayed in making payments?
It would not be fair on my part to name the companies as they might be facing financial issues at their end. But we are hopeful that we should be able to recover the dues very soon.
Kindly run us through the orders that you are hopeful of getting in this year.
There is a renewed focus on capacity expansion in power generation segment and we hope to get equipment supply orders from about 16,000 mw project tenders that are likely to come up in the next six-seven months. I guess once the tenders are in place, we would be able to have a clarity. I am not saying we will get all the orders but given the competence and profile of BHEL, we are hopeful of significant business.
In these times of high input cost where the margins are under pressure, how do you plan to reduce operating cost within the company?
We have initiated several processes to keep operational costs under check which includes works for improvement of technology absorption levels, improvement of localization, and instilling competition among the vendors to supply at lower prices, and our own productivity in terms of design to cost and lean manufacturing initiatives.
As a matter of fact, we have reduced our metal consumption by 1.5 per cent, which translates into saving of Rs 50,000 crore and helps the company become more competitive in the operating space. In-house research and development of products also helps reduce costs.
All these factors work towards positioning BHEL very competitively in the market. Though there has been a marginal reduction in profits this year, but 13 per cent in net profit over turnover is something which very few companies are able to deliver.
While the company has been very strong in power sector but now we see diversification in areas such as metro and renewable segment. Can you throw some light on the new areas that BHEL plans to enter to maintain the growth momentum?
Metro rail clearly is a growing segment and we want to be part of the country’s growth story. The capacity of existing plants would be enhanced considering the fact that 25-30 Indian cities would have metro rail network in future.
We are positioning ourselves to cater to the market. The capacities at the new plants will be in tune with the growing market demand. The company plans to invest Rs 1,000 crore in developing capacities in areas such as transport, transmission and renewable energy.
InfralineEnergy thanks B P Rao for sharing his valuable insights with our readers. In 'In Conversation', we engage experts from various sectors to share their views on the different transformations taking place in the Indian energy sector.