In a desperate bid to woo customers and revive growth in the capital goods space, private sector manufacturers are taking a haircut and offering discounts for power generation equipment.
In engineering, procurement and construction (EPC) orders, for instance, manufacturers are now offering a discount of 10% over and above average prices of Rs.4.24-4.5 crore per megawatt (MW) to run their plants.
Indian power generation equipment manufacturers include state-owned Bharat Heavy Electricals Ltd (Bhel), Doosan Heavy Industries and Construction Co. Ltd, and joint ventures between Larsen and Toubro Ltd (L&T) and Mitsubishi Heavy Industries Ltd; Toshiba Corp. and JSW Group; Ansaldo Caldaie SpA of Italy and Gammon India Ltd; Alstom SA of France and Bharat Forge Ltd; BGR Energy Systems Ltd and Hitachi Power Europe GmbH; and Thermax Ltd and Babcock and Wilcox Co.
“With no orders around, manufacturers are ready to work on wafer-thin margins or even negative margins,” said a Mumbai-based capital goods sector analyst requesting anonymity.
In the domestic market, slowing economic growth, high borrowing costs and delays in securing regulatory approvals have impacted power plants. No private sector power equipment maker has received orders in 2012-13 and it is unlikely to be very different this year, especially in the aftermath of irregularities associated with the allocation of coal blocks by the government.
“Projects with an implementation horizon of 2020 have placed orders. Other than projects like ultra-mega power projects where domestic sourcing is required, the electricity generation equipment market at best is a 10,000MW per year of orders market, while supply may be three times that, leading to cut-throat competition,” said Debasish Mishra, senior director at Deloitte Touche Tohmatsu India Pvt. Ltd, an audit and consulting firm.
India’s power generation equipment manufacturing space has a capacity of around 30,000MW, with an equal share of boiler and turbine generator sets. Overall, India has a power generation capacity of 2,28,721.73MW, with a targeted additional capacity of 88,000MW in the current Five-Year Plan (2012-17).
Power project developers have also been struggling with interlinked issues such as fuel shortages, and delays in signing fuel supply agreements and long-term power purchase agreements.
“These are challenging times. The manufacturers are offering rock-bottom prices for the sake of running their plant. The logic is, there is not much work around and one can’t keep the facilities idle. So in such a scenario, the focus is on recovering the operating cost. We can’t offer such discounts. There are so many claimants to one tender,” said a senior executive at Bhel, India’s largest power generation equipment provider.
Last year the government hiked the import duty on power generation equipment to 21% from 5% in a bid to hold off competition from Chinese manufacturers such as Dongfang Electric Corp. and Shanghai Electric Power Co. Ltd. But even that move hasn’t helped much.
“We have issued an advisory to the states to only buy from domestic equipment manufacturers. This may help in some orders being placed,” said a senior Union power ministry official requesting anonymity.
“This pricing strategy has been played by the private sector manufacturers. But only those with huge orders on the engineering side can play this for a long time. Even our prices are very competitive as we can’t be below par,” added another Bhel executive who also didn’t want to be identified.
Queries emailed to the spokespersons of Bhel, Doosan Heavy Industries, L&T, Mitsubishi Heavy Industries, JSW, Alstom, Bharat Forge, Hitachi, Thermax, and Babcock and Wilcox on Monday evening remained unanswered till press time on Tuesday.
A Toshiba spokesperson in an emailed response said, “We cannot clarify the general price trends since it differs from deal to deal depending on the bidding process and other factors. At the same time, we cannot disclose the price for specific deal considering the relations with customers.”
An Ansaldo Caldaie spokesperson said, “We are in line with the present market prices.”
A Gammon spokesperson in an emailed response said, “Very few projects relating to thermal power plants are in the bidding stage at present. In any case, our JV (joint venture) is not participating actively on these offers at the moment and hence quoting at a discount as mentioned by you does not arise.”
A BGR Energy Systems spokesperson in an emailed response said, “We win orders on a competitive bidding basis through a transparent process.”
B. Prasada Rao, chairman and managing director of Bhel, articulated the general mood of pessimism at the company’s annual general meeting in September, saying, “Prevailing economic and business environment do not give assurance of recovery in economic and business environment in near future.”
Bhel’s order inflow rose 43% to Rs.31,528 crore in the year ended 31 March. In comparison, it had received orders worth Rs.60,507 crore in 2010-11 and Rs.22,096 crore in 2011-12.
The only significant order that Bhel secures this year is for the supply of a steam generator package for two thermal units of 500MW each from Neyveli Lignite Corp. Ltd. The Rs.2,569 crore order comes at a time when Bhel has been struggling to optimally run its manufacturing capacity of 20,000MW per annum.
Analysts believe that the tough times may continue for the sector. “There are no visible near-term signals that we are close to any turnaround in the sector,” wrote UBS Global Equity Research in a 28 October report.
“Although it appears that the sector may have reached a bottom, sector participants expect conditions to remain difficult in the short to medium term and anticipate no major revival,” the report went on to add.
Similarly, Credit Suisse India Research said in a 27 August report, “We expect power sector ordering to remain sluggish at least until FY15 as: (1) reforms to augment domestic coal production are still lacking (linkage coal allocation is restricted to 78 GW of post Mar 2009 projects, implying another 62 GW of capacity already ordered would get coal only after Mar 2017), (2) auctioning of captive coal blocks for private companies is yet to commence and (3) limited power procurement bids are likely to be floated under the new Case-II bidding norms.”
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