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What BGR Energy’s NTPC Order Win Means for BHEL And L&T

  • In a slowing investment environment in which orders for big projects are few and far between, intense speculation had built up on who would win the mammoth Rs 16,000 crore tender from NTPC.The speculation is over now: a joint venture of BGR Energy Systems Ltd and Hitachi power has emerged as the lowest bidder for the supply of supercritical boilers.

Shrinking margins

  • So what does the win by the BGR-Hitachi combine mean for the other players that had bid, —Bhel and L&T? Bhel has a preferential status with NTPC till 2012, under which it is entitled to get 50 percent of any bulk tender orders of NTPC if it matches the lowest bidder’s price. That means it can still execute half of the orders if it supplies at the same price as BGR-Hitachi.Bhel has a preferential status with NTPC till 2012, under which it is entitled to get 50 percent of any bulk tender orders of NTPC if it matches the lowest bidder's price. AFP

  • For Bhel, getting NTPC’s order will be a big relief. Its order book for the first nine months of this financial year was down 58 percent from the same period a year ago. But the price at which BGR has bid is a bit of a concern. Ambit Capital estimates the average realisation for BGR-Hitachi at Rs 9 lakh per mega watt— about 25 percent lower than Bhel’s average realisations of the past ten years.In the past two years, Bhel’s gross profit margins have been around 41 percent; however, then, its realisations were around 33 percent more than the Rs 9 lakh bid  made by BGR. That again, according to Ambit, gives Bhel a single-digit gross margin.

Shrinking market

  • Of  even greater concern are the shrinking opportunities for players like Bhel, L&T and BGR in the boiler market. It means that the erosion in margins, according to analysts from Enam, is actually structural and something that companies will have to live with.Another indication of the poor conditions in this market is that around 100 GW of orders for the 12th five year plan have already been placed and very few orders remain open, reducing the potential to generate revenues.In such a scenario, unless business sentiment and project implementation improve drastically over the next two years, a recovery in prices looks unlikely.

Order Inflow for L&T in trouble

  • In the case of L&T, losing the bid at this stage means it has lost the opportunity to win any order in the three tender offers by NTPC.A report by Bank of America-Merrill Lynch also said L&T had lost out on a Rs 17,500 crore contract from  Abu Dhabi Airport. It makes achieving the company’s guidance of increasing orders by 5 percent in the current financial year highly challenging. Indeed, BoAML thinks the final figure will reveal a 5 percent drop in order inflows compared with last year.In the end, L&T, which has said it does not want to compromise on margins, may perhaps have to depend more on construction and infrastructure orders if it is not ready to bid aggressively.For L&T, the road ahead just got tougher.

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