How BHEL, India’s engineering jewel, lost its shine

In 2012, as India was battling an economic slowdown, its government-owned power-equipment maker, Bharat Heavy Electricals Ltd, was busy raking in a lot of money.

That year, it mopped up over Rs 47,000 crore in revenue and around Rs 7,000 crore in profits. It even paid a dividend of Rs 3.6 per share that year, making it one of the country’s top 20 dividend payers.

But on August 9, 2017, BHEL was rapped by India’s central auditor, the comptroller and auditor general, for its dismal performance in the last five years . Since 2012, revenues have fallen by over 40% and profits have plunged by 93%.

The public sector undertaking primarily designs and manufactures products for the power, transportation, renewable energy, oil and gas, and defence sectors. The CAG has observed that its lack of diversification and inability to compete with Chinese competitors are dragging its performance.

“BHEL could not achieve any of the strategic plan targets till 2015-16; shortfall ranging between 23.33% and 113.91% against specific goals,” the report said.

This is the antithesis of Prime Minister Narendra Modi’s Make in India initiative that seeks to boost the country’s manufacturing. Modi’s scheme aims to increase the share of manufacturing in India’s GDP from 16% now to 25% by 2025.

Power struggles

BHEL, headquartered in New Delhi, was set up in 1964.

Between 1964 and the mid-2000s, it held a monopoly in the highly-profitable power equipment business, supplying products to state and central power utilities. A little over 75% of its revenues still come from the sector, for which it has manufactured equipment that could generate over 170 gigawatt.

Between 1972 and 2016, it posted strong growth and remained one of India’s top dividend payers. In 2013, the government even declared BHEL a Maharatna (a great jewel), allowing investments of up to 15% of the company’s net worth without government approval. This was aimed at helping it reach a turnover of Rs 1 lakh crore by 2016-17.

“Much of BHEL’s strong performance in 2011 and 2012 was the result of a super bumper growth in the power sector at that time,” said Sudhir Kumar, an analyst at CARE Ratings.

Then came the reversal in fortunes.

Beginning sometime in 2011, thermal power production, BHEL’s core business, began to slow down. “Industry demand for power has not picked up and there are hardly any new thermal power projects being set up. Overall plant load factor has also come down. All that meant that the company saw a slowdown,” Kumar said. A draft report from the Central Electricity Authority estimates that India won’t need a coal-power plant before 2022 as 70,000 megawatt capacity is already in the pipeline.

BHEL also lost business to Chinese companies as power utility firms such as Lanco, Adani Power, Reliance Power, Vedanta, and JSW went for cheaper imports.

“Today, your company is in the midst of the toughest times it has faced since its inception,” Atul Sobti, the chairman and managing director of BHEL, said in a letter to shareholders last year. “The uncertain global economic order, caused by weak global recovery, slowing global trade, and China’s growth transition, is the ‘new normal’.”

What happens now

All isn’t lost, though.

India’s growing shift towards renewable energy may have put the firm’s order book under strain, but it is also a new opportunity. The country wants to install 175 GW (1 GW is 1,000 MW) of renewable power in the next seven years. Kumar of CARE Ratings reckons that BHEL’s decision to pursue the solar sector, even though it has come “two years late,” could eventually turn lucrative.

Already, it has a solar photovoltaic portfolio of 370 MW, comprising 360 MW of ground-mounted power plants and 10 MW rooftop power plants. “BHEL has been concentrating on solar modules and although it has been a bit late, the diversification could further help business prospects,” Kumar said.

The company has also begun to manufacture products for the lucrative defence sector. In February this year, it launched a remote-controlled weapon station for the Indian Army’s Arjun battle-tanks, which helps a soldiers to aim and fire at aerial targets from inside a battle tank. In June, the company tied up with Japanese infrastructure company Kawasaki to produce stainless steel coaches and bogies for metro rail.

BHEL plans to foray into aerospace, too, and collaborate with the Indian Space Research Organisation to make space-grade solar cells and partner in satellite launches. Then, there is the business of maintenance, repair, and operations of aircraft engines.

But it is unclear how these plans will pan out. On Thursday the company announced a 4% growth in profits for the June quarter, while overall income rose to Rs 6,194.21 crore compared to Rs 6,070.21 crore in the year-ago period. BHEL’s current order book stands in excess of Rs 101,000 crore, and its future success will depend on bagging big projects this financial year, say experts.

“We believe a strong recovery may not be in sight for BHEL in the medium term,” brokerage firm ICICI Direct said in a report in June. “Even if we believe the financial performance has bottomed out in the medium term, uncertainty over big order wins will keep return ratios muted.”

This article first appeared on Quartz.