Tax on foreign equipment won't make power more expensive: B Prasada Rao

Last Updated: Sat, Jul 14, 2012 18:41 hrs

Bharat Heavy Electricals Ltd (BHEL), the biggest player in the domestic power equipment market, has seen its order book shrinking lately on a slowdown in the power sector. The company is now looking forward for a government decision on imposing a 21 per cent duty on foreign power equipment that will shield domestic manufacturers from imports In an interview with Mansi Taneja and Jyoti Mukul, B Prasada Rao, chairman and managing director of BHEL, says the the country needs to add 30,000-40,000 Mw per year if it wants to meet power generation targets and keep its economiy growing at eight per cent. Edited Excerpts:

Now that the government is moving towards imposing customs duty on foreign power equipment, do you see Bhel benefitting from it?
It’s a step towards providing a level-playing field with foreign equipment vendors because there is no duty on mega power projects. Domestic players are not looking for protection. Even in China, there is a 30 per cent customs duty on imports. But, China can come and freely and export to our country. That’s an advantage this market provides for foreign vendors. Domestic players pay a lot of taxes. For example, the excise duty is an extra tax on me. It’s nothing to do with my cost of production. The government had set up a committee under Planning Commission member Arun Maira, after which it was acknowledged that we were at a disadvantage.

Won’t the duty increase the cost of power?
I don’t expect any increase in power costs and tariffs, because overall power equipment will need local support over a period of 25-30 years. If there are problems with foreign equipment, they (power producers) will have to wait for months for fixing it. But if it’s Indian equipment, it gets fixed fast. Now, there is domestic competition among four-five companies. In the recent NTPC bulk tender, the price has been excellent, much better than even Chinese.

The government is looking at a proposal to give exemption to existing mega power projects’ imports. Will this limit the benefit of the new tax regime?
The benefit will not come till those projects for which the exemption is made do come up. These will be projects in 12th Plan period. Benefit to us will not come till the 13th Plan.

Lately, there have been some concerns on BHEL’s order book. Are cheap imports one of the reasons for that?
New orders have come down because of various problems in the power sector such as coal linkages and financing issues. Earlier, 25,000 Mw of new projects used to get finalised every year, out of which our share was about 15,000 Mw. But last year, it came down to 4,000 Mw. We expect this year it should increase to 10,000-15,000 Mw.

What is the outlook for the next few years?
The country needs to add 30,000-40,000 Mw per year if it has to reach the target of 800,000 Mw by 2032 and to maintain a GDP (gross domestic product) growth of eight per cent. This year, most of the power projects will come from the state and central sector as the private sector has been grappling with more problems. Last year, BHEL had a share of 80 per cent in the new projects, but generally our share had been 50-60 per cent of market.

With new players coming in, will you be competitive in your quotes or have you resorted to any compromise in margins in the past to get more orders?
We will remain the largest player in the segment even two years down the line. Definitely, we have the advantages of scale. We produce everything required for power plants. Over a period of 40 years, we have established skills as well as expertise required for troubleshooting. Price is a factor of the market. We have a strategy of reducing cost. We adopt new technology and localise it quickly so that costs some down. It’s a continuous effort and with this, we have been able to maintain the kind of margins which are there in our balance sheet.

If the market will require certain price corrections, we don’t mind doing that. In the past, we have managed to match the market price. Our manpower costs are fairly predictable, which is leveraged by the company to get more and more orders.

Because of the slowdown in the power sector, you have been looking at entering new segments such as oil and gas, defence among others. What kind of avenues you see there and how much would non-power business contribute to your revenues?
These are not new segments. We have been present there in a smaller way. Currently, about 20-25 per cent of revenues come from non-power segments. We are further activating ourselves in all areas where we are present in a small way. We are looking at a big growth in the transportation segment, especially in the railways. We are also increasing our offerings in transmission space to improve our market share. We are also looking at the renewable space, both solar and PV (photovoltaic). We are already doing a lot of work in strategic sectors such as defence and space.

We expect in the next 10 years, the share of non-power sector will come to 50 per cent. Both power and non-power segments will grow, but the latter will be growing faster. We want a balanced portfolio of both.

Will you be looking at creating a subsidiary for your non-power business?
We have not thought about it yet. But it may or may not be strictly possible, as we use same technologies and facilities.

How big is your export market? Are you looking at entering any new geographies apart from Pakistan, where you are close to bagging your first deal?
We do about Rs 4,000-5,000 crore exports every year. We are already present in 70 countries across the globe, including Afican, South-East and Central Asian countries. There were some problems last year in our target markets, but this year, we expect it to get back to normalcy.

What is the update on Bhel's disinvestment proposal? There have been some movements on that front of late. Do you think the market condition is currently right for disinvestment?
That is the prerogative of the government. The company does not need money. There are two views, one is that the market sentiment is not good and it might not fetch good valuation. The other view is that it will be the right time for investors. Ultimately, it is for the government to take a final decision.

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