Failure of Maharatna BHEL: CAG charts co's journey from Rs 19 cr/day profit to Rs 2.5 cr loss

New Delhi: BHEL, one of the crown jewels in the public sector enterprises (PSE) universe, turned loss making for the first time since inception in 2015-16. Is one of the reasons for this slide into losses BHEL’s inability to stand up to Chinese competition? This is what Atul Sobti, the CMD of BHEL, said in a letter to shareholders published in the annual report for that year, dated August 10, 2016: “Today, your company is in the midst of the toughest times it has faced since its inception. The uncertain global economic order, caused by weak global recovery, slowing global trade and China’s growth transition, is the ‘new normal’.” And this article in The Hindustan Times on Wednesday quotes an unnamed official of the Comptroller & Auditor General saying that BHEL was “heading towards a disaster”. He goes on to say that “Chinese companies are far superior in quality, innovation, pricing and timely completion of the project.” The CAG report tabled in Parliament shows BHEL’s profit of Rs 7,400 crore in 2011-12 turned into a loss of Rs 913 crore in 2015-16. As per the Public Sector Enterprises Survey, along with BHEL, another Maharatna, the Steel Authority of India (SAIL), held the dubious distinction of displacing BSNL to become the number one loss making public sector unit in India in 2015-16. Just like BHEL, SAIL too saw its net worth turn negative within one year, as its revenue declined by Rs 7,064.61 crore or an average Rs 19 crore every single day of last fiscal. It single-handedly accounted for close to a fifth of the losses brought in by the top 10 loss making central public sector units last fiscal. [caption id=“attachment_3910471” align=“alignleft” width=“380”]  Representational image.[/caption] That our PSUs are sliding deep into red is evident: In 2015-16, combined losses of 78 Central PSUs widened by almost 55 percent over the previous fiscal. So what has lead to this state of affairs, where blue-chip PSUs are turning loss making with a vengeance? According to a written reply by the Minister of State for Heavy Industries, Babul Supriyo, in the Lok Sabha, BHEL has been missing turnover targets by a wide margin, year on year. In 2015-16, it missed its turnover target by a fifth. In the previous fiscal, the company was able to achieve only two-thirds of its targeted turnover. According to the CAG report, BHEL is doing several things wrong: 1) The country’s chief auditor said even when the power sector plunged into a slowdown, BHEL did not diversify into new business areas. Power continued to account for more than three-fourth of BHEL’s turnover between 2011-12 and 2015-16. BHEL’s turnover declined by over 46 percent, from Rs 49,510 crore in 2011-12 to Rs 26,587 crore in 2015-16. Profit of Rs 7,040 crore in 2011-12 turned into a loss of Rs 913 crore in 2015-16. That means BHEL went from earning a daily profit of almost Rs 19 crore to bringing in a daily loss of Rs over Rs 2.5 crore within four years. 2) BHEL did not set year wise milestones for implementation of the envisaged strategies; it could not achieve any of the strategic plan targets till 2015-16; shortfall ranged between 23.33 and 113.91 percent against specific goals. 3) The bane of our PSUs has been bulging employee costs and BHEL is no different. It has been hiring manpower despite hurtling towards losses. CAG says despite slowdown in the power sector since 2010-11 and dampening investment sentiments, BHEL inducted 9,346 employees between the calendar year 2011 and 2012 against retirement of 5,844 employees during this period. This meant that the percentage of employee cost to turnover increased consistently from 11.04 percent in 2011-12 to 20.84 percent in 2015-16. So by 2015-16, employee costs accounted for a fifth of the turnover! In the splash of red on BHEL’s balance sheet, the government obviously turns out to be the biggest loser. The CAG report notes that market valuation of BHEL declined from Rs 97,940.71 crore at the beginning of April 2011 to Rs 37,533.95 crore (as on 16 February 2017), representing a drop of 61.68 percent. Or roughly by two-third. Consequently, the market value of the government’s holding in BHEL also decreased by Rs 38,092.50 crore. The report notes that during this period, the BSE Capital Goods Index increased from 13,255.14 to 15,267.22 and BSE PSU index remained almost at the same level, but BHEL’s share price declined sharply from Rs 412.17 per share to Rs 153.35. Not just China, BHEL is obviously also being trumped by indigenous companies.