NTPC's Rs 16k cr order: Why BHEL shouldn't party just yet

Shares of heavy equipment maker BHEL soared nearly 13 percent in early morning trade after the Supreme Court on Thursday cleared the way for state-run power generation utility NTPC to place orders worth Rs 16,000 crore for supercritical equipment as the Italian boiler maker Ansaldo Caldaie failed to technically qualify for the bidding process.

A Delhi High Court had earlier ruled in Gammon-Ansado’s favour when it had challenged its disqualification. However, the Supreme Court reversed the decision, leaving BHEL, L&T-MHI, BGR-Hitachi as potential bidders.

[caption id=“attachment_216861” align=“alignleft” width=“380” caption=“BHEL witnessed a negative order inflow of Rs 3,500 crore for the October-December quarter and for the nine months ending December 2011, the order inflow for BHEL stood at Rs 10,000 crore against a guidance of Rs 55,000 crore for FY12.”]  [/caption]

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Reacting to the news, BHEL was basking in the glory, trading at an all-time high today. However, as a CLSA note points out, the heavy equipment maker will not be the sole beneficiary of NTPC’s order. In fact, the bulk tender order will be divided between the L1 and L2 players- L1 being the player who offers the lowest bid and L2 being the player who is the next best bidder.

According to the report, “Boiler bulk tender conditions stipulate that three projects (six/seven units) will be awarded to the L1 bidder, while the remaining two projects (four/ five units) will be awarded to the L2 bidder.”

Since BHEL will be considered the L2 bidder, only one amongst L&T and BGRstands a chance to win boiler orders. This in return will make pricing very aggressive and the critical orders that BHEL finally does manage to bag will assess its long-term margin growth. Moreover, BHEL witnessed a negative order inflow of Rs 3,500 crore for the October-December quarter and for the nine months ending December 2011, the order inflow for BHEL stood at Rs 10,000 crore against a guidance of Rs 55,000 crore for FY12. Hence the amount of NTPC’s orders BHEL actually manages to get will be an acid test for the company.

Another concern for BHEL is the shortage of coal supply. The recent steps by the PMO to tackle the coal availability issue are favourable for the power sector but not for BHEL that may face major shortage of orders, says Nomura, which downgraded the stock to neutral. Several projects could still face project delays due to lack of fuel supplies and that will inturn delay orders for BHEL.

Developers that do not feature on the Cabinet’s list of projects that are to get coal supply will now wait for coal block auction results to assess their fuel security. And this could further delay developers’ decision on new equipment orders, which will impact BHEL negatively.

“Even as demand for power is unlikely to slow, we expectactual power capacity to be constrained by limitations on land and fuel availability and environmental clearances, " said Nomura. Further, the slowdown in order flows will also put pressure on BHEL’s working capital.

Nomura cut BHEL to “neutral” from “buy” and CLSA maintained a “sell” rating.

The stock is currently trading at Rs 306.75, down 5 percent from its day’s high.