The Indian rupee's tumble to a record low may help Bharat Heavy Electricals Ltd. (BHEL), the nation's biggest power-equipment maker, regain market share from Chinese rivals as the weaker currency pushes up import costs for generators.
The rupee has declined 19 percent against the U.S. dollar and 21 percent against the yuan in the past year, the worst performance in Asia, according to data compiled by Bloomberg. The depreciation means companies such as billionaire Anil Ambani's Reliance Power Ltd. are paying more for foreign loans taken to purchase parts from China.
"This is a positive indicator and it certainly improves our cost competitiveness," P.K. Bajpai, finance director at New Delhi-based BHEL, said in an interview.
Orders won by BHEL for boilers, turbines and generators fell to the least since 2007 as of March 31 as suppliers including Shanghai Electric Group Co. (601727) and Dongfang Electric Corp. (600875) won business by offering discounts and quicker implementation schedules. A sliding currency will favor the Indian state-owned company's bids for contracts and reverse the stock's plunge to a five-year low, said Rohit Singh, an analyst at IDBI Capital Market Services Ltd. in Mumbai.
Negative Sentiment
Shares of BHEL have slumped 44 percent in the past year, compared with a 10 percent drop in the benchmark Sensitive Index (SENSEX), as Chinese suppliers expanded their market share in India while a shortage of coal stalled some projects. The stock, headed for its third annual loss, closed at 200.75 rupees on May 18, its lowest level since March 16, 2007, according to data compiled by Bloomberg. It traded at 217.95 rupees yesterday.
"The negative sentiment on the stock reflects the overall challenges faced by the power sector in India," Bajpai said. "Power is something that can't be ignored, and we are confident of bouncing back."
Most analysts don't share his optimism. The stock has 12 buy ratings versus 26 who grade it a sell, data compiled by Bloomberg show.
The local currency's weakness is temporary and many producers aren't in a hurry to place orders because of the fuel- supply bottleneck, said Lakshminarayana Ganti, a Mumbai-based analyst at the brokerage unit of Standard Chartered Plc.
"BHEL should brace for a long winter, a lull of at least a year for orders," he said in a telephone interview.
Expanding Market
Chinese equipment makers controlled 29 percent of the Indian market in the five years ended March 31, according to a presentation on BHEL's website, versus almost nothing in the previous period. Two calls to Shanghai Electric seeking comments weren't answered, while two to the office of Dongfang's Board Secretary Zhang Linchao went unanswered.
Reliance Power (RPWR) ordered $10 billion of equipment in October 2010 for its coal-fired plants and signed agreements for $12 billion of loans from Chinese banks. Lanco Infratech Ltd. (LANCI) said in September it was considering raising yuan loans to fund $3.8 billion of projects, while Jindal Steel & Power Ltd. (JSP) ordered equipment from Shanghai Electric about three years ago for its generation units in the states of Orissa and Chhattisgarh.
The rupee's drop is making banks "more cautious" in lending to new projects as capital and hedging costs increase for producers that have borrowed in dollars and yuan, Sushil Maroo, chief financial officer at Jindal Steel & Power, said in a telephone interview.
"The volatility in foreign-exchange rates will not be short-lived and the answer is more and more indigenization," he said. "Bharat Heavy is well poised to make big leads in the next plan orders."
Boosting Generation
Prime Minister Manmohan Singh plans to spend as much as $300 billion in the five years to March 2017 to boost generation capacity and reduce blackouts to accelerate economic growth from the slowest pace in three years. After failing to meet its targets dating back to 1951, the government's goal for the five- year period is to add 76 gigawatts. About one in four Indians lives without electricity as supplies aren't enough for the entire population.
"The concern with BHEL is the slowing pace of order intake and if that is fixed, the stock could rebound," said IDBI Capital's Singh, who has a buy rating on the stock. "If the rupee continues to slide for a longer time, it may turn things in favor of domestic manufacturers."
BHEL's orders in the financial year ended March 31 declined 63 percent to 221 billion rupees ($4 billion), the least in five years, according to Hitesh Kuvelkar, an analyst at First Global Stockbroking in Mumbai. The company expects a jump in contracts in the current year to about 600 billion rupees, he wrote in a report dated May 24.
Capacity Glut
Net income in the quarter to March 31 rose 21 percent to a record 33.8 billion rupees, beating estimates, according to a statement from the company last week. BHEL plans to double revenue in five years, with a target of $20 billion, Chairman B. Prasada Rao said on April 3.
India's total power-equipment capacity is 24 gigawatts annually, compared with a demand of about 22 gigawatts. BHEL and leading local rivals including Larsen & Toubro Ltd. (LT) and BGR Energy Systems Ltd. (BGRL) plan to increase that to 36 gigawatts in the next three to four years, in what could lead to a glut, IDBI Capital's Singh said.
Overcapacity in the local market and a weakening rupee may diminish interest in Chinese makers, according to Jindal Steel & Power's Maroo.
Adani Power's Chief Executive Officer Ravi Sharma didn't respond to questions sent by e-mail, while Reliance Power's CEO Jayaram P. Chalasani and Lanco's spokesman V. Sreenivas didn't answer two calls each made to their cell phones.
"What the weakening of the rupee means is that cash flow requirements from projects will become critical," Mehul P. Sukkawala, a Mumbai-based credit analyst at Standard & Poor's. "The preference for local equipment manufacturers will rise, provided they are able to meet the demand and the desired technology."
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