Companies & Sectors
Coalgate, fake orders raise questions on BHEL’s order book credibility, says Nomura

“The next 2-3 years could witness a significant clean-up of the system as several orders placed with BHEL, by its customers, could be restructured, cancelled or deferred,” says a Nomura Equity Research report

Some of BHEL’s private sector customers have been named by the Central Bureau of Investigation (CBI) in the alleged coal allocation scam, widely referred to as ‘Coalgate’. While the status of coal mines allotted to them remains uncertain, Nomura Equity Research in its report highlights the potential risk to BHEL’s order book from projects that were ordered on the back of these mine allocations. It is now a credibility issue for BHEL’s order book, points out Nomura.

 

Several equipment orders placed in the past (especially to Chinese firms) are potentially fake orders and were placed in order to favourably boost their chances of securing coal mine allocation. Nomura believes the next two to three years could witness a significant clean-up of the system as several orders could be restructured, cancelled or deferred. While one can argue that advances would have been paid against potential fake orders too, the global brokerage firm highlights that such advances would have been negligible given the magnitude of gains that these coal mines would have delivered to the promoters.

 

The proposed means of improvement in coal supply could, in fact, halt near-term order inflows for BHEL. Complying with the directive from the Prime Minister’s Office, Coal India (CIL) has initiated the process of signing fuel supply agreements (FSAs) with power plants having long-term power purchase agreements (PPAs) which are expected to be commissioned by 31 March 2015. However, Nomura notes that the order could increase uncertainties on new order inflows for BHEL. How will the scenario change?

 

Earlier, power developers signed Letters of Assurance (LOAs) with CIL and hoped to get at least some coal on a priority basis to start the power plant. However, based on the new development, the projects will be evaluated to confirm whether the LOA will be converted into FSA. Nomura expects the Central Electricity Authority of India (CEA) to notify the list of projects shortly. Nomura says that there will be certain projects which will not feature in this list. These projects are likely to face pressure from lenders on account of increased fuel uncertainty and may be delayed/ cancelled.

 

Even though the bulk of the Twelfth Five-Year Plan orders are already finalised, projects not in the notified list and yet to order equipment will have to wait for the results of the coal block auctions for fuel security. Decision-making for equipment orders placed with BHEL, thus, could be delayed further, in Nomura’s view.

 

For several months now, there has been speculation regarding the implementation of an import duty on imported power equipment. Nevertheless, Nomura believes that the proposed duty is still a non-issue.

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