Escalating steel prices likely to affect 60% of Bhel’s order book

A delay by Bharat Heavy Electricals Ltd, or Bhel, in meeting its order book commitments may cost the company severely as steel prices have escalated by 40% since the fixed price contracts were signed.
Since Bhel cannot pass on the rise in material costs to the consumer, the power equipment manufacturer has no option but to absorb the increase in input costs or mitigate part of it through a slew of cost control measures.
Heading north: A steel processing unit in Hisar, Haryana. Though steel price will stabilize as the government has introduced an export tax, it will hurt the profit margins of companies such as Bhel, analysts say. (Photo: Rajeev Dabral/Mint)Bhel has an annual steel requirement of 600,000 tonnes.
“The sharp rise in steel prices will affect 60% of our present order book. Most of the times we work on fixed price contracts. When we had signed these orders (in 2003), the steel prices were at Rs17,000 per tonne. Today they are at Rs24,000 per tonne. We being a PSU (public sector undertaking) there is no provision to change the contract provisions for us or our subcontractors,” said a company executive, who is close to the developments but did not wish to be identified.
The company with a manufacturing capacity of 10,000MW per annum has a present order book position of 31,923MW. Bhel posted a net profit of Rs2,815 crore on a revenue of Rs21,608 crore in 2007-08 and ended the year with an order book worth Rs50,265 crore.
The executive, however, maintained that the profit margins at the company may not impact in the short run due to various steps taken by Bhel, but if steel prices did not soften then it was bound to have a long-term impact on the company’s profits.
“With the steel prices remaining at the current levels and if the power generation equipment prices remain at Rs4 crore per MW, our margins will certainly come under pressure. We are trying to contain costs, cutting down the material requirement. In order to take care of sharp escalation in steel prices we have an agreement with steel manufacturers in the country, but it is only for a year,” the executive said.
However, analysts maintain that Bhel would take a hit even in the short term.


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