L&T-MHI evaluating BGR-Hitachi acquisition in a game changer for the Indian power business
A venture of Larsen and Toubro Ltd (L&T) and Mitsubishi Heavy Industries Ltd (MHI) is evaluating the acquisition of units set up jointly by BGR Energy Systems Ltd and Hitachi Power Europe GmbH, in what could be the harbinger of consolidation in the Indian power generation equipment manufacturing sector, according to two people aware of the development.
The BGR-Hitachi joint ventures (JVs)—one makes turbines and the other boilers—have orders valued at around Rs.3,000 crore. BGR Turbines Co. Pvt. Ltd is 74% owned by BGR Energy Systems Ltd and 26% by Hitachi, Japan, while BGR Boilers Pvt. Ltd is 70% owned by BGR Energy Systems Ltd and 30% by Hitachi Power Europe, Germany. The units have a manufacturing capacity of 3,000 megawatts (MW) each.
“The L&T-MHI JV is looking to acquire BGR-Hitachi Power JV,” said a top power sector executive, requesting anonymity.
“The BGR-Hitachi Power JV is being evaluated. MHI India is involved and is examining the assets,” added a New Delhi-based power sector analyst who didn’t want to be identified. While queries emailed to MHI on Friday remained unanswered, an L&T spokesperson said in an emailed response that the company would not respond to “market speculation”.
A BGR spokesperson denied any move to sell the business. “It is absolutely incorrect and there is no iota of truth,” the spokesperson said. “The JVs between Hitachi and BGR Energy are well established and carrying on business.”
An external spokesperson for Hitachi declined comment, saying, “Information asked pertains to an independent company. Hence, we would not be able to comment on the information asked. BGR Energy Systems operates its business based on its business plan.”
News about the possible sale comes amid uncertainty over land acquisition, power sector policies and the poor health of state-owned electricity distribution utilities, all of which have resulted in orders drying up for equipment makers. Power project developers have been struggling with interlinked issues such as fuel shortages, delays in signing fuel supply agreements, lack of long-term power purchase agreements and a credit crunch.
Still, “such a transaction makes sense given the fact that globally MHI and Hitachi have merged their business”, a former L&T executive said, speaking on condition of anonymity. In November last year, MHI and Hitachi merged their energy equipment business, with the first company holding a 65% stake and the second the rest.
“The question of the future of the JV between BGR and Hitachi Power has been doing the rounds since MHI and Hitachi’s business merged,” said a former BGR Energy Systems executive, also speaking on condition of anonymity. “Consolidation in the sector is bound to happen.”
Apart from state-owned Bharat Heavy Electricals Ltd (Bhel), the Indian power generation equipment manufacturing space comprises ventures such as those between L&T and MHI; Toshiba Corp. of Japan and the JSW Group; Ansaldo Caldaie SpA of Italy and Gammon India Ltd; Alstom SA of France andBharat Forge Ltd; BGR Energy Systems and Hitachi; and Thermax Ltd and Babcock and Wilcox Co.
Orders for the 12th Plan period (2012-17) have already been placed, with some of these going to the aforementioned units, according to the Central Electricity Authority (CEA), India’s apex power sector planning body.
“A lot of domestic manufacturing base has been set up, but there are not enough orders. There are concerns,” said a top CEA executive, who asked not to be identified.
India has a domestic boiler manufacturing capacity of 36,200MW of which Bhel and the new JVs comprise 20,000MW and 16,200MW, respectively. Also, of India’s turbine manufacturing capacity of 35,000MW, Bhel and the new JVs comprise 20,000MW and 15,000MW respectively.
“Consolidation in the industry is on the cards,” B.P. Rao, chairman and managing director of Bhel, said in February.
News of a possible sale also comes in the backdrop of the BGR-Hitachi JV not extending the bank guarantee for NTPC Ltd’s turbine order for two units of 800MW each for the Darlipali project (1,600MW) in Orissa. NTPC has been unable to place orders due to land acquisition hurdles. The JV had also emerged as the lowest bidder for the supply of super-critical boilers to NTPC and has been awarded orders for six turbine units of 660MW each.