The stock of BHEL fell two per cent on Monday, after the Rajasthan Electricity Board scrapped a tender for supply of equipment and commission of plant.
While the news may have little bearing on the company financially, this incident reinforces a larger risk of delays/cancellation of orders by beleaguered State Electricity Boards (SEB).
State-run electricity board Rajasthan Rajya Vidyut Utpadan Nigam scrapped tenders worth Rs 12,000 crore for two projects of 660 MW each. BHEL was the lowest bidder in the project and BGR Energy Systems, reportedly, the second lowest.
Lowest bid
While other SEB orders were delayed on these counts, the said project had received environmental clearance as well as fuel linkages. The scrapping of tender therefore, comes as a surprise.
Guidelines issued by the regulatory authorise prevent the order from being awarded to the second lowest bidder.
Hence, if a SEB does not wish to award the order to the lowest bidder, it may resort to scrapping the tender and starting afresh.
But pricing does not appear to be the issue here.
According to BHEL officials, the company's bid was 12 per cent lower than the second lowest bid.
Financial distress
This leads to the other possibility of the Rajasthan SEB suffering from financial crunch. Rajasthan, Tamil Nadu and Uttar Pradesh are known to be among the top loss-making electricity boards in the country.
In January, quite a few banks restructured their loans given to SEBs. Rajasthan SEB's loans worth Rs 6,000 crore were reportedly restructured. Many of the orders pending from these electricity boards were also delayed in the last couple of years.
The current bid by BHEL is not part of its order book, and hence, there is little financial impact. That said, an equipment player starts allocating resources for a project, once it is known to be the lowest bidder. To this extent, it does lead to diversion of resources.
But the bigger worry for BHEL is the trend of cancellation of bids/orders. In January, BHEL announced removing Rs 5,850 crore of orders from its books after it was cancelled by an unnamed customer.
At Rs 22,100 crore, BHELs' order inflows for 2011-12 was just over a third of the Rs 60,500-crore orders it received the previous year. Poor order flows pose the risk of reduced revenue visibility for a company. This is often a reason for the stock being de-rated in the market.