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Raghuvir Srinivasan

THE last two years have seen a turnaround in the finances of Bharat Heavy Electricals (BHEL). Its order-book has expanded sizeably and the cash-surplus position has turned it into an interest earning company.

In this interview with Business Line at New Delhi recently, Mr C. Srinivasan, Director (Finance) shares his experience of managing the finances of a company that is into long gestation projects.

Excerpts:

Could you give us an insight into the current financial position of BHEL?

After 2000-01, when the company was going through a difficult period in order booking there was all round improvement in 2001-02 when we booked orders worth Rs 9,800 crore. That year we paid off all our short-term loans, including cash credit of Rs 1,025 crore, by raising a long-term loan of Rs 500 crore and we ended 2001-02 with a total loan of Rs 600 crore including the fresh one that we raised. We consolidated on this in 2002-03 when our order book surged to almost Rs 11,000 crore for that year alone. Exports alone were Rs 1,400 crore including a major order from Libya. Today, we have a consolidated order book of Rs 16,500 crore.

We also pushed our debtors for collections including state electricity boards (SEB) from whom we collected about Rs 225 crore. That brought down outstanding debts by about Rs 500 crore in 2002-03. Our debtors outstanding period came down from 230 days to 198 days which is a substantial improvement considering that our own strategic plan was to go down to 180 days by 2006-07 only.

How do you manage your working capital in this kind of a business with long lead time?

What we do is we negotiate price with our customer in such a way that there is even flow of funds. We take an advance of 10-15 per cent depending on the market condition, which will help us to mobilise the initial requirement of raw material. Then, we collect 75-80 per cent against despatches progressively.

Even though there is a long manufacturing cycle, the payment against the contract is staggered in such a way that smooth functioning is possible. But you cannot depend only on that because most of the orders are executed for SEB's where payments get delayed. So you should have good liquidity to back you up. Our liquidity position is very good — we don't use bank credit and our cash surplus is about Rs 1,200 crore. Last year our average net cash generation after all obligations including dividend payment was about Rs 600 crore. This is deposited in a bank account and from an interest paying company we have turned into an interest earning company.

You said you have deployed your surplus in bank accounts. How does it help you in the present low interest rate environment?

You see, this is unfortunate. When we were borrowing, we did so at around 13-14 per cent. Now when we are in surplus, the market rate itself has come down. We have certain limitations on investment. There are specific instruments in which we can invest surplus such as bank deposits, treasury bills, AAA rated corporate debentures and so on. We strictly adhere to this and in an absolutely safe investment return will obviously be less. It generates about 5.5-6 per cent. But then, the post-tax cost of our debt is also only 5.5 per cent. We raised our debt at 8.85 per cent at a time when rates were very high.

What is your capital expenditure programme for the year?

In the current plan we have estimated our capital expenditure as Rs 700-odd crore to refurbish our hydroelectric project capabilities. We believe that in the next 5 years, hydro projects will have a lot of potential apart from gas-based projects. The other area we are concentrating on is nuclear power project capabilities apart from investing in manufacture of turbine blades.

The current year's capex target is Rs 180 crore.

You have a cash surplus of Rs 1,200 crore and a capex programme that will consume Rs 180 crore leaving a large surplus. Any change possible in your dividend policy?

This is being reviewed. Only 3 years back we raised our dividend rate to 30 per cent from 20 per cent. Last year we raised it from 30 to 40 per cent. We are constantly looking to reward shareholders but we have to look at the long term too. Our policy is that we should not raise the dividend so much that later on we cannot keep pace. Ours is a seasonal business and we don't know how the future will be. That said, we would definitely look at this issue sympathetically.

What have been your efforts on cost reduction?

The major part of our cost is materials. We have adopted consolidated buying for materials such as steel and copper. The volumes will give us better discount and substantial bargaining power. We have adopted reverse auctions that is transparent and also beneficial to us. We are also looking at standardising design and engineering for 250 and 500 MW plants that are the common ones in India. This will help us to reduce the cycle time and cost.

On the employee side, we have signed a wage agreement up to 2006, which will help us to stabilise costs. We have also reduced manpower from about 62,000 to 47,500 employees in the last three years through 3 Voluntary Retirement Schemes (VRS). We believe another 1,500 may opt for another VRS that we are now planning, apart from those superannuating. We are ultimately aiming at an employee size of 45,000, which, we believe, is optimal for the size of our order book. Our competitiveness is also enhanced by the fact that our assets are all depreciated and we also have no interest charge.

You put through a currency options contract recently. Could you elaborate?

Basically we have a Rs 500 crore loan. Last year we took a forward cover against the dollar and this year we have now offered an option for about Rs 100 crore. This is a rupee loan for which we can take a dollar option. When we see the dollar rate coming down, instead of a fixed rupee I can switch to a floating dollar. With the dollar falling, my principal will correspondingly go down.

How exactly does this operate?

We will earmark a portion of the loan, which will be converted into a forex liability. Since we have substantial forex earnings we can afford to take a forex liability. We converted Rs 100 crore of the loan into foreign currency at the prevailing dollar rate. The interest will also be floating, linked to the LIBOR. So there will be a premium to be paid since the counter-party is taking the rupee liability. That premium of maybe 2.5 per cent, will be added to the LIBOR which is currently 1.5 per cent. We will have to pay 4 per cent in all.

Only the exchange rate portion will be open. At that time if the dollar rises then I will have to pay more rupees. That is an exposure I can take given my dollar earnings; I can pay dollar to dollar. We have opted for such a contract for a 1- year period. At the end of this period we can take a call on extending or terminating based on the prevailing position.

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