BHEL is on right track, but a slow one
₹275.85 on 4 March, the excitement has fizzled out. While the JV is a win-win situation for both the partners, a deeper look at the contours of the deal suggests that benefits will accrue only gradually. BHEL will hold a 49% stake in a JV that will set up an ammonium nitrate manufacturing plant.
The plant will have a capacity of 2,000 tonnes per day, or 6.6 lakh tonnes per annum. BHEL will monetize its surface gas technology, which will enable production of ammonium nitrate from 13 lakh tonnes of coal per annum to be supplied by CIL. Ammonium nitrate is a major ingredient in manufacturing of bulk explosives.
It is a key raw material for CIL as the explosives are used for blasting before undertaking the open-cast mining operations. This will act as backward integration for CIL and reduce its import dependence. However, this JV with CIL is also unlikely to move the needle much in terms of growth in the near-term owing to the gestation period of at least two years before commissioning.
The profit potential of the JV can be estimated using the financials of ammonium nitrate business of Deepak Fertilizers and Petrochemicals (DFPL). DFPL, which makes ammonium nitrate from liquefied natural gas, had a turnover of ₹4,300 crore in FY23 from the sale of 5 lakh tonnes of ammonium nitrate with an average selling price at ₹86,000 per tonne. Assuming 75% capacity utilization for the JV of BHEL-CIL, it should give almost the same sales value and profit of nearly ₹1,500 crore at an optimistic net profit margin of 40%.
BHEL’s bottom line could increase by around ₹750 crore as it has 49% share in the JV. Even so, a turnaround in the earnings per share growth with the number of shares at 3.48 billion is unlikely. This is not the first
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