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Edited Transcript of BHEL.NSE earnings conference call or presentation 13-Nov-19 11:30am GMT

Q2 2020 Bharat Heavy Electricals Ltd Earnings Call

New Delhi Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Bharat Heavy Electricals Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kamalesh Das

Bharat Heavy Electricals Limited - Director of Engineering, Research & Development and Executive Director

* Manoj Kumar Varma

Bharat Heavy Electricals Limited - Director of Power & Director

* Nalin Shinghal

Bharat Heavy Electricals Limited - Chairman & MD

* Yogesh R. Chhabra

Bharat Heavy Electricals Limited - Deputy Company Secretary

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Conference Call Participants

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* Abhineet Anand

SBICAP Securities Ltd., Research Division - Analyst

* Abhishek Puri

Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power

* Aditya Bhartia

Investec Bank plc, Research Division - Analyst

* Ajinkya Dilip Bhat

Macquarie Research - Analyst

* Girish Achhipalia

Morgan Stanley, Research Division - VP

* Inderjeet Singh Bhatia

Macquarie Research - Head of Research

* Koundinya Nimmagadda

JM Financial Institutional Securities Limited, Research Division - Analyst

* Mohit Kumar

IDFC Securities Limited, Research Division - Analyst

* Pulkit Patni

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Puneet J. Gulati

HSBC, Research Division - Analyst

* Rahul Gajare

Haitong International Research Limited - Research Analyst

* Renjith Sivaram

ICICI Securities Limited, Research Division - Assistant VP

* Renu Baid

IIFL Research - VP

* Sumit Kishore

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Abhineet Anand, SBICAP Securities Ltd., Research Division - Analyst [1]

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Good evening, everyone. Welcome to 2Q FY '20 Conference Call of BHEL. From the management, we have the Dr. Nalin Shinghal, CMD, BHEL; Mr. Subodh Gupta, Director, Finance; Mr. Manoj Varma, Director, Power; Mr. Kamalesh Das, Director, Engineering; and Mr. Anil Kapoor, Director, HR.

I'll hand over to the management for opening remarks, post which we can have Q&A. Over to you, sir.

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [2]

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Thank you, Mr. Anand. Good evening, friends. I'm Nalin Shinghal, CMD, BHEL, and I have with me Shri. Subodh Gupta, Director, Finance; Shri. Manoj Varma, Director, Power; Shri. Kamalesh Das, Director, Engineering and R&D; and Shri. Anil Kapoor, Director, HR. A very warm welcome.

Dear friends, capacity expansion continues to be driven by the Union government in the areas of thermal as well as nuclear power, railways, et cetera. In addition to the ordering that has been seen in the first half of the financial year, various major tenders are expected to be finalized in the coming months. Ordering in emission control equipment in this year is also picking up, with significant ordering expected from utilities in the near term. Railway transportation and water management business are gaining traction with the continued focus of the government. We are targeting to enhance our business in these areas.

Coming to events specific to BHEL. Efforts towards enhancing our performance have been given a new thrust. In the immediate context, we are concentrating on various aspects of project execution. Through concentrated efforts in the recent past, cash collection is showing improvement. More initiatives are being put in place to improve the working capital position, including strategies to control material costs. We are also looking at ways to improve the existing performance management systems to make them better linked to the company's overall performance.

Diversification strategies are being nuanced to ensure more avenues of future sales. With the combination of strategies addressing both the immediate as well as long-term prospects, we are confident not only overall improvement in the company's performance, but also building business for the future.

I would like to share with you some important milestones of the previous quarter. Our ESD in Bangalore plant, after commissioning of the lithium-ion cell line, trial runs have been completed and prototype development is in progress by ensuring commencement of commercial production in the fourth quarter of this year.

In the Railway segment, which is one of the most -- major diversification areas for us, the second and third series rakes of AC EMUs have been made operational in the last quarter in the Mumbai Suburban Railway Services; 10 more rakes are under production. Incidentally, the first rake, which started operation in December 2017, has clocked more than 2.3 lakh kilometers in operation.

During Q2 FY '20, we booked orders worth INR 7,404 crores out of which Power segment is INR 5,619 crores, Industry segment is INR 1,346 crores and export is INR 439 crores. Major orders received in the Power segments were FGD packages for Nabinagar and BRBCL Nabinagar and primary and secondary erection package for Kudankulam nuclear power plant.

In the Industry segment, major contributions are from Solar and Transportation segments.

With this, the total order book as on September 30, 2019, stands at INR 108,603 crores, out of which the Power Sector is INR 87,924 crores, Industry Sector is INR 11,205 crores and INR 9,474 crores is from export projects. In beginning October, we received order for steam turbine generator package for 2 x 660 megawatt THCD IL Khurja project worth INR 1,575 crores.

We are safely placed in tenders, including 2 x 660 megawatt NTPC Talcher and 1 x 800 megawatt SCCL Adilabad project, numerous FGD projects and many tenders in spares and services segments.

Tendering is underway for 2 x 800 megawatt NTPC Singrauli, 2 x 800 megawatt NTPC Lara and 3 x 800 megawatt NLC Talabira projects. Tenders for FGD for more than 20 gigawatts mostly from government utilities are also in process.

In Nuclear segment, tenders are active for fleet mode procurement of TG Island package on EPC basis for 6 x 700 megawatt PHWR reactors and 40 numbers of steam generators for 10 x 700 megawatt PHWR reactor.

Coming to the financial performance. Pace of execution is picking up. During the quarter, the company registered a turnover of INR 6,029 crores, showing an improvement of 37% over Q1 FY '20. Though we are -- though there are pressures on material costs due to changes in product mix, but our constant focus on controlling costs such as containing miscellaneous expenses, et cetera, has enabled us to post profits in this quarter.

EBT and PAT for the quarter stand at INR 165 crores and INR 119 crores, respectively. As a percentage of turnover, this stands at 2.7% and 2% compared to minus 7.8% and minus 4.9% in the previous quarter.

Cash collection is one of the major operational priorities, which is now showing good results. There is a double-digit growth in cash flows, which stand at INR 12,204 crores for the first quarter of the year compared to INR 11,088 crores in H1 2018-'19.

Thank you all once again for joining this conference call. We will take the questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from the line of Sumit Kishore from JPMorgan.

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Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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Sir, my first question is on execution. If we look at execution growth on a year-on-year basis, there has been a decline once again. Given that for the full year, we have started out expecting a growth of almost 10%, where are we in terms of the top line growth for the full year in terms of the MoU target that you have? What are the factors that are holding down execution?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [3]

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We cannot give a forecast on the year-end position, but as of now, as I've already mentioned, there is a substantial growth as far as Q1 is concerned, because Q1 was really a quarter of concern for us, and so significant efforts have been made for improvement there. So you already have the Q2 figures which have come out now.

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Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [4]

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Okay. And have the factors which had depressed execution in Q1 been addressed in terms of delays at the customer end, tight liquidity, land availability issues, et cetera?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [5]

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We are in the process of addressing those. I cannot say that they have been fully addressed, but you see that the results are showing largely efforts have been made to tighten up this whole -- the execution process. The land delays, yes, they are certainly still continuing. Would you like to add any more?

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Unidentified Company Representative, [6]

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So actually what CMD is telling, now we have to also make a balance between execution vis-à-vis cash. Because cash is also one of the reasons. We are taking positions also with some customers, at some places, some projects. So that is also -- it is not that there are issues in execution. But at the same time, cash has been considered the most important factor now; as you also know, the working capital position of the company. So with the efforts of -- with the efforts what have made, we are able to grow on cash collection. So we are managing cash vis-à-vis execution. So there has to be optimum mix and balance of the both.

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Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [7]

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Sure. And coming to working capital, could you please tell us what is the position on the deferred debt? As well as the current receivables, we can see have reduced, what is the position on deferred debt?

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Unidentified Company Representative, [8]

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The contract assets have increased.

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [9]

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The contract assets have increased from INR 22,297 crores to INR 23,566 crores, but the trade receivables have come down from INR 15,945 crores to INR 14,043 crores. And that too more of that -- out of that, even current has gone down substantially, it's more than 20%. The current trade receivable as on March 31, '19, it was INR 12,010 crores. Now as on 30th September, '19, it is INR 9,153 crores. So the reduction is -- a very big number of reduction we have achieved in current trade receivable.

Contract assets, because of the deferred payment terms we have with the customers, it is one of the major reasons that's going up. Otherwise, as far as current trade receivables are concerned, we are focusing towards collection and that's why it's coming down also.

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Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [10]

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Sure. My last question is what is the value of orders where you are favorably placed as of now? And on gross margins, the dip that happened in 2Q FY '20, was caused due to what factors?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [11]

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EBITDA? Tenders, where BHEL is safely placed, total is almost INR 21,000 crores. Are you asking about the material cost increase or what?

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Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [12]

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Yes. The gross margin dipped, so the material cost increased.

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [13]

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So material cost increased. Basically, the material cost increase, basically, we have already told you also, it depends on the type of products we are executing. If -- there are 4 types of turnovers what we recognize, shop and (inaudible), certainly, margins -- whatever orders we are getting, those are all competitive orders. So certainly, we cannot have that kind of margin levels we used as in the past.

So because of that also, that is one of the reasons for material cost going up. Though in absolute terms, it's not going up because the denominator is down, so percentage seems to be higher. Otherwise, as far as material cost is concerned, we are making all-out efforts to contain it within the estimates. But because the competition -- competitive forces are putting us in a pressure, the gross margins are coming down.

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Kamalesh Das, Bharat Heavy Electricals Limited - Director of Engineering, Research & Development and Executive Director [14]

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To go further, we are also looking at, from the engineering perspective, how to reduce material cost as well as our procurement processes. These are 2 areas we are focusing on in reduction in material costs.

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Operator [15]

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The next question is from the line of the Aditya Bhartia from Investec.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [16]

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Sir, other expenses have fallen quite sharply this quarter. What has that been on account of? And it would be great if you could share the quantum of provisions and ForEx income or loss that we've booked in this quarter.

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Yogesh R. Chhabra, Bharat Heavy Electricals Limited - Deputy Company Secretary [17]

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Okay. If I give you the breakup of other expenses, you may note it down. As compared to the quarter 2 of '18-'19, you are talking with respect to quarter 2?

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [18]

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Yes.

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Yogesh R. Chhabra, Bharat Heavy Electricals Limited - Deputy Company Secretary [19]

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So quarter 2 '19-'20, it is INR 924 crores vis-à-vis quarter 2 of '18-'19 INR 1,003 crores. So there is a reduction of INR 79 crores, almost 8% against the provision.

In quarter 2 '19-'20, the provisions creation -- the net provision creation is INR 88 crores vis-à-vis INR 824 crores in quarter 2 of '18-'19. So there's a reduction of almost INR 736 crores. This is up to Q2. Sorry, this is not for Q2, this is up to Q2, up to quarter 2, up to half year vis-à-vis last of half year.

So INR 924 crores, quarter 2 '19-'20, last up to INR 1,003 crores; other expenses, minus INR 79 crores; provisions INR 88 crores, INR 824 crores last; minus INR 736 crores, (inaudible) INR 230 crores this quarter -- this year; last year, it was INR 235 crores; indirect material, INR 166 crores, INR 168 crores.

And just one major -- this is despite that the ERV gain, up to this quarter, we had only INR 90 crores, though it was INR 360 crores last. So there is reduction in ERV gain by INR 270 crores.

So after absorbing all these impacts, we are able to manage through middle line.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [20]

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Okay, understood. And this provision reduction that we have seen would be largely on account of earlier provisions that we were creating in respect of employee expenses?

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Yogesh R. Chhabra, Bharat Heavy Electricals Limited - Deputy Company Secretary [21]

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Now basically, as you know, there's a group called PCSG group in the company, Project Closure Synergy Group. So they are making all-out efforts to get the money, what we have already provided in the books. So it is because of those efforts, this withdrawal is happening. And the withdrawal quantum is much better compared to last quarter's number of withdrawal.

If we look at the LD withdrawal, what we have already quoted in the books, so the LD and DD withdrawal is INR 250 crores more as compared to the quarter 2 of last year. It's up to quarter 2 of last year, H1.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [22]

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Okay. Understood, sir. And sir, given that earlier you've mentioned about retention money going up, is it fair to assume that contract assets will continue rising over the next -- over the foreseeable future as well?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [23]

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Possibly, yes.

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Unidentified Company Representative, [24]

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Well, we are making specific efforts to convert contract assets to create receivables, so there will be both pressures for the efforts to convert them as well as this retention money in those areas. So overall, we should look at the decline as we have to complete our (inaudible).

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Operator [25]

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The next question is from the line of Mohit Kumar from IDFC Securities.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [26]

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Sir, what is -- I have 2 questions. First is on FGD. What is the status of loss -- overall loss 5 of NTPC FGD projects and there are 2 fraction in [debt] equities of our FGD? And that can you throw some light on the private sector CapEx on the FGD side?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [27]

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Mr. Manoj Varma will give that.

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Manoj Kumar Varma, Bharat Heavy Electricals Limited - Director of Power & Director [28]

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FGD projects, which were issued in the tender form from NTPC, those have been -- bids have already been submitted -- bid has already been submitted for this lot 4 and lot 5. Now the price bid are being opened by them and then they will conduct the RFP.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [29]

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When do we think all this to happen?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [30]

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Yes, this will happen in the month of, I think, December most probably. First lot will -- lot 4 will happen in the month of November end and lot 5 may happen in the month of December.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [31]

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What about the state utilities and private sector?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [32]

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State utilities are not coming up to that extent, what the central utilities are coming. Basically, the total 161 gigawatt of FGD business what it was projected by CA, out of which most of these projects have been finalized only by the central utilities. State utilities have now come up with some of the tenders like SCCL and maybe other of RVNL and (inaudible) and others, but it is not going our way it was supposed to because out of 50-60 gigawatts, whatever has been ordered, it is mainly from the central utilities. So state utilities have now come up with NTPC tenders.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [33]

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And sir, do we expect the Singrauli, Talabira and the Adilabad to happen by end of FY '20?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [34]

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Definitely. Definitely, it should happen by end of FY '20. Indications what we get is they are going to be finalized by Q4 of current financial year.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [35]

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Okay. My last question is what is exposure to state PSU in terms of receivables? And what is to TANGEDCO and TSGENCO in particularly?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [36]

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The exposure to TANGEDCO, including the contract assets, is around INR 6,000 crores.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [37]

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And sir, TSGENCO?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [38]

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TSGENCO, it is INR 3,800 crores.

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Operator [39]

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Next question is from the line of Ajinkya Bhat from Macquarie.

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Inderjeet Singh Bhatia, Macquarie Research - Head of Research [40]

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Yes, this is Inderjeet here. A couple of questions from my side. One is, now in the new bids that you're putting in, is this whole cash being kind of more important for you? Is that also a parameter which is guiding it? Or the working capital norms on these new contracts are kind of similar to what we kind of went into a couple of years back?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [41]

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We are closely looking at the terms and conditions of the contract when we are bidding; basically, the complete holistic view of the tender when we bid for it.

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Inderjeet Singh Bhatia, Macquarie Research - Head of Research [42]

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And sir, second question is, there've been kind of some media reports about government selling a part of the stake to a strategic investor. Is there any kind of comment on that? And another thing is, is there any discussion with the ministry around kind of using say tools like VRS for our employee strength, the way BSNL is kind of looking at? Any comments on that will be appreciated.

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [43]

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We have also read the media reports about a number of things, but that's all where I would like to comment on.

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Inderjeet Singh Bhatia, Macquarie Research - Head of Research [44]

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Okay. Anything on the VRS side? Any plans or any discussions or early stage of discussions with the government?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [45]

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We'll come back when something happens.

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Operator [46]

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The next question is from the line of Abhishek Puri from Axis Capital.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [47]

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Sir, 2 questions. One, if you can elaborate on the order inflow number that you've mentioned, INR 7,400 crores? Is it for the first half or for the quarter?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [48]

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This is for the quarter, Q2 FY '20, INR 7,400 crores.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [49]

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Okay. That is one. Second, I think we have been carrying this order favorably placed book for some time, SCCL and both Talcher have been there in the books for more than 4 quarters, we've been talking about it. When do we expect to finalize these and the subsequent tenders also that you've spoken about Singrauli, Lara and Talabira?

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Unidentified Company Representative, [50]

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These customers -- NTPC is also -- they have also got it board approved, and they have been requesting the state government of Odisha also. Recently, our honorable minister had -- Mr. Piyush Goyal also had a talk with the state government nominated personnel. So we are quite hopeful that Talcher should come out in the next 1.5 months or 2 months max. And Lara, Singrauli also we are hoping for -- we were given indications that it will happen by Q2, but now, I think it will slip into Q3 also. So -- but definitely this fiscal, it will happen. That's what we are hopeful.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [51]

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Okay. And the Talabira one, sir?

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Unidentified Company Representative, [52]

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Talabira also, we have been in talks with the (inaudible). That also we are likely to see the light of the day during this fiscal.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [53]

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But has the financial bid been submitted here, for Talabira?

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Unidentified Company Representative, [54]

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No, no. Not yet.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [55]

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Okay. My second question is on -- if I look at the results, the Power sales have been declining for the last 2 quarters by a large double digit, whereas on the other hand, we are building up significant inventory. What is that buildup related to? Are we delaying the supplies where the payment has not come through? Or what exactly is that?

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Unidentified Company Representative, [56]

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We are also taking a call in a number -- in cases where we are having problems and payment issues. We don't want our receivables to go up further. At the same time, I think decline is -- also, as you know, we had in the beginning itself, the decline is really linked to availability, the legal issues and land issues. So decline is largely linked to that.

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Unidentified Company Representative, [57]

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I'll refer to the supplement what CMD sir was telling that the projects, which have been under execution, there had been certain issues of cash realization. So there we have taken a certain stance and we are reviewing that. These things should get converted to cash realizations. And post that also, we are trying to see that the outturn on the shop capacities are happening simultaneously, but as far as the dispatches to projects are concerned, that we are taking a conscious call. So material dispatches will happen only once the requirement at sites is happening. So those 2 things we are trying to balance out. So the Power sales, you, as of now, may see some decline, but these are going to pick up by the end of the fiscal once we are executing the projects.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [58]

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Why I'm asking this, sir, because our debt levels are now close to INR 5,000 crores, more than -- or almost similar to the cash level, INR 6,800 crores is the cash level overall. So will we continue taking debt and building up inventory like this? Or how are we going to balance this is what my concern is.

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Unidentified Company Representative, [59]

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No, there are 2 ways that -- while we are focusing on the shop capacity utilization and the requirement of projects in the offing, we are also taking calls on pushing the -- our request and preferably seeking audience from customer at all levels to see that the cash realization also happens. So this may be a temporary phase, but it will definitely improve.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [60]

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Okay, great. And lastly, if you can give the breakup on the receivables as to how much is pending from the central utilities, private sector? And where the recovery has come through in the last 6 months, which was good to see?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [61]

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State utilities around INR 17,816 crores. INR 17,816 crores is from state utilities, which is pending, including contract debts. Central PSUs, INR 12,339 crores. Private customers, INR 4,380 crores. Exports, INR 3,074 crores. So put together all 4 is INR 37,609 crores.

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Operator [62]

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The next question is from the line of Renu Baid from IIFL.

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Renu Baid, IIFL Research - VP [63]

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I just have 2 questions left. A, what would be the expectation on the gross margin on an annualized basis? We understand on a quarterly basis, we tend to be volatile. But given then, on an average, during the first half, we've had 40% on kind of gross margin from a billing margin. So for full year, do you think broadly we should be in similar range or numbers could see some deterioration or improvement?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [64]

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We would not like to give any forecast at this stage.

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Renu Baid, IIFL Research - VP [65]

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Okay. Largely based on the kind of execution mix, which is planned, so would it be similar to last year's level? Or there would be continued pressures that we have seen during the first half of the year, a, given the commodity prices also have (inaudible).

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [66]

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I would repeat my reply that we are not going to give any [forecast] here.

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Renu Baid, IIFL Research - VP [67]

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No problem. And sir, just a simple clarification as a second question. Though there have been news reports regarding strategic sale, et cetera, there have also been a lot of media reports regarding divestment of further noncore assets of BHEL, noncore business of BHEL, which essentially includes water, transportation and so. And transportation has been one of our flagship segments that we're trying to diversify and build up a new revenue stream. So is there any update or any activity where the company is involved? Or these are just media speculations from your end? What would be your comments on this, sir?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [68]

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I would say we would -- we are actively looking at ramping up the transportation business as well as water business as well as defense business. These are areas we are actively looking to ramp up. And of course, we are also reading a lot of media reports. That's all I'd like to say.

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Renu Baid, IIFL Research - VP [69]

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Okay. But there have been no such discussions with DIPAM or anyone from the government and ministries?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [70]

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No.

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Operator [71]

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Next question is from the line of Koundinya Nimmagadda from JM Financial.

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Koundinya Nimmagadda, JM Financial Institutional Securities Limited, Research Division - Analyst [72]

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Sir, if you can help us remind us in 2Q FY '19, the depreciation expense was a little lower vis-à-vis the quarterly run rate. Can you help us understand what has happened?

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Unidentified Company Representative, [73]

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Actually last year, Q2, what -- the company had aligned its depreciation rate with the Companies Act. Since it happened in last year's Q2, the difference with respect to Q1 as well as Q2 was impacted in Q2 of last year. So it was a lower number. You would be seeing a lower number. This is the normalized rate of depreciation for the current year, what we're seeing now.

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Koundinya Nimmagadda, JM Financial Institutional Securities Limited, Research Division - Analyst [74]

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Okay. Understood, sir. Sir, maybe can you help us understand what happened to other expenses? And what would the run rate be like? Because this quarter, we are seeing it at low levels, but will that continue going ahead? Or will we revert back to normalized level that we have been seeing in the past? I am asking about other expenses, sir, which have come off...

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [75]

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The breakup of other expenses?

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Koundinya Nimmagadda, JM Financial Institutional Securities Limited, Research Division - Analyst [76]

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Yes, sir.

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [77]

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Or something specific you asked?

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Koundinya Nimmagadda, JM Financial Institutional Securities Limited, Research Division - Analyst [78]

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Sir, I was asking about the breakup. I mean, my call got disconnected, unfortunately, when you were explaining that. And I was also asking...

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [79]

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Mr. Yogesh Chhabra from Finance will share you this.

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Yogesh R. Chhabra, Bharat Heavy Electricals Limited - Deputy Company Secretary [80]

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Sir, I'll share the H1 numbers with you. Currently, you will be seeing in the results, the numbers are INR 1,318 crores for the current year and last year, it was INR 1,871 crores. You would be seeing in the results. I will give you the breakup of that. The breakup for the current year is INR 1,318 includes INR 924 crores of other expenses, miscellaneous expenses; provisions are INR 88 crores, (inaudible) is INR 230 crores, indirect material is INR 166 crores, and the ERV gain, which is netted off from these expenses is INR 90 crores this H1.

And on a comparable basis for the last year, I'll give you the numbers. The total is INR 1,871 crores. The makeup is INR 1,003 crores for other expenses. So there is a saving of INR 79 crores in that administrative expenses. The provisions were INR 824 crores in H1 of last year. (inaudible) was INR 235 crores. Indirect material was INR 168 crores. And last year, the company had a significant gain of INR 359 crores last year H1.

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Koundinya Nimmagadda, JM Financial Institutional Securities Limited, Research Division - Analyst [81]

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Understood. Sir, you spoke of reduction in admin expenses. So is it something that you're going to continue? Or will we revert back to the levels that we've seen earlier?

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Unidentified Company Representative, [82]

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Now there's a focused cost reduction group, and all-out efforts are being made to contain all the material costs over its all other expenses. So it is because of that other expenses, we have seen a reduction of more than 8%. It has come down from the last year of INR 1,003 to INR 924 crores. That is continuing. And I expect this to continue in the forthcoming quarters also.

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Koundinya Nimmagadda, JM Financial Institutional Securities Limited, Research Division - Analyst [83]

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Understood. Sir, again, on the raw material cost, sorry for asking it, again. So do you think that -- I mean there has been a spike in the current quarter. I understand it could be a quarterly thing. So where do you see this going? I mean will the spike that we have seen currently, will it go ahead -- will it continue going ahead of the costs? Can we see a reduction on this number?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [84]

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As I've already said, we are not giving any forecast, but we are focusing in reduction of cost through design as well as through the procurement methods. However, that said, this reduction is largely likely to happen in the coming years. That will take some time to really reflect in the figures.

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Operator [85]

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Next question is from the line of Puneet Gulati from HSBC.

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Puneet J. Gulati, HSBC, Research Division - Analyst [86]

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Just wanted some clarification on your strategy. So what you're saying is, essentially, you will still continue to produce to keep the shop running, keep it in inventory and not sell it to the customers. So your receivables will not build up, but inventory will build up. Is my understanding broadly, right?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [87]

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No, that's not what we are saying really. What we are saying was that there is a focus on getting our execution status streamlined. So for the next some period, we still expect this to happen. But ultimately, when the execution gets streamlined, the entire process will be streamlined and this inventory balances should -- will also go down. This is what we expect.

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Puneet J. Gulati, HSBC, Research Division - Analyst [88]

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Okay. But what is really holding back getting your payments on time? Or is it more a contract structuring issue?

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Unidentified Company Representative, [89]

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It is -- precisely, since the major contribution of our revenue is coming from the state utilities, what we gather from the market and possibly would have been endorsed to you also from some forums. But they are also struggling for funds. Besides the funding from PFC, whatever funds they have to put as per contract [TOPs], there they are struggling. So that is why linking up their own funds, either through government guaranteed bonds or on borrowings from other agencies, they are unable to pay us on time. So that is why we have taken a conscious decision to regulate the supplies, enabling the funds flow also of the company to be streamlined.

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Puneet J. Gulati, HSBC, Research Division - Analyst [90]

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Okay. And will this receivables that you described, is there any significant project completion that you anticipate which can help unlock a decent amount of receivables?

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Unidentified Company Representative, [91]

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Yes. In TANGEDCO, we are hopeful of one project which we should be getting through this fiscal only, that is March ending. So there, we are almost on the verge of nearing finishing stage. There, we hope that in the next 2 months the position of realization will be better. And 1 or 2 projects of TSGENCO also we are targeting. So I think in the next 2 months order, we should be in a little better position as compared to...

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Puneet J. Gulati, HSBC, Research Division - Analyst [92]

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Okay. But have they been communicating that -- you have almost INR 10,000 crores receivables from them that they'll pay up whatever is left? Or will there still be more after you deliver these projects?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [93]

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They are also equally concerned. We are also making persistent efforts.

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Operator [94]

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The next question is from the line of Girish from Morgan Stanley.

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Girish Achhipalia, Morgan Stanley, Research Division - VP [95]

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I had a couple of questions. First one, power sales have obviously been declining. So you've articulated the fact that you've been trying to manage the cash balance. Can you quantify in your backlog how many such projects are actually slow-moving because of this cash flow mismatch issue?

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Unidentified Company Representative, [96]

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No. I in fact informed you, we are having right now 3 major clienteles, of which 2 are state telcos and 1 is definitely the central utility. So we are getting audience, and we started this approach. But the state utilities, more assurance is required and the results are yet to flow in from them.

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Girish Achhipalia, Morgan Stanley, Research Division - VP [97]

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So would it be fair to say that 30%, 40% of your state orders would be slow moving then?

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Unidentified Company Representative, [98]

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They are not slow moving. They are only regulated as of now. But by the end...

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Girish Achhipalia, Morgan Stanley, Research Division - VP [99]

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I mean -- what I mean regulated by yourselves. So you are actually executing slower, that will be about 30%, 40% of your state orders?

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Unidentified Company Representative, [100]

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I won't say it in percentage terms, but definitely, it is only to manage the fund flow, cash in, cash out.

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Girish Achhipalia, Morgan Stanley, Research Division - VP [101]

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Okay. And the second question I had was in terms of industrial business. I thought that there will be some operating leverage, but it doesn't appear to be. So the margins, despite a 20%-plus growth, have actually compressed again. So is there something which is low-margin that is being executed here or...

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Unidentified Company Representative, [102]

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You are talking about industrial vertical.

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Girish Achhipalia, Morgan Stanley, Research Division - VP [103]

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Yes, in Q2, the margins are lower for the industrial. So I just want...

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Unidentified Company Representative, [104]

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It is not reflected, you will see. Historically, the industry sector has had lower margins. Newer business areas are low-margin areas. And specifically, yes, solar has been fairly low margin. That industry itself, you know the industry status. That is one of the industries.

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Operator [105]

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The next question is from the line of Renjith Sivaram from ICICI Securities.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [106]

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Sir this -- when we look at your H1, the breakup you had given, the provisions, you had mentioned that it has reduced from INR 824 crores last year to INR 88 crores this year. So what was it for this quarter in terms of provisions? Was there any write-back this quarter?

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Unidentified Company Representative, [107]

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The write-back -- or basically, net provision for the quarter is minus INR 76 crores, which was INR 515 crores was the net creation last year H1 -- sorry, Q2. You are asking for Q2?

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [108]

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Yes, yes.

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Unidentified Company Representative, [109]

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Q2 is minus INR 76 crores this year. And last year, it was INR 515 crores plus.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [110]

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Okay. So that has been the major reason for this reduction in other expenditure for the quarter.

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Unidentified Company Representative, [111]

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Last year, creation was more as compared to the current year. Creation was to the tune of INR 1,100 crores last year in Q2. This year, it is INR 550 crores. Because of the lower creation, the net is minus INR 76 crores.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [112]

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Okay. And sir, when I look at your revenue, the first 2 quarters was a decline. So are we relooking at our full year MoU guidance? Like, what's the kind of full year target that we'll be having in mind?

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Unidentified Company Representative, [113]

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Certainly, the target is still with us, that whatever MoU target is there. So we are not -- we are working towards the target now. Let us see what happens in the target.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [114]

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And also, like, in your L1 position, you have this couple of projects which have been continuing for, like this Talcher. So where do you see that? Because we hear from NTPC that there are certain environmental relation -- there are certain protests in Orissa regarding that land and the work to be started there. So what do you hear? What is the sense that you get in terms of these issues?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [115]

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As of now, it is Board approved by NTPC also. They are also looking for the optimism. We are also equally hoping that same thing. Already, the government at central level is also requesting for pushing more power projects in Orissa. Now state government may be working out certain strategies. And we definitely as on today also are hopeful that this will get through by this fiscal year-end.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [116]

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Okay. And lastly, in your receivables, what is the breakup of the collectibles and the others?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [117]

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I think you can take the detailed breakup from Mr. Yogesh from (inaudible). You can be in touch with him. The detailed figures can be taken.

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Operator [118]

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The next question is from the line of Deepak Krishnan from Goldman Sachs.

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Pulkit Patni, Goldman Sachs Group Inc., Research Division - Equity Analyst [119]

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This is Pulkit from Goldman Sachs. Most of my questions are answered. One bookkeeping question. Can you highlight what is the foreign exchange gain/loss that has been booked in this quarter?

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Unidentified Company Representative, [120]

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Gain around INR 90 crores -- the quarter is INR 42 crores, the gain is INR 42 crores in the current quarter.

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Pulkit Patni, Goldman Sachs Group Inc., Research Division - Equity Analyst [121]

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INR 42 crores in the current quarter?

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Unidentified Company Representative, [122]

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Vis-à-vis INR 274 crores Q2 '18-'19.

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Pulkit Patni, Goldman Sachs Group Inc., Research Division - Equity Analyst [123]

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INR 274 crores. Okay, makes sense.

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Unidentified Company Representative, [124]

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So despite that, the bottom line is this INR 165 crores, Q2.

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Operator [125]

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Next question is from the line of Rahul Gajare from Haitong Securities.

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Rahul Gajare, Haitong International Research Limited - Research Analyst [126]

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Sir, my questions have been answered.

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Operator [127]

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(Operator Instructions) Next question is from the line of Girish from Morgan Stanley.

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Girish Achhipalia, Morgan Stanley, Research Division - VP [128]

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On the backlog side of the power portfolio of around INR 88,000 crores, how much is state orders that are pending to be executed?

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Unidentified Company Representative, [129]

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State must be around INR 35,000 crores.

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Unidentified Company Representative, [130]

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INR 30,000 crores, INR 35,000 crores.

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Unidentified Company Representative, [131]

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INR 30,000 crores, INR 35,000 crores. I think that will be the figure, around INR 30,000 crores, INR 35,000 crores.

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Girish Achhipalia, Morgan Stanley, Research Division - VP [132]

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And the rest would be NTPC?

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Unidentified Company Representative, [133]

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Yes, broadly, NTPC, which is also contributing some 50% of that.

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Girish Achhipalia, Morgan Stanley, Research Division - VP [134]

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Sir, the second question. On the industrial side, solar and railway would be what proportion of the total INR 11,000 crores order book?

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Unidentified Company Representative, [135]

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You just note down the breakup. The total industry sector order book up to Q2 is INR 3,322 crores. INR 3,322 cores, the orders what we have received in the last 6 months. Out of that, renewable is INR 1,560 crores. Transportation is INR 616 crores.

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Girish Achhipalia, Morgan Stanley, Research Division - VP [136]

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Sorry, I was referring to the order book which is pending to be executed. I just want to have some color on the order book.

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Unidentified Company Representative, [137]

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Are you asking about the order book?

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Girish Achhipalia, Morgan Stanley, Research Division - VP [138]

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Yes, sir. Yes, sir.

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [139]

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Around that, the number is not available. We can furnish you the number later on separately.

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Operator [140]

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The next question is from the line of Abhineet Anand from SBICAP Securities.

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Abhineet Anand, SBICAP Securities Ltd., Research Division - Analyst [141]

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In the opening remarks, CMD sir did mention about the lithium-ion production and all. If you can elaborate on the same, it would be great.

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [142]

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We have set up a facility for space-grade lithium ion batteries -- cells and batteries, which has gone into production, and we are supplying to ISRO. And we are further looking at the tie-ups for going into commercial grade as well. Going ahead, that is what we will also be looking at.

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Abhineet Anand, SBICAP Securities Ltd., Research Division - Analyst [143]

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So is there any -- I mean government is looking into any battery -- lithium-ion battery facility, I understand, in India. Are we going to play some role in that?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [144]

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Yes, we plan to. There are a number of incentives with a number of schemes are coming out, and we plan to be a part of this.

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Operator [145]

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(Operator Instructions) Next question is from the line of Ajinkya Bhat from Macquarie.

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Ajinkya Dilip Bhat, Macquarie Research - Analyst [146]

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Apart from these NTPC -- apart from the NTPC, a couple of these tenders, what is the pipeline looking like you see what potentially would get ordered in FY '21?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [147]

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FY '21, you mean?

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Ajinkya Dilip Bhat, Macquarie Research - Analyst [148]

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Yes. Apart from these known ones, the Singrauli, Talabira, Lara, these kind of orders, apart from that, what is there in the pipeline?

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [149]

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One is Adilabad Singareni Collieries, that is also mentioned in '21. Then Talabira you have already mentioned. And NLC we are looking for 2 orders of 660. And then [Poradi] MSEB, that is also likely to come. Then some of the revamping brownfield projects are also in the offing.

And then nuclear, we are hoping for a fleet mode of 6 units of 700-megawatt each, that is roughly going to be a potential of more than INR 12,000 crores in one go. That will -- we are hoping, what we understand from -- though NPCIL has planned it for this year only, but their earlier date of May has now been deferred for November end opening. The tender has already been bid by the parties. So there also, we are quite hopeful. There are only 2 parties as of now who are bidding including BHEL. And SG package also 12 -- including 12 steam generators. So that also will go to next year only.

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Unidentified Company Representative, [150]

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The market looks to be good, as has been performing in the last 2 to 3 years, roughly 8 to 10 gigawatt, we are hopeful that next year also it will be there.

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Ajinkya Dilip Bhat, Macquarie Research - Analyst [151]

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Okay. Sir, can you give us some update on the progress on the Bangladesh order?

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Unidentified Company Representative, [152]

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Bangladesh, of course, there were certain delays. We are trying to address them. And we hope to meet the deadline of February '21 for Unit 1.

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Ajinkya Dilip Bhat, Macquarie Research - Analyst [153]

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But have we started work there? What...

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Unidentified Company Representative, [154]

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Work is already going on.

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [155]

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Yes, the work is in full swing. I heard that's the state shortly.

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Operator [156]

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The next question is from the line of Mohit Kumar from IDFC Securities.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [157]

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Sir, what is your L1 order as of now? And what is your breakup between industrial and power segment?

And secondly, is there any large industrial order which is in the horizon where you're participating?

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Unidentified Company Representative, [158]

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As already mentioned, the tenders where we are definitely placed totaling to about INR 21,000 crores, of which about INR 16,000 crores is power sector. About INR 16,000 crores is power sector.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [159]

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Sir, is there any large opportunity in the industrial side going into the next H2?

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Unidentified Company Representative, [160]

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Sorry, could you come again, please?

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [161]

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Sir, is there any large opportunity side in industrial in -- which is -- which can come up in H2 FY '20.

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [162]

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We are looking at orders from ISRO for launch vehicle tankages as well as for WAG-9 locos. These are some of the large ones that we are looking, in addition to various [STV] power plants from NTPC as well as PGCIL transformer orders.

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Unidentified Company Representative, [163]

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There are various orders that we are looking at.

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Operator [164]

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Thank you. As there are no further questions, I now hand the conference over to the management for closing remarks. Over to you.

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Nalin Shinghal, Bharat Heavy Electricals Limited - Chairman & MD [165]

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Thank you, ladies and gentlemen, for your patient hearing and an interactive question-and-answer session and for your interest in BHEL. Goodbye.