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Lanco saves Rs17,000 crore (you read it right) via order to China’s Harbin

DNA / KV Ramana / Thursday, September 16, 2010 4:07 IST

Lanco Infratech has given an order for supply of 16 sets of 660mw power equipment to Harbin Power, the largest supplier in
Mainland China, at what analysts say are “stunningly low prices”.

Lanco would procure the sets at around Rs68.3 lakh per mw, or one-fourth the prevailing price of Rs2.5 crore per mw. The
value of the order is estimated at Rs6,830 crore or Rs17,000 crore less than current market prices.

This is said to be the largest-ever export order bagged by Harbin for single-host device. Lanco is also believed to have paid
5% of the total cost as advance to Harbin.

“I am shocked at the price at which Harbin has agreed to supply the equipment. I am still not able to figure out the logic
behind the pricing,” an analyst with a leading research firm told DNA Money on condition of anonymity.

Lanco would use the equipment for eight of its projects including Anpara, Amarkantak and Babandh. A source said the
pricing is low since the order is just for turbine and generator (TG),while another source said the order is for boiler, turbine
and generator (BTG).

“If it is a TG order, then there could be some logic. But, if it is a BTG order, then there is something for all of us to probe,” the
analyst said.

Lanco officials did not provide any clarity on the issue despite repeated attempts since Monday. Emails sent to the company
remained unanswered.

Though the timeframe for the supply equipment is not known, sources said that Lanco would seek an immediate delivery of
six sets while the balance would be sourced over a period of time.

However, the funding for procuring the equipment is being seen as a major issue by the analysts.

Though Lanco has so far not provided any clarity on the order and its plan to utilise the equipment, sources said the order
does not include erection, testing, commissioning of BTG and supply/installation of associated auxiliaries. It also excludes
control and instrumentation systems including transformers, and import duties.

Not willing to take it easy, the other power equipment majors are alleging that the contract to Harbin was awarded privately
behind closed doors. Interestingly, industry majors like Alstom and DongFang too kept off the bidding process for a variety of
reasons including the apprehensions about the funding ability of Lanco. It is believed that Harbin was the only bidder.

The pricing issue is something the analysts are still trying to crack. “We believe such low pricing amid increasing competition
will be negative for the whole sector including Bhel,” Amar Kedia and Gaurav Gupta, analysts with Nomura, said in a note.

“Although realisations implied by the Harbin order are not comparable to Bhel’s supercritical BTG realisations of about
`28-30MM/mw (which has larger scope of work), they are low even by Chinese standards (norm of at least
Rmb1.1-1.3MM/mw),” Shilpa Krishnan, Sumit Kishore and Deepika Belani, analysts with JP Morgan, said in their note.

“According to (Lanco) management, the overall project cost will end up being significantly lower by contracting with Harbin,
instead of Bhel/L&T, and the remaining equipment orders will be placed with other OEMs. The construction contract will be
captive, in our view. The sheer size of the contract (16x660 mw ), spanning 8 projects, suggests a robust pipeline which
remains to be announced by Lanco. As of now, under-construction/development supercritical projects being discussed by the
company include 6x660MW units,” the JP Morgan trio said.

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