Alstom Projects to lose boiler business to Alstom-Shanghai Electric JV

Global restructuring by multinationals can often result in surprises for shareholders of their Indian subsidiaries of multinational corporations. Engineering company Alstom Projects India announced that its parent company Alstom is forming an equal joint venture with China’s Shanghai Electric Group, to be called Alstom-Shanghai Electric Boilers Co.
The unit will combine both companies’ boiler businesses and will have combined revenues of €2.5 billion or Rs 15,900 crore.

Boilers are a critical component of coal-fired power plants and China is the largest market for these plants, which is Alstom’s main objective in forming this joint venture. The JV will supply these boilers through direct sales and it will also be a privileged supplier to Alstom and Shanghai Electric for power projects being implemented by them and for their respective service divisions.

In India, Alstom Projects India is the main operating entity of Alstom, and it is also listed on the domestic stock exchanges. It has two main divisions: power, which contributed to about 97% of revenues in 2009-10 and transport which contributed to the rest. It has a technology licensing agreement with Bharat Heavy Electricals Ltd (Bhel) for design and production of super-critical boilers.

In India, it makes power boilers at Durgapur and this division’s assets will be transferred into a separate company, which will be then acquired by the joint venture company. Alstom Projects India has not disclosed how much of revenues are contributed by its boiler business. In 2009-10, of the Rs 2,750 crore worth of orders that it got, the main orders included super-critical boilers for Bara (Jaypee) power project for Rs 415 crore and Krishnapatnam (APGENCO) for Rs 373 crore or totally about 30%.

This division is a key part of its coal-fired power business. Apart from China, India too has a fairly large market for coal-fired power plants, since the limited availability of gas restricts the number of gas-based power plants which can be set up. Alstom also caters to the gas-based power sector and hydro-power sector and also supplies equipment to the industrial sector. Thus, even after the transfer of the boiler business, these other segments will continue to contribute to its performance.

When Alstom Projects India will seek to formalise this arrangement it is likely to approach shareholders for permission to carve out the boiler division into a new company. It may then indicate the turnover attributable to this division and the consideration to be paid by the joint venture for acquiring this business.

Alstom Projects India can still bid for turnkey power plants, and use the joint venture to supply the boiler package. But it will no longer be eligible for the product revenues from this segment. Once the consideration is announced, shareholders will be able to determine if they are being compensated adequately for losing this business. Their initial response was one of disappointment, as its share fell by about 3.5% on the BSE after it announced the proposed transfer.

Read the press release from Alstom here and the release from Shanghai Electric Group here.

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