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Healthy execution, focus towards services

GE Power India (GEPIL) reported healthy revenue growth at 27% YoY to Rs9.3bn in Q4FY21 led by strong FGD order execution. Company has a robust executable orderbook of Rs54bn (~1.5x TTM sales) and the order pipeline for FGD too is promising, as majority of state and private utilities are yet to tender. The withdrawal of parent from large coal utility projects opens up opportunities for GEPIL to focus on long-term value creation by ramping up the high-margin, high-RoCE services business. Factoring-in near term stress on margins due to commodity price inflation and covid second wave, we marginally cut FY22E earnings by 1.3% but raise the same for FY23E by 6.2% supported by better cashflows. Given the recent acquisition to expand the services portfolio and increase its contribution, we maintain BUY on the stock with a revised SoTP valuation of Rs407 (earlier: Rs352).

Healthy growth in services orderbook:

Company witnessed 75% growth in the service order intake during FY21 and this is likely to support strong growth in this segment going forward. The acquisition of 50% stake in NTPC GE Power Services Private Ltd (NGSL) presents an opportunity to leverage NTPC’s third-party O&M.

High commodity prices and unfavourable mix impact margins:

The overall raw material cost proportion in sales increased 100bps YoY and 120bps QoQ impacting the overall margins. The higher mix of low-margin FGD is also depressing the overall margins. The recent VRS and gradual increase in service business is likely to support overall margins in the medium to long term perspective.

Cashflows likely to be stronger FY22E onwards:

We factor-in a major uptick in FGD execution for FY22E, which we believe will lead FGD revenues to their peak. Majority ordering will be from NTPC though ~145GW of ordering towards FGD is pending finalisation (predominantly from state electricity boards and private sector). We believe, execution of the current orderbook will impact near term working capital, however, cashflows to improve from FY22E onwards. This would be post completion of high working capital intensive NTPC FGD orders and increase in mix of services.

Atmanirbhar push by government to help improve services market share:

Currently, ~Rs20bn of domestic coal plants are serviced by Chinese companies; however, given the government’s reservations towards China, we believe majority of these contracts are likely to move to non-Chinese players. We believe, this will help improve GEPIL and Siemens’ market shares (the two companies are the major third-party service solution providers).

Easing of working capital to aid cashflows in medium to long term:

Though nearterm cashflows are under stress due to high retention of NTPC FGD orders, receivables due from BHEL and high execution of FGD-related work. We believe, this situation will ease from FY22E onwards resulting in a net-cash balance sheet in FY23E vs net debt in FY22E.

Maintain BUY:

Low-hanging fruits in terms of substitution of Chinese companies in the domestic services market, and enhanced focus towards services, are likely to aid medium to long term earnings growth. We expect gradual improvement of cashflows and increase in RoEs to aid higher dividend yield going forward. Given the healthy growth outlook and recent acquisition to increase service segment capabilities, we maintain BUY on the stock with a revised SoTP target price of Rs407 (earlier: Rs352).

Outlook and Valuation

GE Power (GEPIL) has been awarded 10 FGD projects amounting to 13GW for Rs48.2bn, which are in various stages of execution and account for more than 50% of the current orderbook of Rs54bn. Company is focusing on ramping up its services business where it has a technological edge; this will aid medium to long term growth. Incremental addition of renewables in the overall power mix will require solutions towards flexibility for thermal power plants, which will open new vistas for growth in the long term.

Company has shifted its mill facility from Shahabad to Durgapur and will continue to execute hydro projects with its design team and equipment imported from other lowcost locations like China among others. Given its strong balance sheet, GEPIL will be able to withstand working capital headwinds and near to medium term stress in cashflows.

Assuming cost of equity at 11.5%, we arrive at a value of Rs24 per share for FGDrelated opportunity as per discounted cashflow (DCF). We value the cash separately at Rs80 and value the ex-BHEL steam business at Rs9 (20x FY23E earnings), services business at Rs246 (50x FY23E earnings), hydro business at Rs21 (10x FY23E earnings) and gas outsourcing business at Rs27 (30x FY23E earnings). Given the enhanced market opportunity in services business enabled by the NGSL stake acquisition and pick-up in renovation and modernisation orders, we maintain BUY on the stock with a revised target price of Rs407 (earlier Rs352).

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