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Strong execution; cash flows impacted

GE Power India (GEPIL) has reported strong revenue growth of 43% YoY to Rs10.9bn in Q3FY21 led by healthy FGD order execution. Company has announced acquisition of 50% stake in NGSL which allows its service business to leverage NTPC’s know-how and address the 3rd party O&M in India and international markets. The company has a strong executable orderbook of Rs60bn (~1.9x TTM sales) and order pipeline for FGD are healthy, as majority of State and private utilities are yet to tender. The withdrawal of parent from large coal utility projects opens up opportunities to focus on long term value creation in terms of ramping up the high margins, high ROCE services business. Given the recent acquisition to expand services portfolio and increase in contribution from services, we upgrade the stock to BUY from ADD and assign a revised SoTP valuation of Rs352 (earlier Rs326).

* Acquisition of NGSL to broaden O&M market reach: The acquisition of 50% stake in NTPC GE power services private ltd. (NGSL) presents an opportunity to leverage the NTPC’s 3rd party O&M. Given the OOEM/OEM competence of GEPIL across power plants, the JV provides opportunity to expand in the area of power plant services. Through this, GEPIL will be able to address the O&M market both in India and internationally.

* Cash flows to improve from FY22E onwards: We factor in major uptick in the FGD execution for FY22E, which we believe will be the peak of FGD revenues. Majority ordering from NTPC is complete and currently ~84GW of FGD orders are finalised. ~145 GW of ordering towards FGD is pending finalisation predominantly from state electricity board and private sector. The company as per the recent statement is qualified to participate 46% of these orders on a standalone basis. We believe, GEPIL is committed to execute the current order book, working capital and cash flows are likely to improve in FY22E onwards, post completion of NTPC FGD orders and increase in mix of services.

* Anti-China stance by the government to aid improvement in service market share – Currently ~Rs20bn of domestic coal plants is serviced by Chinese companies, given the recent reservation of the government towards Chinese, we believe majority of these contracts are likely to move to non-Chinese. We believe, this will aid in improvement of market share by GEPIL and Siemens who are the major third party service solution providers. BHEL is also present in this market, but we believe, they will be more competent in handling their own equipment.

* Easing out of working capital to aid cash flows in the medium to long term: Though near term cash flows 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 to ease out from FY22E onwards resulting in net cash balance sheet in FY23E versus net debt in FY22E.

* Upgrade to BUY: Low hanging fruits in terms of substitution of Chinese companies in the domestic service market, and enhanced focus towards services is likely aid in medium to long term earnings growth. Gradual easing out of cash flows and improvement in ROEs to aid higher dividend yield going forward. Factoring in better than expected execution, we raise FY21E/FY22E earnings by 40% /18%, respectively. Given healthy growth outlook, recent acquisition to increase service segment capabilities and strong execution, we upgrade the stock to BUY from ADD rating with a revised SoTP target of Rs352 (earlier Rs326).

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