GE Power India - The queen's gambit - ICICI Securities

The current situation of GE Power India is synonymous with a famous opening in chess called 'The Queen's Gambit', in which a pawn is sacrificed to gain a positional advantage, in our view The withdrawal of the parent from large coal utility projects opens up opportunities to focus on long term value creation in terms of ramping up high margins, and high RoCE services business. As clarified by the company, ~54% FGD projects will be under uncertainty. The resolve of government to discourage Chinese completion can open up ~Rs20bn per annum of domestic services opportunity, which is currently catered by the Chinese companies in India. The recent sharp ~50% fall in the stock price has made risk-reward favourably placed with a medium- to long-term perspective. Factoring pick in FGD execution, we raise FY22E earnings by 34%. Given the sharp fall in valuation recently and the unlocking of opportunities under services, we upgrade the stock to BUY and assign an SoTP-based valuation of Rs254 (earlier: Rs363).

- Shift in valuation methodology and brief outlook: We factor in major uptick in the FGD execution for FY22E, which we believe will be the peak of FGD revenue. Majority ordering from NTPC is complete and currently ~84GW of FGD orders have been finalised. Around 145 GW of ordering towards FGD is pending finalization, predominantly, from state electricity board and private sector. The company, as per the recent statement, is qualified to participate in 46% of these orders on a standalone basis. Factoring this and taking into account the terminal nature of this opportunity, we shift our valuation approach to DCF for FGD segment. We assume termination of BHEL-related opportunity; however, some portion of ex-BHEL steam prospects like HRSG, ESP etc may continue. Other major segments are services, gas outsourcing and hydro segment, which are prominent in the overall scheme of things. We believe GEPIL is committed to execute the current orderbook, working capital and cashflows may improve FY22E onwards.

- Anti-China stance by the government will aid in improvement in service market share - Currently, ~Rs20bn worth of domestic coal plants are serviced by Chinese companies, given the recent reservation by the government towards China, we believe, majority of these contracts may move to non-Chinese regions. 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, GEPIL and Siemens will be more competent in handling their own equipment.

- Global gas division outsourcing segment to be stable - GEPIL has a division close to ~300 people involved in supporting global gas segment of GE. As per our understanding, this division's contribution should be around Rs2.5bn. For our valuation purpose, we believe, this segment's contribution will be stable at Rs2bn, assuming no growth.

- Easing out of working capital will aid cashflows in medium to long term: Though near-term cashflows are under stress due to high retention of NTPC FGD orders, receivables are due from BHEL with high execution of FGD-related work in the near term. We believe this will ease out from FY22E onwards resulting in net cash balance sheet in FY23E vs net debt in FY22E.

- Upgrade to BUY due to benign valuation, medium to long term service segment growth and easing out of cashflows: Low hanging fruits in terms of substitution of Chinese companies in domestic service market and enhanced focus towards this may aid medium to long term earnings growth. Gradual easing out of cashflows and improvement in RoEs will aid higher dividend yield going forward. Hence, we upgrade the stock from Reduce to BUY rating with a revised SoTP-based target price of Rs254 (previously: Rs363).

Outlook and Valuation

The company has been awarded 10 FGD projects amounting to 13GW for Rs48.2bn, which are in various stages of execution and account 64% of the overall orderbook of Rs75bn. The market for efficiency and emission control, which is at ~US$900mn currently, is expected to reach to US$3-4bn in few years and will largely be centered around parts, repairs and services of boilers, turbines and generators. Consequently, the company is focusing on ramping up its services business where it has a technological edge; this will aid in 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. The company has shifted its mill facility from Shahabad to Durgapur and will continue to execute hydro projects with their design team and equipment being imported from other low-cost facility like China, etc. Given its strong balance sheet, the company will be able to withstand working capital-related headwinds and near- to medium-term stress in terms of cashflows. We change our valuation methodology from PE multiple to SoTP. Also, for the business valued on PE multiple basis, we have rolled over to FY23E earnings from FY22E earnings.

Based on FGD order intake assumptions as shown in Table 3 and assuming cost of equity of 11.5%, we arrive at a value of Rs30 per share for FGD-related opportunity, as per discounted cashflow (DCF). We value the cash separately at Rs28 and value ex-BHEL steam business at Rs26 (20x FY23E earnings), services business at Rs108 (30x FY23E earnings), hydro business at Rs21 (10x FY23E earnings) and gas outsourcing business at Rs40 (30x FY23E earnings). Factoring pick in FGD execution, we raise FY22E earnings by 34.5% and estimate an earnings CAGR of 42% for FY20-FY23E. Given the strong executable orderbook of Rs75bn (3x TTM sales), sharp fall in valuation recently and unlocking of opportunities under services, we upgrade the stock from Reduce to BUY with a revised target price of Rs254 (earlier: Rs363).

Shares of GE Power India Ltd was last trading in BSE at Rs.195.2 as compared to the previous close of Rs. 186.65. The total number of shares traded during the day was 336958 in over 7678 trades.

The stock hit an intraday high of Rs. 195.95 and intraday low of 177.35. The net turnover during the day was Rs. 64857850.

Source : Equity Bulls

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