GE Power India - Strong execution; cashflows impacted - ICICI Securities

GE Power India (GEPIL) has reported strong revenue growth of 71% YoY to Rs8.9bn in Q2FY21 led by healthy FGD order execution. Company has a strong executable orderbook of Rs73bn (~2.7x TTM sales) and healthy order pipeline for FGD both from NTPC and private companies. Given the higher contribution from FGD, raw material cost proportion is expected to be high; however, we believe execution traction will be strong. Higher FGD execution also led to increase in net 'working capital to sales' to 20% vs 7% in Mar'20. Cash deficit from operations widened to Rs4bn for H1FY21 from Rs2.5bn deficit in H1FY20. 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 run-up, we downgrade the stock to ADD from Buy and keep the SoTP valuation unchanged at Rs254.

- Cashflows impacted due to FGD execution; likely to improve from FY22E onwards: Higher portion of FGD in execution led to higher receivable days, which increased to 232 from 200 in Mar'20. Overall, this led to higher networking capital days of 73 vs 26 in Mar'20. Consequently, cash deficit from operations in H1FY21 was Rs4bn vs deficit of Rs2.5bn in H1FY20. We factor-in major uptick in FGD execution for FY22E, which we believe will be the peak for 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 boards and private sector. Company as per its recent statement is qualified to participate 46% of these orders on standalone basis. We believe, GEPIL is committed to execute the current orderbook; working capital and cashflows are likely to improve in FY22E and onwards.

- Anti-China stance by government to aid improvement in service market share: Currently, ~Rs20bn of domestic coal plants is serviced by Chinese companies. Given the current reservation of the government towards China, we believe majority of these contracts are likely to move to non-Chinese firms. We believe, this will aid in improving GEPIL and Siemens's market shares; 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.

- 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 assume this segment contribution to be stable at Rs2bn assuming no growth.

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

- Downgrade to ADD due to recent run up: Low hanging fruits in terms of substitution of Chinese companies in the domestic service market and enhanced focus towards this is likely aid in medium to long term earnings growth. Gradual easing out of cashflows and improvement in RoEs is likely to aid higher dividend yield going forward. However, given the recent rally in stock price, we downgrade the stock to ADD from Buy with an unchanged SoTP target price of Rs254.

Shares of GE Power India Ltd was last trading in BSE at Rs.275 as compared to the previous close of Rs. 261.95. The total number of shares traded during the day was 84679 in over 2096 trades.

The stock hit an intraday high of Rs. 275 and intraday low of 263.25. The net turnover during the day was Rs. 23068135.

Source : Equity Bulls

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