Ge Power India Ltd

NSE:GEPIL

Earnings Call Transcript

[Operator]

Ladies and gentlemen, good day, and welcome to the earnings conference call of GE Power India Limited in respect of inter-alia, the financial results for the quarter ended on 30th June 2024.

[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prashant Jain, Managing Director of GE Power India Limited. Thank you, and over to you, sir.

[Prashant Jain, executive]

Thank you, Lisan, and a very good evening, everyone. A very warm welcome to all of you for joining this call to discuss our financial performance for the quarter ended June 30, 2024. I'm happy to speak to all of you who have shown immense trust in us and our business. I hope you all had a good time to review our results, the investor presentation and the earnings release, which are available on our website as well as the stock exchanges.

For this call, I welcome my team who will join me to answer your queries on various aspects of the business. I have with me Mr. Aashish Ghai, our Chief Financial Officer; Mr. Puneet Bhatla, our Services CEO; and Mr. Stuart Connor, who is representing the promoter and our Steam Power Global CEO.

I would start the discussion with a quick update on what we see in the global economy, then touch a bit about the Indian economy and then the impact on your company. In the last quarter of 2023, global GDP growth remained robust as international trade continued to show positive trends despite cautious optimism due to rising geopolitical tensions. Increased exports from major economies such as China, India and the United States played a crucial role in supporting global trade growth, thereby mitigating the impact of intensified global power struggles. Nevertheless, the United Nations conference on trade, development has expressed skepticism about trade figures surpassing the levels achieved in 2022. While global trade has been an upward trajectory, [ UNC plans' ] outlook remains cautious.

On the domestic front, the first quarter of '25 marked a pivotal period for the country as the new coalition government of GE Power committed to continuing with necessary reforms. Despite the complexities of coalition politics, the government's clear emphasis on building infrastructure capabilities has been evident, signaling an intent to drive forward the country's development agenda.

The International Energy Agency has projected that global growth in the energy sector will reach its fastest pace in the last 2 decades, driven by intense heatwaves and a significant surge in demand for solar PV, which is set to reach new records. According to the IEA's Electricity Mid-Year Update, global electricity demand is anticipated to grow by approximately 4% in 2024, up from 2.5% in 2023.

The strong increase in global electricity consumption is expected to persist into 2025, with a forecasted growth rate of around 4% once again. The robust expansion underscores the pivotal role of renewable energy sources, particularly solar PVs in meeting the escalating global energy demands and highlights the urgent need for continued investment and innovation into the renewable energy sector.

Coming to Indian economy and the power sector. In the Indian context, the government's commitment to expanding renewable energy has intensified, while there is a strong push towards integrating more renewable energy sources in the energy mix, the government is also acutely aware of the burgeoning electricity demand. Consequently, there's a concurrent emphasis on enhancing the generation capacity of conventional and existing power supply sources.

The strategic objective is to ensure that thermal power capacity remains sufficient until an adequate renewable capacity is seamlessly integrated into the national grid. Over the past 2 years, there has been a concerted effort to promote the adoption of solar rooftops, which is a crucial step in bolstering the overall renewable energy capacity of the country.

This initiative has gained further momentum with the government's latest budget, which has allocated substantial capital to encourage solar rooftop installations, underscoring the impact of decentralized solar energy installations in meeting the nation's energy needs. On the conventional energy front, the industry is clearly anticipating updates on the deadlines of the installation of the flue gas desulfurization plants, the FGD plants. This technology is vital for reducing emissions from thermal power plants and ensuring compliance with environmental standards.

Two years ago, the deadline for installing FGD equipment in retiring plants was extended to 31st December 2027, while for nonretiring plants, the deadline was pushed to December 31, 2026, from the earlier deadline of December 31, 2024. The industry is closely monitoring these timelines as timely compliance will be critical for both environmental sustainability and the continued viability of conventional power generation in India.

The dual approach of aggressively expanding renewable energy capacity, while simultaneously upgrading conventional power infrastructure reflects the government's balanced and pragmatic strategy. This approach ensures energy security, environment sustainability and the reliable delivery of power to meet the nation's rapidly growing economy.

Now moving to the executive summary of the company's performance for Q1 FY '25. During the quarter, we are pleased to share that this has been a strong quarter for core services and FGD orders and therefore, for orders [ incoming ]. Your company has received the FGD order worth about INR 775 crores from JP Nigrie and JP Bina. There were other developments during the second quarter that we would like to brief.

We have already communicated once with a set of investors earlier in July. For those who could not attend the earlier call, here's the brief: On the 10th of July 2024, the company disclosed that the Board of Directors have approved the sale and transfer of its hydro and gas power business. The completion of the slump sale of hydro and gas business shall be subject to necessary approvals, including approvals and -- as needed.

On July 25, GE Power India Limited issued a public disclosure mentioning that GE Steam Power International B.V., the promoter has ended its plan to exit from GE Power India Limited and end its plan to de-promoterize. GE Steam Power International B.V. will continue to be the promoter of the company. GEPIL's management has outlined a proposal, which aims to put your company on a sound financial footing by focusing on lower risk and high-margin business.

The promoter, GE Vernova, supports this strategy. To date, GE Vernova has not been able to find a new promoter on its earlier announced de-promoterization program, which and therefore, on this basis has decided to end the plan to exit from GEPIL and de-promoterize. The GEPIL management, on August of 8th, issued a response on the letter issued by promoter GE Steam Power International B.V., dated August 7, 2024 on GE Vernova Hydro global strategy. The response note mentioned that GE Vernova Hydro Power businesses' strategic focus would be in selected markets.

In the absence of GE Vernova's support, GEPIL anticipates a decrease in demand for services to be potentially provided by the Center of Excellence, COE that supports the GE Vernova Hydro Power business and does not foresee any further anticipation in new hydro bids in the market.

This reinforces the decision of your company to carve out the business and the above development would make it more favorable for the company in terms of the valuation that is currently agreed with the promoter due to the impact that we see due to the above announcement. So if I may summarize, we now have a strategy for the company, which is margin accretive, cash accretive, to focus in improving the working cycle capital of the company from an average of 10 years to 7 years today to a future of an average working capital cycle of about 3 years -- 2 to 3 years.

Therefore, the strategy of the company to focus on margin-accretive, cash-accretive service business and upgrade business to focus on lower-risk EP projects in the FGD and to continue to bolster the efforts in the Durgapur facility to provide services for customers in 13 countries outside India for service parts and for pressure vessels and cryogenic applications for industrial and oil and gas applications, sets the company towards a positive trajectory with more certainty. Also, with an end on the current de-promoterization program also GE Vernova to continue as the promoter. So overall, that sets us with the carve-out of hydro and gas on a path to be able to deliver double-digit margin, double-digit EBITDA in 2 years' time frame from now.

Now on the financial front, I would like to hand over the call to Aashish Ghai, our CFO, to share further.

[Aashish Ghai, executive]

Thank you, Prashant. Good evening, everyone, and I'm pleased to welcome you all and share the financial performance for the first quarter of financial year '24-'25. Your company has started the year on a strong note at the back of the announced GEPIL strategy to pursue margin and cash-accretive opportunities.

During the current quarter, the company booked orders worth INR 1,038 crores. The order in the corresponding quarter of financial year 2023-'24 stood at INR 191 crores. So what we have seen is a 443% increase during the period. With a strong order intake in the current quarter, the backlog of your company has also increased quarter-on-quarter to INR 3,917 crores as on 30th June 2024 from INR 3,309 crores as on March 2024.

Moving to revenue from operations for the quarter. It stood at INR 430 crores, slightly up from what we saw in the corresponding quarter of previous year, which was INR 424 crores. But worthy to note is that what we are seeing is a favorable shift in the sales mix with higher contribution coming from high [ calorie ] service business. The same is also reflected in the performance on the loss before tax, which stood at INR 11 crores of loss in the current quarter against loss before tax of INR 136 crores in the corresponding quarter of previous year for the stand-alone entity.

Your company is committed to the journey it has embarked upon by choosing commercial deals with the right risk-reward profile, plus executing the existing backlog safely and successfully. Thank you.

[Prashant Jain, executive]

Thank you, Aashish. I would like to once again reiterate that the quarter was good and, especially with orders in FGD, which is with lower risk as in the area of EP and consistent growth on the services.

So with that, I would like to open up the floor for question and answers, ladies and gentlemen.

[Operator]

[Operator Instructions] The first question is from the line of [ Tushar Bhavsar ] from [ Cognizance 4D ].

[Unknown Analyst]

Am I clear?

[Prashant Jain, executive]

You're very clear.

[Unknown Analyst]

Sir, my question was like I had heard like one of the -- I think, in one of the conferences like I heard like our company, like within the FGD market space, I mean, in the next 2 or 3 years, there is a market size of INR 60,000 crores for the Indian companies to get in. Can you tell me like what market share do we expect in that area?

[Prashant Jain, executive]

So the market, yes, I confirm the market size, the challenge that we see from the market is the timing, which I've also been sharing previously that the government had extended the timeline of the implementation. So in theory, the market has to continue by 2026 and 2027 for the retiring and nonretiring units as per the plan. Now, that means about 90 gigawatts is up for grabs.

What we are looking at is we are being very selective in terms of the scope that we want to bid. So far, in the previous weeks, we've had roughly about 8% to 9% market share. In terms of gigawatt, we may continue, but what we will do is we will not participate in the EPC anymore. So we will partner with EPC and participate as EP. So in gigawatt terms, we might still have 7% to 5% market share, depending on the type of projects that get decided in the year because per year, depending if in a year, we have 2 or 3 projects which are coming from states that we don't want to deal with, maybe we will see a bad year, but then we might see a good year.

So it depends on which projects get finalized. But yes, our objective is to stay in EP and therefore, in terms of -- if I have to annualize for the sake of our strategic plan, we are annualizing in terms of 1 or 2 orders that we will announce per year. And that value you can assume to be in the range of INR 300 crores to INR 500 crores per year. That is what I would say. We have assumed in our estimates for the business plan that we have shared with you for our plan to be double-digit EBITDA in 2 years from now. So anything that we see better than that could be an upside, but then we have to see which orders get finalized and when.

We do see that there will be some -- that the industry will seek an extension, but this is sub judice so it depends on how the regulators and the courts rule on that. So you might see the spurt in ordering as we go forward. So we have to see how the orders get decided. If there is an extension that will work to our favor, for sure, but we have to see how the regulators decide on that.

[Operator]

[Operator Instructions] The next question is from the line of Nilesh Doshi from Green Lantern Capital LLP.

[Nilesh Doshi, analyst]

Just...

[Operator]

Sorry to interrupt. Mr. Doshi, can you speak a bit louder? We're not able to hear you.

[Nilesh Doshi, analyst]

Sure. Can you hear now? Is this fine?

[Operator]

Sir, please proceed. Please -- still sounding soft.

[Nilesh Doshi, analyst]

Yes, okay, let me try. So sir, just extending to the previous question. You said that 90 gigawatt kind of FGD -- equivalent FGD orders are required -- I mean, FGD implementation is required over. And the EPC cycle what you have mentioned is 5 to 8 years versus the timeline is 2027 end, I mean December. I think it is next to impossible for anyone to complete the project within these 3 years, right?

[Prashant Jain, executive]

Yes, that is right. You're right. In fact, our anticipation is that once they place the order, they might go to the government and the regulators and say, "Look, we have ordered in time, and please give us an exception." I do you anticipate this is what the developers might do.

[Nilesh Doshi, analyst]

But that means that they will have to get all these orders placed within the next 3 months -- if I mean, hypothetically, if they do within the...

[Prashant Jain, executive]

That is -- practically, you're right. It's practically impossible. We don't see that sense of urgency anywhere today. We do see there is interest, yes, but I think this is that -- we anticipate, now this is only anticipation that they would order within the timeline and then they would apply to the regulators saying that okay, we've ordered it and at least granted extension and avoid penalty.

[Nilesh Doshi, analyst]

Yes. Sir, second is you've agreed that the overall opportunity in FGD could be INR 60,000 crores, which includes EPC. So if I have to bifurcate between EP and C, will you be able to help us, what would be that percentage?

[Prashant Jain, executive]

Yes, the -- I would say that 30% is roughly the scope of the EPC -- for the EP that we would like to bid on. So it depends on the -- customer to customer, it will [ trend ] slightly up and down. But if I had to give an average, that would be 30%.

[Nilesh Doshi, analyst]

So this JP is also from our side is EP, right?

[Prashant Jain, executive]

Yes, it is a supply portion, and we have a large supply portion in that project, yes.

[Nilesh Doshi, analyst]

But it has been ordered by JP directly to us. Is that the way now FGD is being installed in the country?

[Prashant Jain, executive]

Yes, it depends on customer to customer because some customers have an EPC arm, some customers may want to deal with an EPC. So every state and every IPP has their own strategy. Some have strong steam in their scope and then they want to increase their steam in their scope.

So the private IPP is the one that we find more attractive on the state government, we are only focusing on a few states. And in the private IPP, we would participate more and sell it to very select few states who will participate. And each project then we are doing project by project tie up in agreement because we don't have one single EPC player in this full market and will therefore [ agreement ] project to project. And each IPP has their preference in terms of what they think they can do by themselves and what they would like to see help from. So yes, it's a deal-by-deal discussion.

[Nilesh Doshi, analyst]

Okay. Sir, the second is on the Durgapur facility. So are we planning or contemplating able to get back into the boiler manufacturing?

[Prashant Jain, executive]

So for Durgapur, our plan today is to -- so I've shared my plan previously, Durgapur was about 800,000 hours capacity. We have now brought that capacity down to about 200,000 hours. Now with this capacity today, we had a service load a few years ago of about 10,000 hours, we have today reached a service load of about 150,000 -- 170,000 hours. And current FY '24-'25, we anticipate 175,000 hours to be loaded to the factory.

So this is, in our view, a good load to be able to come in to -- closer to the breakeven. Our objective is to cross 200,000 to 250,000 hours. The areas that we are currently focusing to get these loads: One, for sure, services in India. With the retail strategies we have also announced, we will target parts to 13-odd countries outside India, where we will supply [ nascent ] parts fabricated in Durgapur. We see some traction there. The third area that we are working on Durgapur is that the cryogenic and pressure vessels. In fact, yesterday, we dispatched the first lot of the pressure vessel for L&T, IOCL job, I think that was roughly $0.5 million or something like INR 606 crores job, which we are currently executing. So that job and then we have also got certain industrial customers for applications in metal where we are providing fabrication support.

Now there are -- when we did the evaluation for about 128-odd areas, we have come to -- we have discovered that the most profitable segment for the factory would be to focus on, of course, the first is on the parts and services that we are doing, which is our conventional strength. The second area that we have identified is the pressure vessels and cryogenic application, which is a low-hanging fruit through the capability of the factory. And we have got the factory certified now and the certification is valid for 3 years, and we are now getting the first trial orders, and we are adding customers. Previously, we had only one customer, today we have 3 customers who have qualified purchase from us and placed the first pilot. And as we deliver them, there we will expand, and we are also adding competencies for cryogenic application. So that's where we are in the progress for the Durgapur factory.

If we're able to cross 200,000 hours as per our business case, we should already, within 2 years, deliver with high-margin, high-cash and double-digit EBITDA performance for the company within 3 years. So that is on track as of now. And if you have to watch, you have to watch very closely the successes that we will see in the Durgapur factory towards this area. We're also evaluating this -- we're also evaluating the waste heat recovery and industrial applications. And those applications where we have technology for boilers, and we will see as we see response from the market, we will keep you updated.

[Nilesh Doshi, analyst]

Because as we understand from CEA in some seminar that there is a massive shortage of boiler suppliers, manufacturers in the country. So -- and you were one of the pioneers in that. So that's why the question.

The second is on the cryogenic side, have you -- I mean, do we have the technology to do -- I'm sure fabrication, you can do it, but I'm more talking about in terms of insulation and ensuring that we have the technology for all those cryogenic -- I just...

[Prashant Jain, executive]

We have a phased plan for -- we have a phased plan to get into the segment, we have mandated KPMG to be a business study for us and we have a 3-year plan. The first plan, of course, was competencies, set up certifications that have been in place and to take pilot project, get qualified with certain customers. And we're in the process of that and we see success there.

We will -- we have a road map there. And we have taken a '24-'25, '25-'26, '26-'27 in 3 years. And how do you want to ramp up in that area, test the market, get the competencies and also invest CapEx as required, and that is in our budget for the current financial year to enter this market, and we are, I would say, progressing in that direction today. The technology part is not anticipated in the day 1. But yes, as we progress forward, we will have strategic tie-ups that is planned in the coming years, for this plant.

So today, we will start with fabrication, but yes, we will move into that area as we move forward. We are exploring the market today, testing, doing strategic tie-ups, putting a team in place. And we are also assessing end-user segment versus OEM segment, where is it that we want to play, how is the competitive situation. So I think we will have better visibility in 6 months on how this is developing and how we see success. So every quarter, we will keep you posted on the developments.

[Nilesh Doshi, analyst]

Sure. So sir, as a layman, if I have to understand Durgapur facility, you have spoken in terms of number of hours in terms of manufacturing, but if I have to understand in terms of revenue terms, I mean, what kind of revenue we can generate? I mean even...

[Prashant Jain, executive]

I would say that Durgapur -- I did not want to comment as a layman on Durgapur for revenue, but I will track down Durgapur on the margin front, not being able to fulfill the factory today hits with our -- INR 25 crores to INR 40 crores negatively today, let's say, last year it is going to hit in the range of INR 25 crores to minus INR 40 crores on the underutilization of the cost of the factory. So to me, if I can cross the mark of 200,000 hours based on this strategy, I take out this loss from the system, and I will get some margin in the system. So that would add positively short cycle low-risk business. So that will strengthen the performance of the company significantly.

So honestly, this is not currently our top line strategy, but it is a strategy to take out the tail that we see currently due to the underutilization in the factory, which is intact, and we have seen good progress, and that is giving us confidence.

[Nilesh Doshi, analyst]

So if I may, in Q1, how many hours we would have clocked?

[Prashant Jain, executive]

Q1 would be about 40,000 hours.

[Operator]

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Prashant Jain for his closing comments.

[Prashant Jain, executive]

Very good evening, and thank you, everyone. I would like to summarize the strategy that the company has identified in the growth areas is on track. We are seeing a good progress on the order intake, as Aashish pointed out in the speech. And from the strategic front, the company is focusing on reducing the overall working capital and repairing the net worth of the company to set the company towards a double-digit positive EBITDA company.

In the interest of your company and the shareholders, we need to focus to improve the net worth of your company. This has a direct impact on our ability to bid for tenders, credit ratings and fund availability with banks as well. Hence, the carve-out of hydro and gas business is of paramount importance.

This transaction provides about INR 241 crores -- INR 214 crores plus INR 38 crores, which is about INR 252 crores net liability reduction, which will improve net worth of your company, and this will further be boosted by consideration of gas business of INR 44 crores.

This is subject to the carve-out getting approved by shareholders. This would also unlock INR 700 crores of nonfunded limits with banks and help in avoiding working capital requirement of INR 500 crores which the hydro business stand-alone is expected to consume in 2 years, assuming no further restructuring, which is a slump sale and with sale valuation of INR 44 crores for gas and premium of INR 100 crores for hydro, which will generate higher wealth for shareholders [ on demand. ]

In future, this will steer for a business strategy, leading to profitable unrestricted free cash flow, dividend-yielding company with lower working capital cycle. So with that, I would like to thank you all, and I would like to thank your team for the support. Good evening and good day.

[Operator]

Ladies and gentlemen, on behalf of GE Power India Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines.