GE Power India Limited (532309) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the earnings conference call of GE Power India Limited with respect to its financial results for the quarter ended on 30th September 2023. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prashant Chiranjive Jain, Managing Director. Thank you, and over to you, sir.

Very good evening. A warm welcome to all of you for joining the earnings call. I have my team with me today to address the financial results for the quarter for first half of the financial year 2024. I would touch upon the global economy where the global energy sector is making significant strides towards achieving net-zero by 2050, despite an actual increase in power-related emissions in 2022. As reported by IEA, emissions were 1.3% higher than in the previous year, reaching 13.2 gigatonne CO2 in the power sector. Moreover, with August 2023 recorded as the hottest globally, this year is expected to even exceed 2022 in terms of carbon emissions. Despite the substantial advance pace in clean energy technologies on a global scale, the adverse effects of climate changes are becoming more frequent, severe and disruptive. The crude oil prices after correcting in the first half of current year, has started upward trajectory again in the face of resilient energy demand and translational dispute. IEA estimates an average growth of 3.2% in global electricity demand in '24, '25 as the energy crisis abates. By 2025, Asia is projected to represent half of the world's total electricity consumption, marking the first time in history, this region will reach such a milestone. Additionally, 1/3 of global electricity demand is expected to be attributed to China. Globally, the rapid advancement of electrifying transportation and heating persisted. Over 2.3 million electric cars were sold in first quarter, about 25% more than in same period last year. IEA expect sales of 14 million units by end of 2023, representing 35% year-on-year increase, with new purchases accelerating in the second half of this year. Electric vehicles and heat pumps taking center stage globally will further accelerate the growing electricity demand. Coming to India. The energy sector faces a critical juncture, efforts are towards deploying clean energy, yet the demand for electricity still strongly relies on traditional energy sources like coal and gas. The country's use of coal is actually on the rise as adding renewable energy sources at scale, and preparing the grid to handle their fluctuating nature does not happen overnight. At the same time, India's energy demand continues to grow. Over the initial 7 months of the financial year, until October, coal production surged by 13%, reaching 0.5 billion metric tonnes compared to about 448 billion tonnes in the same period previous year. Further coal dispatches have levered upward trajectory. Up to October '23, the cumulative coal dispatch reached 541 million metric tonnes in contrast to 483 metric million tonnes during the corresponding period in FY '22-'23, denoting an increase of 12%. The growth in power demand in India, as outlined by IEA was evident during the first half with consumption growing 7.8% to about 847 billion units. Most of the growth has come from surge in demand during July, September quarter as opposed to April, June quarter, which is usually the hotter period. Humid weather conditions and scanty rainfall in August and September led to surge in electricity demand, with peak demand touching 241 gigawatt during the quarter. The Central Electricity Authority has projected peak demand to touch 256 gigawatt in '24, '25. On the back of surge in demand for coal-base power, the government too has extended emergency clause under the Electricity Act 2003, mandating coal-base power plants to run at full capacity until June 30, 2024. During the recent quarter, government declared it has not started developing plans to phase out older coal-based power plants after 2030. This announcement is in line with the current power scenario in India, and this resonates with the primary focus of our company's service offerings and presents a substantial opportunity for growth in the coming years. How does this impact the performance for your company in first half 2024 for the Q2. I will now share a few moments on that. During the second quarter of '23, '24, there has been no substantial shift in market conditions for our business. We are still seeing that FGD and Hydro PSP opportunities are converting slower to orders than anticipated. For FGD, we have received a letter of intent in the second quarter for the GSECL Sikka Power Station of INR 444 crores, which has converted to an order last month, and it is the only FGD order we have been able to book in the current financial year. I would also like to mention the letter of intent we received in the second quarter for manufacturing of pressures vessels in our factory in Durgapur. This is the first time we have received such a letter of intent and when converted into an order, it will support the demand for Durgapur factory. For the upgrade in services, we have seen that the pipeline has started to convert into orders, especially in the DeNOx segment. The orders are still small and will take us a while to fulfill the gap that we have from the lower orders from FGD and new build. The segment that continues to grow quarter-on-quarter is core services, where we have booked 40% more orders quarter-on-quarter. This once again confirms that our strategy to focus on services has been right move for your company at this time. Our revenue overall is down 17% versus Q2 of the previous year, primarily due to lower orders in the previous quarters as well as project delays. Last topic that we mention regarding claims. We are continuing the efforts. The procedure remains long and time consuming, and it is taking longer to convert them into margin. So that's the overall summary on the operating performance of the company, and I hand over now to our CFO, Yogesh Gupta, who will take you through the financial performance of the company for this quarter. Over to you, Yogesh.

Thank you, Prashant. Good evening, everyone. I'm pleased to welcome you all to share the financial and operational performance of the company for the second quarter of FY '23-'24. During the quarter, the company got orders worth INR 671 crores against INR 248 crores in Q2 FY '22-'23. GSECL Sikka orders of INR 444 crores was the major highlight of this quarter '23-'24. As of September 30, 2023, we have order backlog of INR 3,699 crore, which represents active revenue opportunities in hydro, FGD, boilers and service segment. Lower-than-expected industry demand leading to lower order inflow in the last 2 years and Saundatti project suspension has resulted in lower revenue for the quarter. Revenue for the quarter 2 '24 stood at INR 354 crores, down from INR 428 crores in the corresponding quarter of the last year. And revenue in Q2 '24 is also lower than the revenue of INR 424 crores in Q1 '24. Cost escalations due to project delays and execution challenges at sites and slower claim conversion has led to lower margin for quarter under discussion. Loss before tax for Q2 '24 was INR 62 crores against loss before tax for Q2 '23 of INR 113 crores. The reduced loss is primarily due to onetime provision impact of Solapur fire incident of INR 78 crores, which was booked in Q2 '23. Further, the decrease in loss before tax for Q2 '24 as compared to the loss before tax for Q1 '24 of INR 136 crores is also due to onetime provision impact of INR 69 crores for the Sipat fire incident. Summarizing, the focus area for the company continues to be volume increase by fresh order intake, claim settlement and cash collections. We now open the forum for the Q&A.

[Operator Instructions] The first question is from the line of Sanjay Kohli from Goldstone Capital.

If you can tell us a little bit about -- there's been a mention of depromoterisation of the parent. And obviously, this is having a bearing on future plans, which areas this particular company is going to remain in. So connected to this, whether the enormous opportunity in Hydro will continue for our company, whether the company will continue to service GE subsidiaries, which are overseas throughout Asia, whether we'll be a hub. So what is the time line essentially for this depromoterisation. And essentially, what does it really mean? Will the parent retain a certain amount of stake? Because our understanding is that GE Vernova is also now getting geared up to list in the United States, and they have informed stakeholders of their intention to come out of any fresh thermal, but of course, continue to service the existing thermal side.

Thank you, Mr. Sanjay Kohli. I think you have well summarized the current situation of the company with the transition from GE to GE Vernova listing as a separate entity and also in making their mandate clear in the areas of operations that GE Vernova would want to play. Coming to the GE Power India Limited, in GE Power India Limited depromoterisation, the time line that was announced was 36 months. And at this point in time, there is no further update regarding the same. So the current mandate which fits within the global strategy Vernova mandate allows a focus on services of coal fired power plants. The second area that you mentioned about hydro...

Hydro and hydro pump storage.

Yes. We are evaluating the opportunities -- hello?

Hello. [Foreign Language]

Yes. So the pump hydro storage and hydro, as I mentioned earlier in the speech is taking longer than we anticipated to convert into orders. The order that we booked last year, Saundatti is also under suspension at this point in time. So the orders are not converting as per what we anticipated into the order books. So we are watching this very closely, and we'll provide an update to you as and when we have it.

Sir, does that answer your question?

Investors are quite concerned about this whole situation and pertaining to -- and in the absence of any update, obviously, there is a concern as to what will be the way forward for our company. And this is in the light of sales de-growth, which has taken place so that is the concern. But I'll come back in the queue. And if you have anything further to add to this, most welcome, but that's it from my side for the time being.

[Operator Instructions] The next question is from the line of [ Danesh Mistry ] from Investor First Advisors.

Sir, if you could just give us a little update on what is the receivable situation this quarter? How much have we received from -- on basis our milestone payments, number one, on the receivables side from our debtors. Number two is the fact, sir, what is our net debt today? And how much do we think will be our net debt by the end of this financial year? And third question and last question, sir, is that you mentioned about the vessels being produced at Durgapur, Assuming that this LOI gets converted over a period of time, what would be the improvement in the capacity utilization at Durgapur? Because you have done a fair amount of optimization, so I reckon, it would be pretty margin accretive for us. And sir, just one more question, sir, if you can just talk a little louder because your voice is very muffled, sir, we can barely hear you, sir.

I will address the Durgapur question first and then I'll pass it over to Yogesh. On Durgapur, we have optimized the capacity in effective terms to somewhere between 280,000, 290,000 to 300,000 hours depending on the workers rotation. This year, we have been able to reach largely from the services about 150,000 hours this year. So there is still -- but this is a significant progress from service from where we were 2 years ago. We see continued growth quarter-on-quarter. We do hope with this pressure vessel and oxygen lancers as the new products that we've developed. We should add more hours. So for example, the pressure vessels will add anywhere between 20,000 to 50,000 or 80,000 hours, or more as we get into the market. This the first project. We want to focus on the learnings, focus on good execution and then we will expand in that area. So that is one promising area. The second area that we are going for is the oxygen lancer, where we have roughly about 20,000 to 30,000 hours, and we have some opportunities that we are -- we are working with. If we do see the conversion of these opportunities, we will see probably a ramp-up to reach the existing capacity in 6 to 8 quarters from now. So there will be some underutilization till then, but we are working hard to accelerate such products, which would help us to mitigate the requirement of the factory. So over to you, Yogesh, for the account receivable questions.

Thank you, Prashant, and thank you Mr. Mistry for your question. And to start with the collections. We collected almost about INR 400 crores in quarter ended [indiscernible] INR 403 crores and about April to June quarter was about INR 490 crores. So full year, we have done almost about INR 900 crores -- six months. Moving on to borrowing. Our borrowing as of September 30 was INR 380 crores. And when we compare it with June borrowings, June was INR 473 crores. So our borrowings have gone down by INR 93 crores if you compare with June. And if you compare with March, our March borrowings were INR 292 crores, we have gone up by INR 88 crores vis-a-vis borrowing as of March '23. Then moving on to like our -- how we have -- like we are looking at the future projections, I would not -- we normally don't give any future projections on how we are trending. And we have been like focusing on the achievements [indiscernible] different players on account of some project challenges that we have initiated and faced, the revenue collection has been great. And we have been taking care of all the safety aspects to do or perform all the functions and execute the projects in perfect within the safety mandates.

Got it, sir. So sir, this borrowing you're saying, is gross or net?

This is gross.

Gross. And net sir, what would be our net borrowing as of September balance sheet, sir?

What do you mean by net or gross...

Basically gross -- so let's say, we have gross of, let's say, INR 100, and then we may have cash of, let's say, INR 40. So our net debt would be INR 60, sir.

Yes. Yes. So this is like we would say like our borrowing in September will be about INR 228 crores, if you net it off with the cash that we have in the core account and all the other places.

Understood, sir. And sir, what would be our September ended receivables outstanding?

September ended receivables are INR 1,950 crores approximately. And this is also lower than if you compare with March. It would be lower by about INR 40-odd crores.

[Operator Instructions] The next question is from the line of [ Danesh Mistry ] from Investors First Advisors.

Just a couple of more questions. One is that we've had -- as you've even touched upon in your introductory remarks, you had a couple of unfortunate incidents -- fire incidents, including the one at Sipat last quarter. So any sense on when we can get the insurance claims over there because we've already provided for all of them? But any sense when the insurance claims and receivables would start to come in for those particular projects?

This is very difficult to predict. Our previous experience has been a year plus or almost 2 years in recovery of such claims, these are complex and they take time so that is what I can say from the previous experiences.

Okay. Got it. And sir, if I may just take a leaf out of the previous caller's question on GE Vernova. So is it -- so do you have any sense on whether -- when we said that GE, the promoter wanted to exit. Does it mean that GE Vernova is the final owner of our company?

We have clarified that in our notification earlier that the change from GE to GE Vernova is a global movement which is having no bearing on the earlier announced the depromoterisation strategy of the company.

Okay. So basically, that will continue, is the sense, that is there as of the year?

Yes, as of now -- yes as of 2024 year.

[Operator Instructions] The next question is from the line of Sanjay Kohli from Goldstone Capital.

Sir, this current quarter's operating numbers, we are noticing the consumption materials consumed as a percentage of revenues is in the region of 80%. Can we hope for a visibility in the coming 2 quarters that this is a more improved number? And if you can give us a sense to what extent is management targeting to reduce this?

You can come again around the question on conversion? Are you saying -- what conversion do you mean?

I'm talking about the consumption -- the consumption -- materials consumed -- as a percentage of your revenues is quite high. It's very high. Still continues to be quite high, although it's reduced, there seems to have been some improvement. We've noticed an improvement from about 90% in the corresponding quarter for last year to 80%. But obviously, there would be a hope to improve further. But can we give -- can management give us some kind of definite visibility for the next half?

We do not predict or currently give future guidance. But what I can share with you is we have a mix in the portfolio of large duration hydro projects. The projects have been in the order book for more than 8, 10 or even more 20 years plus, and they have a very long gestation period, and then suddenly we have quarter of activity and then it changes. So that's one and which has a different material cost to revenue ratio. The second aspect is the backlog from the boilers, which is again a different product. It's a product business from the factory, it has a different profitability or gross margin ratio. And the third one is the service upgrades and service scores and FGD. So since the area that is stable is the service. And that portion, however, today is currently not significant. Therefore, the majority of the turnover comes from long-run projects of either hydro or FGD and therefore the fluctuation quarter-on-quarter based on the cost updates because if in a long project, if you have a cost update in one quarter, then we will see a big variation and then if you have a claim that materializes within 3 quarters later then that kind of significantly changes the impact. Therefore, considering the project nature of the business, what we have been proposing as a strategy is to continuously focus on the growth of services, where we have stability, we have clear guidance that we can provide in future. So at this point in time, that is how we are trying to manage the mix of the portfolio. And therefore, it's hard to predict quarter-on-quarter what would be the gross margin or cost to sales ratio.

First, I would like to add to the specific question on material here which Prashant went through. Here we have when we look at the quarter ending June '23, we have INR 69 crores of Sipat, which is almost about 16% of...

Your voice is very faint. If you can just speak into the handset, please.

Is it better now?

Yes, better now.

So specific question to with regard to cost of materials, 92% to 76%. In the quarter ended June 2023, we have like provision for the fire loss of Sipat which has been mentioned even in the Regulation 33, Note #3, and we have like considered this in the cost of material. And this translates to 16% of revenues. If you see like versus quarter 3 September, there are no such provisions. So we are better off by 16%, which is 76%. Approximately that...

This is largely the -- it's largely, as I said, in large projects when we have a cost update, it does impact and that's what is driving the fluctuation.

Mr. Sanjay Kohli, does it answer your question?

Yes. So as there's growth in services this metric will get better and better?

Yes. As I said, today, the volume of service mix is less than 30% to be significant and appear in the balance sheet and make an impact, so it will get a while, while we get there. The structural cost to be recovered, currently we need volume and that will not be fulfilled by services alone at least for a few -- at least for 4 to 6 quarters ahead.

And the pressure vessels opportunity, how big is this going to be?

I would say that currently, we want to be focused. It's a new area. We've just entered. We are evaluating the margin attractiveness. It's the first test order. And we will come back with you once we are clear on the strategy. We want to test it out, how does it go, how does it bring in margin and profitability, we will come back. It's a test, It's a pilot. We have got into that area. It's a largely fair opportunity. I would say it's an opportunity that can support Durgapur if we do it out well. So we will come back to you with more. At this point of time, I would not want to go ahead of where we are in the process.

As there are no further questions, I would now like to hand the conference over to Mr. Prashant Chiranjive Jain, Managing Director, for the closing comments. Go ahead, sir.

Thank you. Thank you all for the questions. And thank you team for preparation and joining me on the call today. Have a good evening. Have a very good Diwali, and have a very good celebration in the festivity season with your near and dear ones. Have a goodnight. Thank you so much.

On behalf of GE Power India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.