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

Ladies and gentlemen, good day, and welcome to the investor call of GE Power India Limited. [Operator Instructions] I now hand the conference over to Mr. Prashant Jain, Managing Director of the company. Thank you, and over to you, sir.

Thank you. A very good evening and a very warm welcome to all of you for joining the call today. Today's call is a follow-up on our previous investor call on the 18th of July. For this call, I welcome my team who will join me to answer your queries. I have with me Aashish Ghai, CFO of GEPIL, GE Power India Limited. I have Puneet Bhatla, who is the CEO of the Services Business. And I have with me today also Stuart Connor, who is the CEO of Steam Power Group as a promoter representative on the call. In today's call, we will cover 2 important topics and thereafter will have an ample time for...

I apologize to interrupt, Mr. Jain.

Yes, please.

Can you speak up a little bit, we are unable to hear you.

All right. Is it better now?

This is better, thank you.

Okay. So in today's call, we will cover 2 topics. And thereafter, we'll have ample time for question and answers. First, on the 25th of July, GE Steam Power International B.V. announced ending -- announced the plan to end the de-promoterization and exit from the Power India Limited. The second topic is the follow-up on the questions with the hydro and gas slumping on the presentation that we have made on the 18th of July. We had several questions and there were still several investors on the call to follow up with few and we wanted to provide an opportunity to ensure that we had all the questions covered. So first topic on de-promoterization. On 25th of July '24, 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 its plan to de-promoterize. GE Steam Power International B.V. will continue to be the promoter of the company. The Board of Directors of the company in its meeting held on 21st July have taken note of the above communication and the decision was communicated to the exchanges. This is in continuation of the earlier disclosures made by the company on 22nd September 2020, 9th February 2022, 6th October 2023 and 3rd April 2024, providing an update on the profit from time to time. [indiscernible] management has outlined the 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 its plan to exit from Japan and de-promoterize. On the second topic of hydro and gas sales, as disclosed by the company on 10th of July '24, the Board of Directors of the company have approved the sale and transfer of its hydro business undertaking to the Power Electronics India Private Limited, a related party and the gas power undertaking of the company to the Renewable Energy Technology Private Limited or related party. The completion of the slump sale of hydro and gas business shall be subject to necessary approvals, including minority shareholders' approval. I would also like to highlight that provided the transaction does not receive support from our minority shareholders, the company will face challenges on sustaining positive net worth and will have difficulties to finance both working capital and bank guarantee requirements, which will impact the company's capacity to bid for new projects and to support the group strategy. I would urge the minority investors to support the proposal and we are very happy to provide any clarifications as you may see, as the net worth of the company has been constantly deteriorating and we have provided the information regarding the same on the presentation that is uploaded on the stock market. The sale consideration of these two transactions is based on independent valuation report from Grant Thornton Valuation Advisors Private Limited. The fairness opinion on the valuation is provided by RBSA Capital Advisors LLP, a SEBI registered company. [indiscernible] and GT in its valuation report, have recommended a positive valuation of INR 438.6 million for the Gas Power business and a negative valuation of INR 1,001 million, which is close to INR 1 billion. Its valuation based on internationally accepted metrologies and compliance with Companies Act 2023. Grand total has utilized the income approach evaluating the company's cash generation potential based on a discounted cash flow method to derive the enterprise and equity valuations of the business. Notwithstanding the negative valuation for hydro business, GE Vernova has offered a nominal purchase [indiscernible], which is close to INR 1 billion premium on the valuation. In spirit of transparency and good governance, the company has uploaded these reports of valuation on the company's website and on the stock exchange for your quick reference. I would urge once again, to remind the highlights of why this transaction is important to the company. The current net worth of the company has depleted to the range of INR 30 crores to INR 50 crores, and this has been constantly depleting quarter-on-quarter for past several quarters due to the cost and project updates in the hydropower projects and also in the cost updates received from the EPC and FGD products and certain [ ESPD ] due to which that your companies are incurring losses for almost 2 years and that has led to a significant deterioration in the balance sheet. It has also led to the investor rating of the company to degrade to BBB negative, which is on the brink of a rating that supports an investment-grade rating. Any further deterioration on this net worth could take the net worth of the company to zero or negative. And therefore, that could impact the company's ability has several tenders have a positive net worth as a criteria for qualifying and supporting the bids. And therefore, that could put the company in a very difficult situation. To summarize, the transaction has a direct impact on our ability to be able to bid for further tenders. It has a direct impact on the credit rate of your company and the funds availability for both bank guarantees and the working capital for funded and non-funded limits. This transaction would have an impact of positive INR 296 crores excluding taxes of net worth boost to the company and this is significant. On top of that, we have a valuation of INR 44 crores of gas that is an additional INR 44 crores. So that is a total of INR 296 crores net worth improvement on the company. Therefore, I request all of you to support and we are happy to take your questions. Over to you for the Q&A.

[Operator Instructions] The first question is in the line of Tushar Bhaskar [indiscernible].

So my question is, like, I'm looking at the valuation report Page 2, right, where we -- like the Grant Thornton report where the hydro business is showing like the revenues and like from the operations of hydro business only. Yes, in 2021, it shows like that the company made a profit of like INR 5 crores. But then in '22, '23, '24, we experienced like heavy losses, like with INR 83 crores, like INR 12 crores and INR 4 crores, right, in '24. But if I go down, like -- yes, if I go down like...

That's INR 40 crores, INR 12 crores, yes, that's right.

Correct. Correct. Sorry, INR 1 million, INR 40 crores. Yes, sorry, I misplaced one of the decimals, I guess, yes. But now in '25, '26, '27, '28, '29 and '30, if you go on Page 4, right? It is showing like net positive result, right? It's showing INR 23 crores, INR 103 crore, INR 94 crore, INR 49 crores, INR 26 crores and INR 27 crores of profit of EBITDA.

Yes, that's right. It's a very good question. Please go ahead.

Right, right. So the point is like it's like we raised the calf and now it's becoming a cow, and we are selling the cow like at $1 again, like when it's time to make it.

Yes. Very good question. I actually clarify this and I would clarify again, the hydro business has contracts that are lasting over a decade. We have contracts, which have started from 2011 and we have not yet come to complete even this year. So what we are seeing in the past is year-on-year the date of the project shifting and therefore, we are receiving cost updates year-on-year as the project gets delayed because of the deal of the project, we have additional costs from the site for execution of the project. And we have, in some cases, also hit the [indiscernible] of the price variation clause and those are subject to either subject to independent engineering valuation or arbitration or such mechanisms to see if we can actually recover any of these costs that we are able to escalate in this year. Now the valuation that we have done, which is in the favor of the contracts, what we have done is you have valued the contract on the contractual base and contractual terms. So from the valuation point of view, that is actually a very valid observation. But the reality of what you see in the last few years is the cost update towards the delay in the valuation of the unfinished portion of the contract and also so that we have assumed that there will be no further deal that's one. However, we are seeing constantly delays on the hydro projects because of several factors like geology, topology, land acquisition, environmental clearance, labor unrest, et cetera, et cetera. All these are continuing every year. And therefore, we are assuming no further delay in the cost, no further cost update in the valuation for the contract. So that is favorable in valuation because we are assuming zero dealers in the future, where as the reality every project literally, as you have seen, is constantly getting delayed because of factors, which are many external done what we can control in the management. That is the first part. The second part, we have also assumed additional three orders that we will book. And I want to give you an example of one contract for which we have taken an approval almost a year ago from the shareholders for the bank guarantee and related target transaction. Unfortunately, even after almost a year, we have not been able to close the contract. But for the valuation perspective, we are assuming that three more orders we will sign without delay and they will be executed without any slippage of the margin in the future. Therefore, from the valuation point of view, the management has considered favorable future as compared to the reality, which has been very difficult in the past year. Now as regards the financials are concerned, I will ask my colleague, Aashish to clarify on the EBITDA level and what actually we have seen so that we get further clarity. And it's a very good question, and I want to follow up sir, if you still have an open point there. Aashish, over to you.

So like Prashant said, I think if you look at the last -- last 3 years, the EBITDA level has been around negative 16%, which kind of reflects the reality of the delays and the cost of base like Prashant said. However, if you look at the next I mean until 2030, you have the projection, but let's say, apple to apple 3 years, if you look at the next 3 years, average INR 1,000 crores, INR 1,100 crores of top line of our forecasting for hydro at an EBITDA level, which is there, what you're able to see is around 7%. However, what you do see and I would just like to clarify that at the profit before tax level, which you are comparing when you look at the previous year. For the next 2 years, we still expect it to be negative for hydro for 2025 and 2026. But at the EBITDA level, it is yes, positive for the reasons that Prashant mentioned that the assumptions for this in the valuation exercises, there is no further delays assumed and hence, no cost of base on account of elongation. The backlog margins would remain intact and new orders, which we are -- which we have baked in into the projections are at a much higher margin that we have on the backlogs currently. So those are so favorable. But at the time of representation or assumptions that has been into the valuation of it.

Okay. My point is, I guess, like you know but now like we are not doing a de-promoterization, right? Like then we should have a solid backing from Vernova, right? Like I mean, for our guarantees.

See, the issue on the de-promoterization or not, if you look at the condition of the company today, we see that the net worth of the company is coming to close to zero. And another couple of quarters, we are looking at the projections currently, the company will enter into negative net worth and the credit ratings will be downgraded. Despite the promoters back in today, we are already deeply related to the BBB negative. And once we get into negative net worth zone, the credit rating will be further deteriorated and the cost of capital will go up and the hydro basically is going to require additional INR 500 crores of debt and additional guarantees, bank guarantee to be issued, which is going to not only convert into margin and cash and reality. The valuation, yes, we have considered favorable. But if you look at our practical experience, this is an additional stress on the balance sheet. But the company will not be able to take for the next few quarters. And therefore, the condition is quite critical. We have three working cycle, working capital cycle in the company today. The first is hydro, where we have seen more than 10 years plus on the cash conversion for a hydro project. It is also having huge liabilities on the company, which is also pulling down the net worth to be negative plus, it has a requirement of additional funding both in funding and non-funding and the cost of capital, which is incurred by the company in the local entity, which is also going up and that is constraining the ability to get additional funding lines for additional growth areas. Therefore, if we look at the -- so if I again come back to the summary of the working capital, hydro is the working capital, even if you invest into these projects with additional INR 500 crores, we think the return will come only after 10 years. For us to be able to get back the margin and cash profitably and that is a very long working capital cycle for the company. On the other hand, the new strategy that we have been implementing on service growth has a working capital conversion of average 6 months with margin and cash for growth services and up 2 years plus at the most 3 years for upgrades, which we can convert into margin into the books. The exiting EP strategy is also helping us convert the margin into cash in about 2, 3 years cycle. So from an average working cycle capital of the company currently, which is more than 7 to 10 years today because of the long nature of the EPC projects and the Hydro EPC plant, the hydro projects. We are not able to convert free cash flow that we can get to the book for the company that we can convert to dividend or positive news for the company that we can have, unfortunately. And therefore, we came to this decision. But okay, is there potential, the answer is yes. Are we competitive? Not so much. We are struggling with certain deals. Number three, it's a very long working cycle capital. The alternative, for example, in the Steam business that the company wants to continue to focus the end-to-end competence. This is the best year ever that we have seen in terms of order intake. And therefore, we are seeing already a strong year and great amount of opportunities for the company to focus on positive margin, positive cash with a path that can convert and create the company gets free in 2 years and also double-digit EBITDA in 2 years, which will enable the company to have free cash flow that the company can utilize for positive for example, even available for dividends. So that is the path that we think would help us to realize the benefits faster. With hydro, we are facing challenges in terms of competitiveness. And we do not have intend capability in the company and we are seeing a continuous drag on the balance sheet. That is the summary I would like to consider. And do you want to add something Aashish?

So just to add on your point of Steam strategy. I think this year, like you said, has been very strong year and in these 4 months, I think we have booked and announced orders more than we have done in the average annual order of 3 years. So just in 4 months, we have surpassed the average annual of the last 3 years. So it has been a very, very strong commercial year on the Steam side. And we are coming at better healthy margins, which you do not see for and those things that you have already mentioned for hydro.

Yes. But there was a similar situation with another company like you know GE and Indo Tech transformers, right? Like then GE actually given like $15 million, $20 million but I agree, like I mean I agree with you. But thank you very much.

I apologize to interrupt, [ Mr. Tushar ]. May I please request you to come back in the queue for follow-up questions. The next question is from the line of Sanjay Kohli from GoldStone Capital.

So Prashant, wanted to check this demerger, the hydro business, which is going out, that's almost half the company and half the people, so not easy to be getting orders in this area. You have had a significant order book and a lot of intellectual capital in-house. So on valuation throughout we've been sort of maintaining that -- there's a lot of capability in-house. And then when all these guys go out, how does that work out?