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Engineering & Capital Goods - India - In dire stratis - ICICI Securities

Posted On: 2020-10-25 23:48:36 (Time Zone: Arizona, USA)

Given the global macro challenges in thermal power sector, GE group has taken a decision to exit the newly build coal power market. This puts the operations of the domestic listed entity GE Power India in jeopardy as it is dependent on the parent in terms of pre-qualifications for boilers and utility grade flue gas de-sulphurisation (FGD) orders. Currently, the Indian entity is in talks with the parent to resolve the situation amicably, which we believe, will come at a cost. In their recent investor interaction, the company shared a challenging outlook in terms of the domestic coal power market and we believe the scenario will pose a challenge to other dominant players in the sector like BHEL. Taking into account the changed scenario, we downgrade GE Power to REDUCE with a revised target price of Rs363 (previously: Rs640) and reiterate SELL on BHEL with an unchanged target price of Rs24.

- Bleak outlook for domestic coal power market to continue - In the recent investor interaction, GE Power India highlighted that the headwinds of the domestic coal power market may continue in near to medium term. They are unlikely to extend the technical partnership with BHEL and will focus more on services segment leveraging on their technological leadership. The announcement by GE, which follows the gradual de-focus from thermal power market by Siemens and sale of high voltage segment by ABB group, indicates structural demand weakness from this segment.

- FGD orders to fuel near-term growth, deadline likely to extend by two years - 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 board and private sector. We believe the funding and weak balance sheet of some of these entities can pose a challenge in terms of payment. GE management expects postponement of FGD implementation deadline by ~2 years from the current 2022.

- Exit of global MNCs from coal power markets to pose challenge to domestic subsidiaries - Domestic subsidiaries are dependent on the parent in terms of pre-qualifications, technology and patents. With the exit of parent like GE, local listed entities like GE Power India will find it tough to compete unless an alternate arrangement is worked out which allows continuation of the status quo. We believe this will come at a cost and impact near- to medium-term margins given the challenging environment.

- We foresee restructuring and impairment cost for the existing coal power equipment facility in domestic market - BHEL has a current capacity of 15GW per annum of coal power equipment facility and GE Power India has a plant in Durgapur for boiler power parts and related boiler equipment. Given the current demand headwinds, we believe, these companies will be forced to take an impairment of their facilities unless they are able to improve utilisation. Additionally, there will be a need to restructure the existing operations, which will lead to a one-time cost.

Source: Equity Bulls

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