CG Power & Industrial: Sustainable growth path

15 Feb 2024 , 03:10 PM

Analysts of IIFL Capital Services hosted CG Power’s management at IIF L’s Investor conference in Mumbai. Laying out CG’s medium term roadmap, management is confident of doubling Sales/PAT in the next four to five years in the existing businesses – Industrial, Power & Railways. Expansion in capacities across product categories – transformers, switchgears and motors (combined capex of ~Rs2.2bn), to allow for ramp up in execution to cater to demand-side levers already in place, with a special focus on exports. CG’s foray into OSAT witnessed material development with the signing of JV agreement and initiation of team building efforts, however the project remains contingent on government approval – expected to be imminent. Analysts of IIFL Capital Services forecast 25%/29% Cagr for Sales & PAT (ex-OSAT) over FY24-26; maintain BUY with a TP of Rs519 (55x FY26) 

Industrial portfolio prospects to get better – 

Planned capex aimed at doubling of LT motors capacity (fully operational by FY25) to drive Rs27bn in incremental revenue of which exports set to become a major constituent, accounting for ~20% of volumes. CG is expected to resort to pricing discipline – aiding sequential improvement in margins, hurting market share gains seen in Q3. However market share remains a priority for the HT motors portfolio (currently at ~19%). Execution of robust inflows to propel sales in the Drives business (~Rs6bn in FY23), set to triple over the next five years while increase in addressable share of BoM (50-55% vs 35- 40% currently) and significant GoI capex to drive Railway execution. 

Sustained strength in Power Systems drives capex – 

Growth in power demand, RE transition and GoI programs aimed at strengthening the electricity grid set to drive robust power infra capex over the medium term prompting CG to increase Transformer capacity to 35,000MVA and Switchgears capacity at a cumulative capex of ~Rs1.9bn. Capacities are set to operationalize over FY24-25, enhancing CG’s ability to capitalize on the higher margin exports opportunities which were until now consciously restricted to cater to domestic demand. 

OSAT plan develops –

With the JV agreement with Stars Microelectronics and Renesas Electronics in place, CG is charging ahead with its OSAT plans and looks to recruit a professional team to manage operations. With a capex of Rs70bn, the facility is expected to take four years to commission and remains contingent on government subsidy approval.