Q2FY24 Review: CG Power & Industrial: Steps up capex to ease capacity constraints

23 Oct 2023 , 12:50 PM

CG Power reported yet another quarter of healthy earnings (in line performance) and robust FCF generation. Buoyed by strong demand for power products and large motors, the company is further investing Rs2.25bn towards brownfield expansion. While channel stocking has been soft for short cycle LT products, industrial demand outlook has been healthy. Focus on exports, favourable mix of orders and better pricing environment has aided OPM expansion to 15%+ levels, which can be maintained in the near term complemented with various internal cost efficiency initiatives. Analysts of IIFL Capital Services marginally increase FY24 EPS by 2% and maintain BUY. Any updates on inorganic expansion or bridging technology gaps will aid re-rating. 

Power systems back with a bang: 

Strong spurt in the demand for transformers translating in favourable pricing environment, favourable mix of power products and execution of high margin export orders (transformers) aided robust 15.7% Ebit margins with 20% revenue growth. PS revenue run-rate is expected to improve from Q4FY24 with partial ease in capacity constraints. Even as OPMs moderate QoQ, analysts of IIFL Capital Services expect FY24-25 Ebit margins to sustain at 14% levels, thus driving operating profits to nearly double in 2 years. YTD order book is up 70% YoY, at Rs33.6bn, at 1.4x TTM sales ensuring strong visibility for FY25. 

Steady growth in Industrial portfolio: 

LT motors portfolio grew in volumes terms despite weak up-stocking from channel partners backed by strong demand while HT motors portfolio has seen an impressive come back with share gains (3pps in Q1FY24). Favourable mix and cost discipline helped to sustain 16% Ebit margins. To support new applications like Nuclear power and defence, CG is expanding capacities in HT motors (Rs350m capex). While inflows declined QoQ on weak channel stocking, CG is confident of order book build up in Q3 with large orders. 

Robust Cash flows, steps up capex: 

With robust FCF of Rs3.1bn in Q2FY24 (backed by PS), CG has maintained discipline in NWC cycle even as growth has accelerated in PS. With Capex of Rs5.7bn over FY24-25, CG should be able to grow revenues/ PAT by 22/25% Cagr in FY23-26.