Q3FY24 Review: CG Power & Industrial: Power T&D outpaces Industrials

24 Jan 2024 , 11:59 AM

Analysts of IIFL Capital Services trim FY24/25/26 EPS marginally for CGPOWER by 5/3/1%, as near-term challenges in LT motors emerge; partially offsetting robust swing in the outlook for its power T&D equipment business. While CG is seeding new portfolios in electronics value chain, efforts to strengthen emerging segments of the core portfolio are progressing well [technology buy-out from Korean player for locomotive (underslung propulsion) by H1FY25]. Timely capacity expansion will drive core revenue/PAT Cagr of 25/29% in FY24-26; Maintain BUY (16% upsides, ex-OSAT). 

Power systems outshine: 

Robust domestic demand for transformers and steep gaps in the availability of capacities have turned market outlook in favour of equipment suppliers like CG. Robust 34% YoY revenue growth (despite slippage of Rs350mn sales on inspection delays), 55% jump in order book (Rs35.7bn, at 1.5x TTM sales) and commissioning of Ph-1 capex in Q4FY24 ensure sustenance of growth in FY25. Ebit margins were strong at 15.3%, despite Rs100mn provision created for transformer replacement claim (160bps impact) on better pricing, favourable product mix and operating leverage. Analysts of IIFL Capital Services expect strong Q4 and 2yr revenue Cagr of 29% with further 16% margins in FY25-26.

LT Motors struggle dragging industrials: 

Amidst weak channel upstocking in LT Motors and price war (7-9% cut in ASP) initiated by small/ tier2 suppliers, CG’s strategy to retain MS drove 3pps share gains (and volume growth) in LT Motors to 38%; but casted sharp 265bps QoQ margin contraction in IS margins, to 13.5% in Q3. HT motors, drives and Railways continued with strong double digit growth. Large order pipeline and healthy OB (+9% YoY) is ensures healthy outlook for rebound in IS offtake, even as OPM in LT motors recovery gradually. 

Robust CFs to fuel capex and growth: 

CG generated FCF of Rs 2.5bn in Q3FY23, announced interim dividend (Rs1.3/sh) and plans capex of Rs6bn in FY24-25. Further, it will jointly redevelop CG House as a commercial property with K Raheja. Further details on OSAT foray have not been shared and is awaiting required approvals from GoI.