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GE T&D reported 14.2% YoY growth in revenues to Rs9.9bn while EBIDTA margin stayed flat at 9.3% in Q2FY19. Order intake during the quarter grew slightly by 2% YoY to Rs7.2bn, led by momentum from SEBs, offsetting weak ordering from Power Grid. GE T&D’s current orderbook at Rs62bn (1.4 x TTM sales) indicates stress in terms of growth and lack of any large order is also expected to impact overall revenue traction. Given the clean-up of the balance sheet and focus on cashflow, we believe the company will be able to sail through the current turbulence. Factoring-in the muted order intake, we expect earnings CAGR of -8% in FY18-FY20E. Maintain our HOLD rating on the stock with a revised target price of Rs241.
* Discoms, TBCB and renewables to limit drop in order intake:
Capex demand from Power Grid is expected to be muted in the near term; however, we expect buoyancy in the state discoms, tariff-based competitive bidding (TBCB) market and renewable sector. Due to higher competitive intensity, pricing is expected to be competitive and this can impact overall margins.
* Execution expected to gain traction:
We expect execution on projects to improve with support from commissioning of poles III/IV of the Champa-Kurukshetra HVDC line. Work worth ~Rs2.8bn on this project is pending execution which supports near term growth. Being an election year, we expect the overall execution pace to gain traction.
* Targeting SAARC market for orders:
In addition to the inter-country HVDC line being planned to transmit power to Bangladesh, there are various other opportunities in Bangladesh which GE T&D is exploring. The company also foresees considerable opportunities in Nepal, Sri Lanka and Bhutan, which can support overall improvement in order intake.
* Maintain HOLD:
Though the outlook in terms of ordering from Power Grid is challenging, we believe GE T&D will be able to sail through with orders from the private sector, SEBs, renewables and SAARC region. Medium- to long-term opportunities from Power Grid’s renewable evacuation plan, finalisation of the smallsize HVDC inter-country order from Bangladesh, and certain HVDC upgrade orders provide visibility. The stock is currently trading at 35.6x FY20E earnings. We maintain our HOLD rating on the stock, with a revised target price of Rs241 (previously Rs 303).
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