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Margin and cashflow stress to impact earnings
GE T&D India is treading through a tight rope in terms of competitive market environment and stretch in working capital impacting cashflows. The net debt of the company had increased by Rs4bn in H1FY20; the management is targeting to reduce this by Rs1bn by March 2020. Delay in finalisation of the green energy corridor orders and near-term stress on margins and cashflows are likely to impact earnings. Hence, we cut our earnings estimates by 13% for FY21 and maintain our REDUCE rating with a revised target price of Rs155 (previously: Rs178).
* Weak execution and impairments resulted in PAT loss – Revenue witnessed a 17% YoY drop to Rs8.2bn due to scale-down in HVDC execution, delay in customer projects and execution timeline for certain projects. The company reported a net loss of Rs811mn for the quarter, which included impairment of DTA due to tax rate change and impairment of property, plant and equipment of the transformer facility amounting to Rs535mn. Provisions of Rs230mn were made in the quarter, of which, Rs70mn were towards IL&FS exposure; adjusted for this, EBIDTA margin stood at 3.3%.
* Muted order intake from subdued PGCIL and TBCB – Order intake for GE T&D India (GETD) during the quarter declined 5% YoY to Rs7bn due to state electricity board. The company received GIS orders from Kerala, West Bengal and Himachal Pradesh SEBs in addition to an overseas order from the parent in Q2FY20: 1) KSEB – 220kV GIS at Vizhinjam and Ettumanoor in Kerala, 2) WBSETCL – 132/33kV GIS in Ramnagar, Manbazaar and Birlapur areas, 3) HPPTCL – 20/33kV GIS at Heling, Chamba 4) GE Switzerland – 400kV switchyard and transformer Summit Group, Bangladesh.
* Technically qualified to participate in Leh-Ladakh HVDC- The company is currently qualified to participate in HVDC order of Leh-Ladakh despite using VSC technology. Earlier, GE T&D wasn’t technically qualified to participate in VSC technology HVDC bids, post successful completion of an overseas order, it is currently qualified. The Leh-Kargil project is still in discussion stage and is expected to take time. The overall transmission-related opportunity from this project is expected to be Rs200bn.
* Maintain REDUCE due to near- to medium-term challenges: Lower gross margins and increase in working capital have adversely impacted the overall operational performance. Order intake is also likely to be muted in near to medium term postponing any fast recovery in execution and earnings. Impairment towards transformer facility hints at overall demand challenges in that particular segment. Hence, though a long-term opportunity in terms of green energy corridor, Leh-Ladakh HVDC, Bangladesh HVDC etc. exist. Given the near term growth challenges, impact on cashflows leading to sharp increase in debt and sharp cut in earnings in FY20E and FY21E, we maintain our reduce rating on the stock. We maintain our target multiple at 28x FY21E earnings factoring in the gradual revival of order intake from Q4FY20E onwards.
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