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Faced with execution challenges
Still some time before upcoming orders enter execution stage
* Dragged by sub-par execution:
Sales grew 10% YoY to INR8.9b in 4QFY19, below our estimate of INR10.8b. Execution during the quarter was hurt by declining HVDC sales, soft order inflow and a weak order book. This, along with operating de-leverage, led to a miss on EBIDTA (+330% YoY to INR770m versus our estimate of INR1.0b). Adj. PAT of INR261m (-15% YoY), too, was below our estimate of INR665m.
* Weak order backlog points toward moderate revenue growth for FY20:
Order backlog available for execution remains weak (-10% YoY to INR64b; 1.4x its FY19 revenue) for FY20. Although order inflow is likely to pick up in 2HFY20, it will enter the execution cycle only by end-FY20. Against this backdrop, we have penciled in moderate mid-single-digit revenue growth (+6% YoY) for FY20. Nevertheless, given the likelihood of order finalization and availability of orders for execution post FY20, we anticipate revenue growth to pick up to 10% YoY post FY20.
* Margins improve off a weak base; scope of improvement limited:
Gross margin improved 350bp YoY to 34.7%, given reduced execution of the lowermargin CK order (INR474m v/s INR1.1b in 4QFY18). EBIDTA margin expanded 640bp YoY to 8.6%, supported by a better revenue mix. However, with revenue growth likely to remain constrained given the lower order book available for execution and competitive pressure prevailing in the market, the scope of further margin improvement remains limited. We, thus, expect margins to remain stable YoY in FY20.
* Order inflow/backlog declines in FY19, but pipeline healthy:
Order intake declined 4% YoY to INR37.5b in FY19, given weak ordering in the industry. However, potential orders in the system remain healthy, considering
(a) transmission infrastructure for 68GW of the renewable energy corridor are likely to be added over the next two years (expect pick-up in traction from 2HFY20),
(b) USD2b substations are likely to be ordered out for the green energy corridor and
(c) near-term ordering for 28GW renewable energy capacity is likely to be concluded in CY19.
* Valuation and view:
We cut our FY20/21 earnings estimates by 16%/7% given the limited scope for further margin improvement for the reasons mentioned earlier. Muted capex from PGCIL over the near-to-medium term also adds an element of uncertainty. We, thus, maintain our Neutral rating on the stock. We value GETD at 25x FY21E EPS of INR11 (in line with 10-year avg. P/E multiple) to arrive at a target price of INR275.
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