Weak Power sector execution impacts performance
* Weak execution leads to loss at EBITDA level: 1QFY20 sales declined 24% YoY to INR45b (v/s est. of INR63.7b), led by (a) land availability constraints, (b) delay in receiving customer clearances, and (c) delay in receiving imported equipment from vendors. Operating loss stood at INR2.7b (v/s est. of INR3b profit), which was caused by operating deleverage. Depreciation was down 35% at INR1.1b (v/s INR1.7b in 1QFY19) as company has revised useful life of assets. Net loss stood at INR2.2b (v/s est. of INR1.6b profit).
* Power segment slips into losses: Power sales (79% of sales) declined 25% YoY to INR35b, while Industrial sales (21% of sales) declined 20% YoY to INR9.2b. EBIT margins declined 12pp/1.3pp YoY to -1.6%/4% in Power/Industrial. Losses in the Power segment were due to weak execution.
* Order backlog at INR1.1t, inflow down 11% YoY to INR39b: Order book stood at INR1.1t (-8.0% YoY). Order inflow stood at INR39b (-11% YoY) in 1QFY20. We build in order inflow of INR336b for FY20.
* Maintain Neutral: In order to factor in potential slip in execution due to the prevailing issues, such as
(a) land availability constraints,
(b) delay in receiving customer clearances, and
(c) delay in receiving imported equipment from vendors and its impact on margins,
we cut our earnings estimate by 12%/6% for FY20/FY21E. Ordering activity and outlook continues to remain muted, however, we do not foresee sharp deterioration in the operational performance as
(a) the company has taken corrective actions and has been able to improve its gross margin to 42% in FY19 (v/s low of 37% in FY16),
(b) executable order book now stands at > 85% (v/s 50% in FY17), and
(c) wage revision post 7th Pay Commission implementation has now been in the base (impact of INR6b in FY18 and INR10b in FY19 numbers) and is likely to settle down.
We maintain Neutral rating on the stock with TP of INR62 (15x FY21E EPS, in line with 10-year average P/E).
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