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Recovery in growth to offset near-term stress

GE T&D India, in its Q4FY21 earnings call, indicated recovery in the overall ordering scenario, led by TBCB ordering, green energy corridor etc. There has been easing of competitive intensity in the near term due to non-participation by Chinese companies. Two HVDC orders, one from Leh-Ladakh and other from Rajasthan provide medium- to long-term visibility. The company has to manage 190 employees and Rs100mn worth assets of GE grid solutions as majority of minority shareholders voted against the sale of this to the parent for Rs870mn. Factoring in margin stress, we cut earnings by 4.6% and 10.1% for FY22E and FY23E, respectively. Given the stress in margins and delay in finalisation of large orders, we downgrade the stock to ADD from Buy with a revised target price of Rs148 (previously: Rs166).

Non-sale of GE grid solution to impact near-term cashflow:

Majority of minority shareholders didn’t approve the sale of GE grid business to parent for a consideration of Rs870mn. As a consequence, no new contracts/purchase order will be issued to the entity for those services. This will lead to an impact of Rs100mn of assets becoming redundant with 190 employees under this division. We believe this can impact near-term cashflow as the company has to restructure the division and bring down the cost. To mitigate the same, the board has advised the management to explore alternate solutions.

Strong export growth, domestic orders to recover:

Exports grew 40% YoY to Rs7.6bn, 22% of revenue during FY21, offsetting the slackness from domestic market. Order intake declined 24% YoY to Rs23bn during FY21 impacted by the covid pandemic. Order outlook is currently healthy with finalisation of a couple of TBCB tenders, green energy corridor-related orders etc. There are two large HVDC order prospects (i) from Leh-Ladakh to Agra (ii) from Rajasthan to UP and one small size HVDC from Adhani in Maharashtra.

Atmanirbhar push by government will support market share:

Although near-term order intake outlook is challenging, government is currently incentivising domestic manufacturing. We believe this will lead to improvement in market share under transformers, reactors, statcoms, GIS and automation-related segment for the company.

Healthy cashflow led to improvement in balance sheet:

Net working capital reduced by 40 days YoY and net debt reduced to Rs1.6bn from Rs4.3bn in Mar'20. Given the covid pandemic scenario, the management has decided to conserve cash and hence, didn’t pay any dividend during FY21. There has been an exceptional cashinflow of Rs440mn, while non-cash provision was Rs412 mn.

Downgrade to ADD due to near-term margin and growth stress:

Net debt decreased to Rs1.6bn in Q3FY21 and working capital has reduced by 40 days YoY. The ordering activity from state government and green energy corridor tenders is expected to gain traction. Given the near-term stress on margins and growth, we downgrade the stock to ADD with a revised target price of Rs148 (previously: Rs166).

Valuation and outlook

Due to the recent stance of the government to encourage localisation, we believe, domestic market share of the company is likely to improve in the long term, especially under transformers, statcoms, GIS and automation-related segment. Net debt and working capital have reduced, which may support return on equity.

The stock is currently trading at 21.3x FY23E earnings, we have assumed recovery in earnings led by healthy order intake and gradual improvement in execution. However, near-term challenges persist due to high commodity prices, delay in decision making regarding new orders and the uncertainty regarding the impact of GE grid solution. Hence, we downgrade the stock to ADD with a revised target price of Rs148 (previously: Rs166). We assign a valuation multiple of 23x FY23E earnings.

Any delay in project execution and weakness in order intake can impact the overall pace of earnings recovery.

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