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Muted execution impacts margins

GE T&D India witnessed 2.2% YoY decline in revenues to Rs8.5bn during Q2FY22, impacted by lockdown. Order inflow for the quarter improved 18% YoY to Rs6.3bn due to pick-up in order activity in the neighboring countries. Current orderbook is at Rs41.5bn (1.2x TTM sales), which provides growth visibility. Higher commodity costs and muted execution impacted the EBIDTA margin in Q2FY22, but this is expected to normalise with improvement in execution. Net debt during the quarter increased by Rs600mn due to higher cash outflow impacting earnings. Localisation impetus is expected to support long-term gains in market share for the company. Given near-term stress in growth and margins, we maintain our ADD rating on the stock and target price of Rs149 implying 25x FY23E earnings.

* Higher fixed costs and muted execution take their toll on earnings: Revenues were down 2.2% YoY in Q2FY22 as execution was impacted by supply chain challenges. Due to higher commodity costs, the company took a hit of ~3% of sales during the quarter. This, coupled with employee cost normalisation, led to a contraction of 258bps YoY in the EBITDA margin to 2.3%. Company is taking measures towards leaner implementation and reducing lead time in order execution. Management has guided the gross margin to remain in the range of 28-30% for the coming quarters.

* Ordering expected to improve in FY23 given buoyant pipeline: Green energy related orders are expected to be finalised by TBCB contractors in next 3-4 months. There are two major HVDC orders, one each from Rajasthan and Leh-Ladakh; the company expects their finalisation in FY23. Given the lower capital investments from State government order inflow from state is likely to remain muted. Current orderbook of Rs41.5bn (1.2x TTM sales) now comprises 63% from private players, 19% from Central utilities and 18% from state utilities. Improved momentum in economic revival provides a fillip to order inflow (the management guided that bottlenecks related to delayed ordering are beginning to get resolved).

* AtmaNirbhar push will support market share: Although the near-term order intake outlook is challenging, the government is currently incentivising domestic manufacturing. We believe this will lead to improvement in market share under transformers, statcom, GIS and automation-related segments for the company.

* Maintain ADD due to near-term growth stress and cost pressures: Ordering from the Central government and green energy corridor tenders are likely to gain traction in H2FY22E while large HVDC orders are expected only in FY23E-end; this limits overall growth in the near term. During the earnings call, the management reiterated its focus towards improving order inflow in the coming quarters and is taking measures towards cost rationalisation. Given the near-term stress in growth and margins, we maintain our ADD rating on the stock and a target price of Rs149 implying 25x FY23E earnings.

Valuation and outlook

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

The stock is currently trading at 22x FY23E earnings and is likely to turn net cash by Mar’23. Given the muted execution, near-term slack in order intake and higher cost pressures, we maintain our ADD rating and a target price of Rs149. Any delay in project execution and weakness in order intake can impact the overall pace of earnings recovery.

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