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Improvement in margins; transmission ordering is expected to pick up in FY23/24

GE T&D India’s (GETD) revenue declined 7% YoY to Rs5.9bn in Q1FY23 as lower orderbook led to a muted execution. However, gross margin expanded 220bps on account of reduction in commodity prices. This, supported by reduction in fixed expenses, led EBITDA to grow to Rs224mn against Rs14mn in Q1FY22. Net debt during the quarter increased by Rs1.1bn to Rs1.9bn since Mar’22 on account of higher working capital requirement for execution over subsequent quarters. Although order inflow improved 27%YoY to Rs6bn, it was muted due to delays in the finalisation of TBCB tenders already approved by the CEA; however, prospects remain healthy over medium to long term. Current orderbook stands at Rs36.6bn (1.2x TTM sales). We expect TBCB and RTM ordering of Rs700bn over the next 24-30 months, mainly for the Green Energy Corridor (including Leh-Ladakh line). We believe gross margin improvement will sustain and might see improvement with pick up in execution in FY23. We maintain our BUY rating on the stock with a revised target price of Rs153 based on 25x FY24E EPS (earlier: Rs124).

* Muted execution but gross margin sees a significant improvement: GETD reported EBITDA improvement to Rs244bn against Rs14mn during Q1FY22, mainly on account of a) gross margin expansion of 220bps to 34.5%; 2) employee cost and other expense declined 7.6% and 14.3% YoY led by cost optimisation steps taken by the management. Provided input prices stabilise at current levels and there are no further unforeseen challenges in the supply chain, management expects gross margin to normalise to 26- 28% on a long-term basis.

* Order intake expected to improve in FY23/FY24 given the buoyant ordering pipeline: Of the current orderbook of Rs36.6bn (1.2x TTM sales), 61% / 21% / 14% /4% is from private sector / state utilities / central utilities / PSUs, respectively. Q1FY23 order inflow grew 27% YoY to Rs6bn on a low base. Of these, 30% is from overseas. Management guided order pipeline in coming quarters will improve as auctions have now started. In renewable energy as well, there is a pipeline of projects that has been identified for evacuation of 20GW. We expect TBCB and RTM ordering of Rs700bn over the next 24-30 months, mainly for the Green Energy Corridor (including Leh-Ladakh line).

Maintain BUY on prospects of order inflow revival and compelling valuations: GoI has recently approved the transmission of projects totalling a value of Rs280bn as awarded to PGCIL. Additionally, there has been a considerable push towards renewable energy both globally and in India, where GETD has significant presence. We expect order intake for the company to be backended in FY23E and FY24E, and thereby, expect execution to ramp up in FY25E. Further, the recent export duty on steel announced by the government (link) is expected to lower the stress on its prices and we thereby, expect gross margin for the company to normalise to 26-28% soon. Hence, we maintain our BUY rating on the stock.

Valuation and outlook

For Q1FY23, a limited number of projects were finalised, hence, order inflow was muted. However, for H2FY23E, we expect order activity to improve as there is a systematic pipeline for the next few quarters and may gather pace in FY24E.

Due to weak execution and lower-than-expected order intake in Q1FY23, we cut our revenue estimates for FY23 and FY24. However, on improvement in gross margin and expectation that it remains stable owing to the reduction in commodity prices, we raise our earnings estimate for FY23E and FY24E by 25.4% and 8.7%, respectively.

We have assigned a P/E multiple of 25x FY24E EPS. We maintain our BUY rating on the stock with a revised target price of Rs153 (earlier: Rs124).

Any further commodity price uptick and delay in order bidding might adversely impact our earnings estimates.

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