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Healthy cashflow offsets margin headwinds

GE T&D India witnessed 36% YoY growth in revenue to Rs9bn during Q4FY21, but declined 12% QoQ. Improvement in working capital supported net debt reduction, which reduced to Rs1.6bn vs Rs4.3bn in Mar'20 and Rs1.8bn in Dec’20. Higher commodity prices have impacted operating margins, which reduced 60bps QoQ. Current orderbook is at Rs45bn implying Rs7bn order intake in Q4FY21, localisation impetus is expected to support long-term gains in market share for the company.

Factoring in weak order intake and margin stress, we cut FY21E earnings by 29.5% and improved cashflow to support marginal 3.3% increase in FY23E earnings. Given healthy cashflow, expected recovery in order intake and margins, we maintain our BUY rating with a revised target price of Rs166 (earlier: Rs146).

* Exceptional provision impacts reported earnings: Revenue grew 36% YoY and control over fixed overheads resulted in turnaround of margins. However, raw material proportion is high due to increase in commodity prices limiting margin upsides. One-off provision of Rs225mn due to certain litigation resulted in lower reported PAT of Rs161mn. Current orderbook of Rs45bn (1.3x TTM sales) provides growth visibility.

* Ordering expected to improve in FY22 given buoyant ordering pipeline: Total investment outlay in the Indian renewable sector is expected at US$500bn, of which, US$150bn is expected in T&D sector in the next few years. Internationally, ordering pipeline from Nepal and Bangladesh of Rs5-7bn can be expected within next 12-15 months. Impacted by lockdown and delay in decision making, FY21 order intake dropped 20% to Rs23bn; however, this is expected to recover given the healthy order pipeline from centre, state and private sector.

* 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, statcom, 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-19 pandemic scenario, the management has decided to conserve cash and hence, didn’t pay any dividend during FY21.

* Maintain BUY on benign valuation, cashflow and growth revival: 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 are expected to gain traction. Due to the recent stance of the government to encourage localisation, we believe, domestic market share of the company is likely to improve. Given the improvement in growth outlook, reduction in working capital and debt, in addition to benign valuation of 19xFY23E earnings, we maintain BUY. We increase our valuation multiple to 23x from 22x and roll forward the valuation to FY23E earnings resulting in a target price of Rs166 (previously: Rs146).

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