Add CG Power Ltd for the Target Rs 925 by Emkay Global Financial Services Ltd
We assume coverage on CG Power and Industrial Solutions (CG Power) with ADD, downgrading it from Buy given premium valuations, while revising up our target price to Rs925 from Rs875, as we roll over our SoTP-based TP to Jun-28. Although CG Power’s 1QFY27 financial performance in its main operational parameters was below our expectations, we believe the company has developed a solid business model across key businesses Power Systems, Industrial Systems, and the newly developed Semi-conductor business. The demand environment is healthy across all segments CG Power operates in it reported robust order inflow of Rs47bn (flat yoy; logged a large PGCIL order of Rs6.4bn in the base quarter), leading to strong order backlog of Rs173bn (+45% yoy).
Miss on Operational front
CG Power’s 1QFY27 operational performance stood below our expectation across all key parameters, with revenue at Rs32.8bn (+14% yoy) missing our estimate of Rs36.4bn while EBITDA at Rs4bn (+4% yoy) was meaningfully lower than our estimate of Rs5bn. PAT at Rs3.1bn missed our estimate of Rs3.6bn. The revenue miss was mainly on account of weaker-than-estimated Power Systems performance (Rs14bn vs our estimate of Rs16.6bn), impacted by slippage of Rs1.5bn transformer shipment; the EBITDA miss was on account of lower than estimated performance in the Industrial Systems business, which housed a Rs200mn one-time provision in the Railways business.
Power Systems - Revenue disappoints, albeit margin surprises positively Power Systems business revenue at Rs14bn (+31% yoy) substantially missed our estimate of Rs16.6bn. A key reason for slippage of Rs1.5bn transformer shipment was delivery being pushed to the next quarter. However, CG Power delivered a positive surprise margin, which improved by 210bps yoy backed by operating leverage and a better pricing environment during the quarter.
Industrial Systems Profitability hit by one-off provision; commentary upbeat
Industrial Systems delivered moderate revenue growth of 6% yoy at Rs18bn, a tad below our estimate of Rs18.6bn. Although Motors business delivered a healthy double-digit growth, Railways along with GG Tronic has yet to gain momentum in revenue booking. Even margin for the segment ws muted at 7.6%, down by 260bps yoy leading to EBIT decline of 21% yoy as CG Power took a Rs200mn provision for obsolete material during the quarter. However, order inflow at Rs16bn (+25% yoy) was robust given the strong business environment in both Motors and Railways segments.
View and Valuation
Given the premium valuations, though, we downgrade the stock to ADD from Buy, despite our appreciation of the company’s business model; we await a better entry point to upgrade the stock. We raise our TP by ~6% to Rs925 from Rs875, valuing the core business at 55x PER its Jun-28E EPS and OSAT at Rs55/share.
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