Buy Atlanta Electricals Ltd For Target Rs.1,980 by Motilal Oswal Financial Services Ltd
Soft quarter
Atlanta Electricals’ (ATLANTAE) 2QFY27 revenue and EBITDA were in line with our estimates, while lower-than-expected depreciation led to a PAT beat vs our estimate. Execution during the quarter was impacted by heavy monsoon, deferment of deliveries, and higher RM prices. Inflows were also weaker than 1QFY27. However, the company remains optimistic about a recovery in both inflows and execution during 2HFY27. Our focus remains on short circuit test for the 400kV facility, which is expected by Dec’26. Discussions on a technology tie-up for the 765kV facility have not yielded results, prompting the company to start working on the technology in-house. We, thus, expect some delays in ordering and execution ramp up for 765kV transformers. We marginally revise our estimates to factor in 1HFY27 performance and roll forward TP to Dec’28. Our target multiple of 32x two-year forward earnings is at a 40-45% discount to players operating in the 765kV range and does not factor in any premium for the 765kV transformer facility, where output is currently delayed. Reiterate BUY with a revised TP of INR1,980 (INR1,950 earlier).
In-line revenue and EBITDA with a beat on PAT
Revenue and EBITDA came in line with our estimates for this quarter, with a beat on PAT led by lower-than-expected depreciation. Revenue for the quarter grew 23% YoY to INR3.9b. Gross margin during the quarter contracted 420bp YoY to 26.6%. Absolute EBITDA increased 9% YoY to INR 596m, while margin contracted 200bp YoY to 15.3%. PAT increased 28% YoY to INR321m, 15% above our estimates. During 1HFY27, OCF stood at INR590m against INR1,183m in 1HFY26 and FCF for 1HFY27 stood at negative INR212m vs a positive FCF of INR576m in 1HFY26. Order book stood at INR32b as of 2QFY27-end, with order inflows of ~INR4.2b during the quarter.
2Q margin dip transient; operating leverage to aid 2H
During 2QFY27, gross margin contracted ~420bp YoY as earlier firm-price orders (~15% of 2Q revenue) absorbed higher copper, steel, and oil prices, while rainled dispatch deferrals of ~INR1.8b hurt fixed-cost absorption. We see both as transient: the remaining fixed-price contracts have been renegotiated and repriced to current levels, all new orders carry price variation clauses, and ~70% of deferred deliveries have already been dispatched. With Vadod unit running at ~30% utilization and management expecting it to scale up, a seasonally stronger 2H should drive meaningful operating leverage. We cut our margin estimate by 50bp and expect EBITDA margin of 17.5%/18.5%/18.5% in FY27/28/29.
Inflows to ramp up in 2H
2Q inflow moderated to ~INR4.2b as commodity volatility delayed conversion of L1 positions. We expect inflows to ramp up in 2H, driven by these L1 conversions and the opening of 400kV bidding once the prototype clears testing by Dec’26 or Jan’27. 1H inflows of ~INR14b already form ~42% of our FY27 estimate of INR33b. The INR32b order book, backed by an INR195b inquiry pipeline, is also improving in the mix, with 220kV and 400kV orders at ~40% and 8.6% of the book, respectively. We expect order inflows to clock a CAGR of 21% over FY26-29.
Financial outlook
Management reiterated its 40% revenue CAGR guidance and EBITDA margin in the range of 16-18% over the next 2-3 years. We bake in a slightly lower margin in our estimate and expect a revenue/EBITDA/PAT CAGR of ~31%/31%/36% over FY26-29E, with an EBITDA margin of 17.5%/18.5%/18.5% for FY27/FY28/FY29.
Valuation and view
The stock currently trades at 42x/28x/22x P/E on FY27/28/29E EPS. We reiterate our BUY rating with a revised TP of INR1,980 based on 32x two-year forward earnings, rolled forward to Dec’28. Our target multiple of 32x two-year forward earnings is at a 40-45% discount to players operating in the 765kV range and does not factor in any premium for the company’s 765kV transformer facility, where output is currently delayed.
Key risks and concerns
Key risks include:
1) a slowdown in the tendering of orders
2) customers’ nonacceptance of higher kV transformers
3) supply chain-related issues
4) a spike in commodity prices.
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH00000041
