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In Q1, CEL reported revenue of Rs 2.4bn (our est. Rs 2.5bn) vs Rs 2.3bn in the same period last year due to supply chain issues. Gross Profit came at Rs 1.2bn vs our est. Rs 1.4bn, decreased by 8% YoY / -13% QoQ, and gross margin came at 53%, contracted by 526bps YoY due to high raw material cost. EBIDTA stood at Rs 155mn, de-grew by 13% YoY vs Rs 179mn in Q1FY24 vs our est. Rs 214mn. Margin came at 6.5% (contracted 111bps YoY) due to high staff cost and other expenses. At the subsidiary level, EBITDA Margins improved to 3.0% as compared to (0.7)% in Q1- FY24. APAT came at Rs -38mn vs Rs 14mn last year same period, led by high interest cost. Drag in margin on account of execution of higher share of low margin order execution. Subsidiary performance was also impacted due to higher expenditure and RM prices. Further standalone margin was also lowest in the Q1FY25. Management expects based on the current order book and order pipeline, the company could grow in the range of 18-20% with a margin band of 11-12% in FY25. Further management expects standalone margin to improve further and subsidiary performance to also improve by cost cutting measures.

* Restructuring of French subsidiary: Revenue contribution from the French subsidiary is roughly around 40-45% on console basis. To enhance the competitiveness of French and Canadian subsidiaries, the company has strategically transferred most of the test bench activities to India over the past year. Leveraging Indian talent and cost advantages. Furthermore, the company has successfully completed the transfer of production of Canadian subsidiary's products to India, allowing for better margin realization. Management expects material benefits of restructuring to start reflecting from H2FY25. We expect margin on console basis to improve from 8.3% in FY23 to 12.1% in FY26.

* Focusing on BTS segment business: In BTS segment margin for the business is comparatively better than BTP. Centum’s current BTP share is around 39% and BTS share is around 29%. Company is working on various new programs where it is bidding for BTS projects from new and existing clients from the sectors like Defence & Aerospace, Transport & Automotive, Industrial and Healthcare & finalized in the short term. By FY26 this system will start to generate revenue.

* View and valuation: We remain positive on the stock led by 1) Gradual improvement in France subsidiary’s performance due to restructuring effort, 2) focus on high margin segment BTS solution and to offer one stop solution to various industry such as defence, aerospace, space, industrial, medical and communications industry, 3) prefer partner for clients like Space Application Centre, ISRO, Defence Research and Development Organization (DRDO), ABB, Thales, Rafale, and 4) Upcoming opportunity in SSLV launches. We expect CEL to register a healthy revenue/EBIDTA growth of 21/37 CAGR over FY24-26. We ascribe a multiple of 35x on FY26E EPS to arrive at a TP of Rs.1,776 with a rating of “BUY”

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