Buy CG Power and Industrial Solutions Ltd for the Target Rs 975 by Motilal Oswal Financial Services Ltd
Weaker-than-expected performance
CG Power’s 1QFY27 result was below our estimates. Margin performance remained strong for the power systems segment but was impacted by one-time provisions for the industrial segment and continued high losses for the semiconductor segment. The pace of inflows has moderated, and consolidated order inflows were flat YoY at INR52b for the quarter. The overall order book stood at INR189b, up 45% YoY. We expect inflows, particularly for the power systems segment, to start ramping up from next quarter. Going forward, we expect CG Power to benefit from 1) capacity expansion at power systems for transformers and switchgear & circuit breakers, 2) price hikes and gradual demand recovery in the industrial segment, and 3) reduction of losses at CG-SEMI by FY28. We cut our estimates by 3%/4% for FY27/28 to bake in 1QFY27 performance. We reiterate our BUY rating on the stock with an SoTP-based two-year forward TP of INR975 (vs. INR990 earlier).
Results below our estimates
CG Power’s 1Q result was below our estimates mainly due to lower-than-expected execution in the Power systems division, lower-than-expected margins in the Industrial systems division, and higher-than-expected losses in the semiconductor division. Consolidated revenue grew 14% YoY to INR32.8b. 5% below our estimate. Gross margin expanded 60bp YoY to 30.8%, broadly in line with our estimate of 31.0%. However, higher-than-expected other expenses during the quarter led to EBITDA margin missing our estimates. Absolute EBITDA grew 4% YoY to INR4b (13% miss), while margin contracted 110bp YoY to 12.1% (vs. our estimate of 13.2%). While revenues and margins were lower than our expectation, higherthan-expected other income softened the impact on PAT. PAT grew 16% YoY to INR3b (7% below our estimate).
Power systems’ execution to accelerate, led by new capacities
The segment revenue grew 31% YoY to INR14b, broadly in line, while EBIT margin expanded 260bp YoY to 23.2% (vs. our est. of 22.2%), led by strong execution and operating leverage. Order inflows stood at INR31.1b (-11% YoY), taking the order book to INR144.3b (+60% YoY). The YoY decline in inflows was largely due to the high base of a ~INR6.5b PGCIL order in 1QFY26. Excluding this, order inflows grew 9% YoY. The bid pipeline remains healthy across domestic T&D, utilities, renewables, data centers, and exports, with no pricing pressure despite industrywide capacity additions. Transformer capacity currently stands at ~75,000 MVA, with an additional 45,000 MVA to be commissioned in phases over 12-14 months (10,000 MVA, 30,000 MVA, and the balance thereafter). Given the healthy order pipeline and expanding manufacturing footprint, we expect order inflow/revenue to clock a 12%/32% CAGR over FY26-29, while baking in EBIT margins of 23%/22%/ 21% over FY27-29E.
Investing in building a semiconductor ecosystem
CG Power continues to build its semiconductor ecosystem, with commercial production already underway at the Phase-1 OSAT facility in Sanand, and Phase-2 remains on track for commissioning by the end of FY27. Near-term profitability will continue to remain under pressure due to continued investments in talent, technology, and ecosystem development, although higher OSAT utilization and customer additions should gradually improve operating leverage. Axiro continues to scale its design business, delivering healthy double-digit revenue growth and a strong order pipeline. The company is reinvesting into expanding its portfolio beyond RF and Satcom into adjacent areas such as power electronics. We expect the semiconductor business to achieve EBITDA breakeven from FY28 as operating leverage improves with scale-up.
Valuation and view
The stock currently trades at 87.8x/65.8x/52.0 P/E on FY27E/FY28E/FY29E EPS. We reiterate our BUY rating with a revised TP of INR975 (vs. INR990 earlier). We ascribe a 58x multiple for the power systems business (baking in the upcoming large capacity), a 55x multiple to industrial systems (10% discount to ABB), and value to the OSAT business via DCF to capture the benefits that will start accruing from FY28.
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