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In Q2FY25, CEL reported decent numbers with disappointing bottom, revenue for the quarter grew by 5.6%/5.2% YoY/QoQ to stood Rs 2512mn vs our est. Rs 2507mn vs Rs 2378mn in last year same period due to delayed in execution. Gross Profit came at Rs 1291mn vs our estimates Rs 1413mn, increased by +0.2% YoY/+2% QoQ, and gross margin came at 51.4% vs our est. 56.3%, (contracted by 280bps YoY), Due to high raw material cost. EBIDTA stood at Rs 203mn (increased by 18% YoY) vs our estimates Rs 227mn vs Rs 172mn in Q2FY24. Margin came at 8.1% vs our estimates 9.0% (expanded 86bps/157bps YoY/QoQ) due to cost control measures. APAT came at Rs -3mn vs our estimates Rs 25mn vs Rs -46mn last year same period, led by higher interest cost.

* Established market position with improved orderbook: CEL has established a strong market position across various sectors. The company’s products are used in critical sectors like space and defence, showcasing its technical expertise in high-complexity areas. CEL offers a diverse product and revenue mix across industries such as defence, aerospace, space, industrial, medical, and communications, providing customized product design, manufacturing services, and turnkey solutions for mission-critical applications. CEL’s broad industry presence also helps mitigate the cyclicality risks inherent in specific sectors. The company current orderbook stood INR 1,772cr which translate to 1.6x of FY24 revenue. 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 10-11% 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 7.9% in FY24 to 10.6% in FY27E.

* 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 19/32 CAGR over FY24-27E. We ascribe a multiple of 35x on FY27E EPS to arrive at a TP of Rs.1,826 with of “HOLD” rating.

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