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Weak margin dents overall profitability

Hitachi Energy’s 2QFY25 result came in below our estimates on account of a miss on margins. The company reported 27% YoY growth in revenue, while a miss on EBITDA margin at 7.1% vs. our estimate of 8.2% led to a sharp miss in PAT. Revenue growth was driven by a strong order book, and order inflows grew 12% YoY to INR19.5b. This was led by strong growth in transmission, industries, data centers, and renewables. We believe that Hitachi Energy will continue to benefit from energy transition initiatives across domestic and international markets. We revise our FY25/FY26/FY27 earnings estimates by -0.4%/+4%/+9% to factor in slightly higher order inflows, particularly from transmission, and higher capex as outlined by the company recently. We reiterate our Neutral rating on the stock with a revised two-year forward TP of INR13,000 (vs. INR12,800 earlier) based on DCF, as the current valuations of 91.8x/61.5x on FY26E/27E factor in most of the positives related to inflow and margin improvement.

Result below our estimates

Hitachi Energy reported a mixed set of numbers as in-line revenue was offset by a miss on the profitability front. Revenue at INR15.5b grew 27% YoY on healthy execution of the opening order book of INR85.4b. EBITDA margin came at 7.1%, vs. our expectations of 8.2% owing to higher other expenses stemming from higher volumes and shared IT system expenses. The company has maintained its double-digit EBITDA margin guidance by FY25-end. Lower-than-expected margins and lower other income resulted in underperformance at the PAT level vs. our estimates. Order inflow for the quarter stood at INR19.5b, up 12% YoY, and order backlog stood at a record INR89.1b. Operating cash outflow came in at INR838m vs. an inflow of INR546m in 1HFY24 owing to working capital buildup. Capex increased from INR291m in 1HFY24 to INR347m in 1HFY25. For 1HFY25, the company reported revenue/EBITDA/PAT growth of 27%/59%/131% YoY. For 2HFY25, we expect revenue/EBITDA/PAT growth of 32%/70%/87% YoY.

Order inflows lack large domestic transmission orders

While order inflows at INR19.5b grew 12% YoY with wins from utilities, substation projects, transformers, power quality, et al., as well as healthy growth in service orders, there was a noticeable lack of large, domestic orders on the transmission side, which the company has been talking about for the past few quarters. The company has participated in the bid for the Khavda HVDC project, for which PGCIL has been announced as the L1 bidder. Key order wins include: 1) 400/220kV CTU for petroleum products company, Dahej; 2) 14x 500 MVA 765 kV bulk transformer requirement by national transmission utility; 3) 2X400/33kV AIS s/s & Ebos_202.5MWp/150MW for solar projects in Fatehgarh & Bhopalgarh; 4) 761 x LOT6500 Main Transformer for 3 Phase Locomotive Engine; and 5) 55X3150 kVA & 2X630 kVA, 33kV ELDS for leading data center and software company.

Exports and services pickup can support margins going forward

The company has witnessed a healthy share of services in order inflows at 12%, from single-digit levels in recent quarters. Similarly, it has managed to maintain the export share in the 25-30% range through its own initiatives as well as orders from group entities. This augurs well for margin improvement going ahead, as exports and services have a better margin profile compared to product sales. Key export orders during 2QFY25 include a) C&P system, Yanbu-PGGI- Hitachi Energy Sweden, b) 145 kV GIS for REE Red Electrica-26 PGHV-Hitachi Energy Spain, c) Azerbaijan Navahi S/S- 330kV AIS package-PGHV-Prime Azerbaijan, d) 145kV GIS for Electran Data Center-PGHV- Hitachi Energy Spain.

Addressable market remains strong for the company

Hitachi Energy is poised to benefit from its presence in high-growth segments such as renewable energy, transmission, data centers, e-mobility, railways, battery storage, etc. The recently-unveiled National Electricity Plan envisages investments worth INR9.15t until FY32, where the company can participate through its offerings such as HVDC, STATCOM, GIS, transformers, HV products, grid management solutions, etc. Similarly, there is robust traction in data centers, with capacity slated to reach 2 GW by 2027. Railways capex too offers Hitachi Energy a strong opportunity potential, with investments lined up for expansion of the rail network, Vande Bharat trains, HSR, station upgradation, et al.

Capacity expansion to take care of future growth

In order to strengthen its market presence as well as cater to increasing demand in export markets, the company has been undertaking capacity expansion in the past few years. Recently, Hitachi Energy announced a capex of INR20b towards expanding its power transformer factory and traction transformer facility, which will help the company penetrate deeper into high-growth areas such as transmission and railways. This investment will be carried out over a period of 4-5 years as part of the Hitachi Energy 2030 strategic growth plan.

Financial outlook

We raise our order inflow and revenue estimates for FY25/26/27 to factor in the upcoming HVDC wins, while margin estimates remain unchanged at 9.5%/11.1%/ 12.2%. We also factor in higher capex in line with the capex plan recently shared by the management.

Valuation and view

The stock is currently trading at 92x/62x P/E on FY26E/27E earnings. We reiterate our NEUTRAL rating with a revised two year forward TP of INR13,000 (vs. INR12,800 earlier) based on DCF as current valuations at 91.8x/61.5x on FY26E/27E factor in most positives related to inflow and margin improvement.

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