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GE T&D India - Muted execution impacts margins - ICICI Securities

Posted On: 2021-08-18 06:06:06 (Time Zone: UTC)

GE T&D India's revenue growth in Q1FY22 was flat YoY at Rs6.4bn, impacted by lockdown. Improvement in working capital supported net debt reduction by Rs250mn. Forex loss of Rs60mn and higher costs hit EBIDTA margins, but we expect this to normalise with improvement in execution. Localisation impetus is likely to support long-term gains in market share for the company. Factoring-in the weak execution and margin stress during the quarter, we cut FY22E and FY23E earnings by 29% and 3% respectively. Given the near-term stress in growth and margins, we downgrade the stock to ADD with a revised target price of Rs149 (earlier: Rs148).

- Higher fixed costs and muted execution impacted earnings: Despite the low base of Q1FY21, revenues were flat YoY due to lockdown in key markets. Other expenses were high due to forex loss of Rs60mn and higher freight costs, resulting in EBIDTA of Rs14mn. Current orderbook worth Rs43.5bn (1.3x TTM sales) provides growth visibility.

- Ordering expected to improve in FY22 given buoyant ordering pipeline: Green energy related orders are expected to be finalised by TBCB contractors in the next 3-4 months. There are two major HVDC orders, one each from Rajasthan and Leh Ladakh, and the company expects finalisation of the Leh Ladakh order in FY23E. Some states are witnessing healthy government ordering.

- AtmaNirbhar push will support market share: Although the near-term order intake outlook is challenging, the Union government is currently incentivising domestic manufacturing. We believe this will lead to improvement in market share in transformer, statcom, GIS and automation-related segments for the company.

- Downgrade to ADD due to near-term growth stress and cost pressures: Ordering activity from state governments and green energy corridor tenders are expected to gain traction. Ordering is getting delayed and the large HVDC orders are likely to be awarded only by FY23E-end limiting overall growth in the near term. Given the consequent stress in growth and margins, we downgrade the stock to ADD (from Buy). We increase our valuation multiple to 25x from 23x arriving at our target price of Rs149 (earlier: Rs148).

Valuation and outlook

Due to the government's policy of encouraging localisation, we believe, the company's domestic market share is likely to improve in the long term, especially in transformer, statcom, GIS and automation-related segments. Net debt and working capital have reduced, and this may support return on equity.

The stock is currently trading at 22x FY23E earnings and is likely to turn net cash by Mar'23. Given the muted execution, near-term slack in order intake, and higher cost pressures, we downgrade the stock to ADD (from Buy) with a revised target price of Rs149 (earlier Rs148).

Any delay in project execution and weakness in order intake can impact the overall pace of earnings recovery.

Shares of GE T&D India Limited was last trading in BSE at Rs. 132.8 as compared to the previous close of Rs. 132.7. The total number of shares traded during the day was 13773 in over 591 trades.

The stock hit an intraday high of Rs. 134.3 and intraday low of 131.85. The net turnover during the day was Rs. 1827636.

Source: Equity Bulls

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