We are enthused by (i) changing mix of business beyond power, (ii) sustained outperformance in motors, (iii) increasing relevance of railways business, (iv) lower unallocable expenses and thus lesser margin interplay with overseas operations and (v) write-offs taken to clean up stale working capital items. Our target price of Rs 65 (Rs 87 earlier) bakes in deferment of the Hungary deal by two quarters and books nil gains against remaining discontinued operations; upgrade to Buy from Reduce on cheap valuations after the recent selloff. CMP is close to factoring in the Hungary deal getting called off and an expensive wind-down of those operations.
Outperforms motor market again; standalone improves on 3 metrics
CG Power continues to outperform in key LT motors market (25% of sales), ‘market perform’ in switchgear (22% of sales) and benefit from good growth in railways (12% of sales, 18% of order backlog). FY2018 standalone operating performance has improved on three key counts: (i) the industrial systems segment has become more relevant, having implication for margin and pace of execution, (ii) Ebitda margin has improved through the year to beyond 8% in the exit quarter, benefitting from normalisation in industrial segment margin (~10% Ebit margin) and reduction in overhead expenses (US and ZIV transaction over)and (iii) material reduction in working capital to 80 days makes it comparable to other product companies.
Retain operational estimates; sale deferral leads to large EPS cut
We marginally increase our Ebitda estimates for CG Power (consolidated) by 4% for FY2019e and FY2020e. The 18-21% EPS cut is the cash impact of (i) Rs 4 bn exceptional loss booked in Q4FY18, (ii) us deferring sale of the Hungary unit by two quarters (Rs 2 bn impact) and (iii) us not considering any payout to CG Power from sale of remaining discontinued operations (had assumed Rs 5 bn positive payout earlier). We also cut our target multiple to 15X (from 16X), apt for a business with 25% five-year PAT CAGR, 5% terminal PAT CAGR and 60% cash conversion ratio.