CGPOWER’s analyst meet detailed several drivers of growth for India business in (i) new products (13% of sales), (ii) end of non-compete clause related to recent sale of businesses and (iii) potential reduction in imports/Chinese competition for motors and T&D products. Management also explained its focus on selling its European businesses; will utilise the turnaround in businesses to monetise at a better value. We maintain our cautious stance on reduction in net debt; increase TP to Rs 67 (from Rs 64) to factor in growth prospects in India.
New products, end of non-compete clause and import dip to drive growth
New products now form 13% of the continuing consolidated sales (up 107% y-o-y in FY2018), benefitting from the shift in demand towards IE2 motors and enhanced scope of work with Indian Railways. CGPOWER expects more support from new products. CGPOWER would also benefit from end of non-compete clause with Crompton Consumer (pumps and industrial fans) and with Lucy Switchgear (RMU business peaked at Rs 2 bn). Other drivers include potential reduction in imports for motors used in compressors (impacts Rs 4-5 bn of related imports; CG has 35% share), more integrated orders of propulsion systems, doubling of CGPOWER’s
Rs 1-bn drives business before FY2022 and potential change in conditions for government purchase of T&D equipment in line with the Make In India campaign. CGPOWER shared a positive outlook for most business segments in India beyond the Power Transformer and Switchgear businesses, where it has been contracting business levels, and would incrementally benefit from JV demand from Indonesia and Malaysia. It was most bullish on Railways business where it expects orders in 2HFY19 to match its current `11 bn order backlog.
Other drivers can accelerate reduction in net debt; we are cautious on timing
With the businesses in Belgium and Ireland seeing a turnaround, CGPOWER is optimistic of refinancing of `6-8 bn of debt into Euro-denominated debt by end-FY2019. This coupled with `4-bn L&A repayment from Avantha group and another Rs 2.5 billion of Hungary debt going away is driving its expectation of a material improvement in consolidated interest expense and net debt. We remain cautious on timing of such drivers and only consider the Rs 2.5 bn coming from Avantha group and sale of the Hungary business in FY2019.
Increase estimates by 1-4%
We increase estimates for FY19-21 by
1-4%, factoring in growth prospects, end of non-compete clause and enhanced ordering from Indian Railways. Retain Buy.
Kotak Institutional Equities