GE T&D India Rating:Add; Strong order intake came as a surprise

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Published: March 2, 2019 1:58:26 AM

The company’s strategy is to expedite the execution, thereby improving the overall margins due to early completion. Adjusted for drop in HVDC contribution in revenue, the overall sales were flat at `11 bn in the third quarter of FY19.

Finalisation of some of the large orders is expected to be impacted due to elections, but small and medium orders will continue to flow from the private sector.

GE T&D witnessed strong order intake growth of 84% y-o-y to `14.4 bn in Q3FY19, with `5-bn order wins to date during Q4FY19, thus bucking the overall declining order intake trend during H1FY19. Current orderbook at `64 bn (1.5 x TTM sales) provides growth visibility and despite slowdown in Power Grid demand, the company was able to capture healthy orders from private (TBCB) and state utilities which has led to the positive surprise. Finalisation of some of the large orders is expected to be impacted due to elections, but small and
medium orders will continue to flow from the private sector.

Given the expected pick-up of large orders from Q2FY20 onwards, healthy order book and improvement in overall outlook, we raise our FY20e earnings by 35% and upgrade the stock to Add with a revised target price of `296 (32x FY20e earnings).

Strong order intake, led by private and state utilities: Strong order intake growth of 84% y-o-y to `14.4 bn in Q3FY19 with `5 bn of order booking in Q4FY19 to date has improved growth visibility. For 9MFY19, the order intake decline has been limited to 10% y-o-y to `27 bn. Thus the company was able to tide over slowdown from Power Grid demand supported by healthy order intake from private and state utilities.

The positive surprise in terms of order intake, optimistic medium to long term order commentary will support the overall growth.
Execution expected to gain traction: We expect the overall execution traction to improve given 60% of order book from the private sector and `2 bn of Champa Kurukshetra orders pending, which is expected to be complete by Q1FY20. The company’s strategy is to expedite the execution, thereby improving the overall margins due to early completion. Adjusted for drop in HVDC contribution in revenue, the overall sales were flat at `11 bn in the third quarter of FY19.

Operating margins to stabilise at high single digit: The Ebitda margins have been healthy at 9.6% (+610 bps y-o-y) for Q3FY19 and +380 bps y-o-y at 10.5% for 9MFY19, supporting the overall earnings despite muted execution. The management is confident that they can sustain the margins at high single digit going forward.

Upgrade to ADD: Positive surprise in terms of strong order intake and optimistic outlook in medium to long-term opportunities from renewable evacuation plan by Power Grid, finalisation of the small-size HVDC inter-country order from Bangladesh, and private orders’ improved growth visibility. The stock is currently trading at 29.6x FY20E earnings; given the improved growth outlook we upgrade the stock to Add at a revised target price of `296 (previously `241).

 

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