CG Power & Industrial Solutions' Q2FY18 results (Underperformer) - Discontinued biz mar strong operational performance

Q2FY18 result highlights

• Standalone PAT at Rs581m (-34% yoy): as higher revenues (+7% yoy) were offset by lower margins and higher interest (+52% yoy; raised domestic debt for international business). Power revenues 6.7% yoy to Rs6.8bn, while industrial revs +18%yoy to Rs5.3bn (mkt share gains).
• Standalone OPM decline 140bps yoy to 6.4%: led by weak industrial margins (-360bps yoy to 8.2%). However, margins improved 400bps qoq led by price hikes to pass on higher RM costs. Power system margins +211bps yoy to 6.6% (low base). Hence, EBITDA fell 9% yoy to Rs771m.
• Subsidiary performance improves: largely on back of Indonesia, which recouped lost sales of 1Q18 in 2Q18. Revenues +51% yoy to Rs3.5bn and EBITDA +16x yoy to Rs548mn as OPM + 1420bps yoy to 15.7%). Mgmt. expects the trend to sustain going forward.
• Losses from associates drags consolidated adj PAT: Loss from associates of Rs551mn was recognized related to investment in Avantha Power (likely to be reversed in future) which led to consol adj loss of Rs98mn (vs PAT of Rs220mn in Q2FY17).
• Rs4.3bn loss from discontinued operations drag reported profitability: largely led by Rs2.65bn Hungary impairment and Rs900mn Hungary operating biz loss. The balance Rs770mn was led by Rs300mn MSEDCL write off, Rs330mn US biz loss and balance Rs100mn from France, Ireland, Belgium, Middle East operations. Moreover, exceptional loss of Rs279mn (litigation) led to Rs4.7bn reported loss.
• Consolidated net debt increased to Rs13.5bn in Q2FY17 (vs Rs10bn at FY17 end) largely due to sustained loss funding of international business.

Key positives: qoq margin improvement in industrial, power systems

Key negatives: higher debt, losses from discontinued operations

Impact on financials: FY18/19 consol EPS cut by 7.4%/4% to Rs2.4/4.7

Valuations & view

The domestic power business is stabilising (intake traction yet to be seen), while industrial segment is gaining traction (mkt share gains, orders from railways, margin improvement, etc.). However, the standalone business is funding the continued rise in international losses (resulting in higher debt & interest costs) as also higher advances to subsidiaries (likely to be written off as in the case of ZIV/Hungary). While this is likely to settle by FY18 end as Hungary sale is completed, the weaker balance sheet is likely to remain a drag. Underperformer.