CG Power & Industrial Solutions' Q3FY18 results (Underperformer) - Weak balance sheet drags profitability

Q3FY18 result highlights

• Standalone PAT at Rs518m (-37% yoy): due to muted revenues (+2% yoy), lower other income (-22% yoy) and higher interest (+14% yoy; domestic debt for international business). Power revenues fell 6.2% yoy to Rs6bn, while industrial revenues +11% yoy to Rs5.8bn (mkt share gains, shift from unorganized to organized).
• Standalone OPM improves 16bps yoy to 7.4%: led by lower unallocable expenses. Industrial margins declined 100bps yoy to 9.4% (higher RM costs passed with a lag) while power margins fell 280bps yoy to 7.3% (high base, negative operating leverage). Hence, EBITDA grew 4% yoy to Rs871m.
• Subsidiary performance improves: led by pick up in Indonesia (like to like rev growth of 23%). Revenues +112% yoy to Rs3.4bn and EBITDA fell 7% yoy to Rs400mn as OPM -1500bps yoy to 11.9% (high base).
• Gains from associate boosts Consol Adj PAT: Rs534mn gains related to invt in Avantha Power led to consol adj PAT of Rs867mn (+52% yoy).
• Rs1.2bn loss of discontinued operations drag reported PAT: largely led by ~Rs900mn Hungary operation loss. The balance was from losses in France, Ireland, Belgium, etc. (Hungary loss to sustain in 4Q18)
• Consolidated net debt increases: to Rs14.5bn in Q3FY17 (up by Rs1bn qoq) largely due to sustained loss funding of international business.
• Uptick in order intake in 4Q18: CG Power won an order of Rs1.07bn in Feb-18 from EESL for Low Voltage motors as also order of US$ 55mn (~Rs3.5bn) in Indonesia in Feb-18 for supply of power transformers.

Key positives: Strong industrial performance, Hungary sale by Mar-end

Key negatives: higher debt and sustained losses of Hungary

Impact on financials: FY18/19 consol EPS cut by 15%/7.4% to Rs2/4.3

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 expansion, etc.). However, the standalone business is funding the sustained losses in international business (higher debt & interest costs) as also higher advances to subsidiaries (being subsequently written off). While this is likely to settle by FY18-end as Hungary sale is completed, the weaker balance sheet is likely to remain a drag on profitability. Underperformer.