CG Power & Industrial Solutions' Q1FY19 results (Underperformer) - Weak operational performance; debt continues to rise

Q1FY19 result highlights

• Standalone PAT at Rs354m (+91% yoy) on low base: Revenues were flat yoy, while higher OPM (+220bps yoy to 7.7%) & lower tax rate (30.7% vs 43.4% in Q1FY18) resulted in PAT growth. Power revenues fell 25.1% yoy to Rs5.3bn (Rs1bn rev deferral), while industrial +13.9% yoy to Rs6.5bn (+26% on like to like basis; mkt share gains in motors).
• Standalone OPM normalises to 7.7%: (+220bps yoy, -30bps qoq) led by industrial normalised to 9.9% (+570bps yoy; positive operating leverage) while power +49bps yoy to 6.7%. Hence, EBITDA +39% yoy to Rs909mn.
• Low base drives subsidiary performance: as last year Indonesia saw a loss on Ramadan related impact on revenues. Hence, revenues +93.9% yoy to Rs3.1bn with Rs283mn EBITDA (loss of Rs161m in 1QFY18).
• Higher tax impacts consol PAT: Revenues +11% yoy, EBITDA +142% yoy to Rs1.2bn (low base). However, higher tax at 82% led to drop in PAT.
• Discontinued operations, restructuring charges drive Rs856mn net loss: on Rs160m re-structuring charges in Ireland, Rs200mn loss in Hungary and balance largely due to losses in Belgium. Hence adj net loss post discontinued ops stood at Rs856mn (loss of Rs860mn in Q1FY18)
• Sale of Hungary operations finalized: at an EV of EUR 38mn (~Rs3.1bn). However, share transfer would happen on completion of certain conditions. While further operational losses would not be borne by CG power, a write off of Rs0.6-1bn is likely on completion of transaction.
• Consol net debt rises: to Rs18.3bn in Q1FY19 (up by Rs1bn qoq) largely due to sustained loss funding of international business.

Key positives: Strong industrial performance

Key negatives: Weak power performance, higher debt

Impact on financials: FY19/20E Consol Adj. PAT cut by ~21%/15%; Post discontinued ops, FY20E PAT cut by 13%.

Valuations & view

The domestic power business has stabilised, while industrial segment is gaining traction (mkt share gains, orders from railways, margin expansion, etc.). However, the standalone business is funding the sustained international losses (higher debt and higher advances being subsequently written off). Considering a weak balance sheet and delay in consummation of Hungary sale (now in Sept-18) will keep the stock performance in check. Maintain Underperformer.