CG Power & Industrial Solutions' Q2FY19 results (Dropping Coverage) - Operations improve; corp governance issues emerge again

Q2FY19 result highlights

• Standalone reported PAT at Rs284m: Adj. PAT +85% yoy to Rs563m led by 13% yoy revenue growth to Rs13.9bn and higher OPM (+290bps yoy to 9.2%) which was offset by higher tax rate (31% vs 25% in 2QY18). Power revenues fell 9.1% yoy to Rs6.2bn, while industrial segment saw strong 42% yoy growth to Rs7.6bn (both railways & motors).
• Standalone OPM improved to 9.2%: (+290bps yoy, +100bps qoq) led by expansion of industrial EBIT margins to 12.2% (+420bps yoy; positive operating leverage) and in power systems segment to 6.7% (+100bps yoy). Hence, EBITDA grew 65% yoy to Rs 1.273 bn.
• High base drives muted sub perf: Indonesia had a strong 2Q18 (weak 1Q18), hence revenues & EBITDA fell 25%/36% yoy to Rs2.6bn/ Rs351m. 1H19 saw +12%/54% yoy in revenues/ EBITDA as Sweden too saw a turnaround.
• Discontinued operations see lower loss at Rs644mn: as losses in Hungary have reduced from qtrly loss of Rs500mn to Rs150mn in 2Q19. Moreover, Ireland and Belgium saw positive performance. However, this was offset by Rs800mn charge on winding up of Middle East ops.
• Consol PAT losses decline led by improved operational performance: Revenues +4.6% yoy, EBITDA +23% yoy to Rs1.63bn with Rs512mn PAT. However, losses from discontinued ops led to adj PAT loss of Rs132mn.  Reported PAT loss at Rs264mn (write off on GIS substation R&D)
• Loan to group entity raises corp governance issue: CG has given Rs7.8bn loans to group entities (Rs6.5bn as at FY18 end). These advances have been securitized and board has approved a repayment schedule for the same with Rs2bn to be received each in 3Q19 and 4Q19. We believe non-disclosure of the same in FY18 and funding to group entities when the company itself is struggling with losses, raises significant corporate governance issues. Consol net debt at 2Q19 end at Rs23.4bn.

Valuations & view

The operating performance has improved led by strong traction in industrial (mkt share gains, margin expansion, etc), while domestic power business has stabilised. However, the standalone business is funding the sustained international losses (higher debt & advances being subsequently written off). Considering a weak balance sheet, delay in consummation of Hungary sale and now funding to group entity drives us to drop coverage. Our last published rating on the stock was ‘Underperformer’ with a 12-month target price of Rs65. Our estimates have not been updated for 2Q19 realities and should not be used for making any investment decision.