CG Power & Industrial Solutions' Q4FY18 results (Underperformer) - Sale of Hungary biz delayed further

Q4FY18 result highlights

• Standalone PAT at Rs627m (+31% yoy): due to 22% yoy revenue growth to Rs14.3b and +120bps in margins. Power revenues +8.9% yoy to Rs7.7bn, while industrial +14.4% yoy to Rs6.6bn (mkt share gains). We note segmental numbers are not comparable on yoy basis.
• Standalone OPM expands 120bp yoy to 8.1%: led by +340bps yoy in industrial margins to 9.7% (positive operating leverage) while power margins fell 79bps yoy to 6.9%. Hence, EBITDA grew 42% yoy to Rs1.16bn.
• Steady subsidiary performance: of Indonesia with revenues +6% yoy to Rs3.6bn and Rs278mn EBITDA Rs963mn (EBITDA loss in 4QFY17).
• Higher tax impacts consol PAT: Revenues +18% yoy, EBITDA +35% yoy to Rs1.43bn. However, higher tax at 54% led to 15% drop in adj. PAT.
• Discontinued operations, write offs drive Rs5.8bn net loss: Discontinued ops saw Rs1.9bn loss (Rs1bn Hungary loss, Rs500mn loss on MSEDCL franchise & balance from other intl mkts). Moreover, there was a ~Rs4bn write off (Rs1bn on Hungary loss funding, Rs1.5bn EPC division wind off, Rs1.65bn inventory write off in transformers) in 4Q18.
• Consol net debt rises: to Rs17.3bn in Q4FY18 (up by Rs2.8bn qoq) largely due to sustained loss funding of international business.
• Net loss jumps to Rs11.7bn in FY18: FY18 consol adj. PAT fell 60% yoy to Rs616mn led by 70bp margin drop (lower OPM in subs; Rs4.5bn EBITDA; +2%yoy), as also higher interest cost (+18% yoy). Reported loss jumped to Rs11.7bn on loss in discontinued ops & write offs.

Key positives: Strong industrial performance

Key negatives: higher debt, delay in sale of Hungary operations

Impact on financials: FY19/20E Consol Adj. PAT cut by ~26%; Post discontinued ops - FY19E/20E PAT cut by 90%/36% (Hungary loss).

Valuations & view

The domestic power business has stabilised (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 international losses (higher debt and higher advances being subsequently written off). Considering a weak balance sheet and delay in Hungary sale yet again (now in Jun-18) will keep the stock performance in check. Maintain Underperformer.