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MOSL: GE T&D INDIA (Neutral)-Big miss led by execution challenge-Cut estimates 30% for FY21

GE T&D India: Big miss led by execution challenge; Cut estimates 30% for FY21

(GETD IN, Mkt Cap USD0.7b, CMP INR178, TP INR180, 1% Upside, Neutral)

 

• Dragged by sub-par execution: 1QFY20 sales declined 37% YoY to INR7.3b, below our est. of INR11.9b. Execution during the quarter was hurt by declining HVDC sales, non-execution of stressed projects and postponement of a few project executions to 2QFY20 (from 1QFY20). This, along with operating de-leverage led to EBIDTA miss (-71% YoY to INR424m v/s our est. of INR1.4b). Adj. PAT of INR34m (-96% YoY), too, was below our est. of INR776m.
• Execution challenges to impact FY20 revenues: Revenue during the quarter witnessed sharp decline of 37% YoY due to (a) decline in HVDC revenue as the project nears completion (decline of INR650mYoY), (b) execution of a project worth INR2b being held back on stress witnessed due to delay in finalization of financial closure, and (c) execution of a State Utility project getting postponed to 2QFY20 on procedural delays from the client side. GET&D expects to recover some deferred sales over the next few quarters; however, revenues are expected to decline v/s flattish revenue guidance given for FY20 earlier.
• Margins decline sharply given operating de-leverage: Gross margins improved 100bp YoY to 34.7% on reduced execution of the lower-margin CK order (INR221m v/s INR867m in 1QFY19). EBIDTA margin declined 660bp YoY to 5.8%, impacted by sharp decline in revenue booking. Revenue growth is expected to remain constrained on the lower order book available for execution (INR59.3b, -10% YoY). Operating margins are expected to remain under pressure. We bake in 170bp margin decline to 8.4% for FY20 to factor in the operating de-leverage due to weak execution.
• Order inflow/backlog declines in 1QFY20, but pipeline healthy: Order intake declined 32% YoY to INR4.2b in 1QFY20, given delay in finalization of orders on account of elections. However, potential orders in the system remain healthy, considering (a) transmission infrastructure for 68GW of the renewable energy corridor are likely to be added over the next two years (expect pick-up in traction from 2HFY20), (b) USD2b substations are likely to be ordered out for the green energy corridor, and (c) near-term ordering for 28GW renewable energy capacity is likely to be concluded in CY19.
• Valuation and view: We cut our FY20/FY21 earnings estimates by 36%/30% to factor in weaker-than-estimated execution and margins. Muted capex from PGCIL over the near-to-medium term also adds an element of uncertainty. We, thus, maintain our Neutral rating on the stock. We value GE T&D at 25x FY21E EPS of INR7.2 (in line with 10-year avg. P/E multiple) to arrive at a target price of INR180.