Capacity expansion may drive gains for CG Power and Industrial Systems

The results of CG Power and Industrial Systems (CG Power) disappointed in terms of margins while witnessing strong order inflows. The company is focusing more on transformers rather than motors.

The board has cleared a qualified institutional placement (QIP) to raise Rs 3,500 crore.

CG Power reported a healthy 21 per cent year-on-year (Y-o-Y) revenue growth and a flat Y-o-Y adjusted profit before tax.

Cash position as of H1FY25 stands at Rs 900 crore. The industrial systems margin was weak, reflecting stiffer competition.

Order inflows were up 31 per cent Y-o-Y and 1.35 times revenues for H1FY25 (up 44 per cent Y-o-Y for Q2FY25).

The order backlog grew 50 per cent Y-o-Y and up 10 per cent Q-o-Q.

The management expects power transformer capacity to reach 35k MVA by March 2025 and shared plans to take it to 40k MVA. It is positive on the switchgear segment.

However, it may go slow on expanding capacity for low tension motors, given moderate market growth and high market share. It is on track to expand capacity for high tension motors, where it has a low market share.

The Q2 saw completion of 55 per cent stake acquisition in GG Electronics for Rs 320 crore for Kavach anti-collision system. The entity has won a small order for the Kavach and aims to be ready with a propulsion system + Kavach ordering from Q4FY25.

Its acquisition of Renesas' radio frequency or RF components business will be initially focused on wireless and satellite communication for low earth orbit communication systems.

It aims to localise the offering and leverage synergies. CG is looking to expand in industrial systems with a focus on EESL (energy efficiency), compressed biogas and desalination.

The uptick in ordering and growth prospects could lead to earnings per share upgrades. Order inflows were led by 25 per cent Y-o-Y growth across power systems and 63 per cent in industrial systems. It was led by the foray into ethanol, desalination sectors and energy efficiency offerings for EESL.

Profitability in Q2 was impacted by strategic expenses attributable to railways.

The management claimed higher other expenses focused on expansion of railway offering where it has recently acquired a majority stake in GG Tronics, offering Kavach requirements of the railways.

The expenses are about Rs 36 crore, and adjusted for this, profit before tax (PBT) margin would be 14.7 per cent. The consolidation of GG Tronics financials was done for 1.5-months with revenue of Rs 20 crore and breakeven at profitability.

The company has received American Railroad Association certification for railways in the US market as a bulk supplier for class one railroad and traction machines. It is hoping to see exports.

CG Power’s existing propulsion system offering along with Kavach from GG Tronics can enable it to qualify for the offer of bundled products. The company is aiming at 20 per cent market share in the Kavach offering.

CG Power is undertaking 5,000 MVA capacity expansion, requiring Rs 266 crore of capex, to take it to 40,000 MVA of transformer capacity. The switchgear & motors equipment capacity expansion are expected to take close to a year.

The $36 million acquisition of Renesas electronics radio frequency components business will enable synergies. CG Power is exploring the design of semiconductors used in wireless, airlines and satellite equipment.

Bullish factors include CG Power’s status as one of the few qualified high voltage transformer players in a market that will see Rs 9.2 trillion capex in transmission and distribution (T&D) over 2022–32.

The growing railways component sales and foray in Kavach and outsourced semiconductor assembly and test (OSAT), among others, opens new revenue streams. But investors would look for fast operating profit margin recovery in the industrials segment and timely capacity expansion.