Valuations factor in the positives for Hitachi Energy India's stock

The stock of Hitachi Energy India (HEIL) was up 5.5 per cent in trade on Tuesday after it won an electric power transmission order in a consortium with BHEL. The high voltage direct current or HVDC transmission order from Power Grid Corporation (PGCIL) is for evacuation of renewable power from Khavda Gujarat to Nagpur. This is a 1,200 kilometre- long project with an estimated project value at Rs 25,000 crore to be executed by 2029. HEIL’s share of order inflow will be Rs 4,000- 6,000 crore.   

 

Nuvama Research believes that HEIL has won the first-of-many HVDCs to be ordered out over the next three-four years to feed the country’s ambitious 500GW RE evacuation goal by 2030 in consortium with BHEL. To benefit from the opportunity, the company had recently announced plans to invest Rs 2,000 crore to expand its capacity, portfolio, and talent base in order to support accelerating global demand for clean energy solutions in the domestic as well as export markets.

 

On the results front, HEIL’s Q2FY25 performance saw a miss on margins. Revenue growth was driven by a strong order book, and order inflows grew 12 per cent Y-o-Y to Rs 1,950 crore. There was strong growth in transmission, industries, data centres, and renewables.

 

In-line revenue and rising order flow was offset by a miss on profitability.

Revenue at Rs 1,550 crore grew 27 per cent Y-o-Y on execution of the opening order book of Rs 8,540 crore. Operating profit margin at 7.1 per cent was lower than expectations of 8.2 per cent owing to higher other expenses. HEIL has maintained its double-digit operating profit margin guidance by FY25-end. Operating profit rose 68 per cent Y-o-Y to Rs 110 crore. Net profit came in at Rs 52 crore, up 110 per cent Y-o-Y but lower than expected. The base of Q2FY24 was weak.

 

For H1FY25, HEIL reported revenue growth of 27 per cent, operating profit growth of 59 per cent and net profit growth of 131 per cent Y-o-Y. For H2FY25, expect revenue growth to rise but operating profit and net profit growth may moderate as base effects phase out.

 

Order inflow stood at Rs 1,950 crore, up 12 per cent Y-o-Y, and order backlog stood at a record Rs 8,910 crore. Operating cash outflow came in at Rs 83.8 crore vs inflow of Rs 54.6 crore in H1FY24 owing to working capital buildup. Capex increased from Rs 29 crore in H1FY24 to Rs 34.7 crore in H1FY25.

 

Order inflows lacked large domestic transmission orders although there were wins from utilities, substation projects, transformers, power quality, et al., as well as healthy growth in service. Hence the recent PGCIL order was good news.

 

The share of services in order inflows is at 12 per cent, rising from single-digit levels. The export share is in the 25-30 per cent range through its own initiatives as well as orders from group entities. This augurs well for margin improvement as exports and services have a better margin profile.

 

Key export orders during Q2FY25 included group orders from Hitachi Energy Sweden, Hitachi Energy Spain, and from Azerbaijan.

 

Hitachi Energy is poised to benefit from its presence in high-growth segments such as renewable energy, transmission, data centres, e-mobility, railways, battery storage, etc. The recently-unveiled National Electricity Plan envisages investments of Rs 9.15 trillion until FY32, where the company can participate with its portfolio. Similarly, there is robust traction in data centres. Railways capex offers potential also.

 

In order to strengthen its market presence and cater to increasing demand, HEIL has been undertaking capacity expansion in the past few years. Recently, Hitachi Energy announced a capex of Rs 2,000 crore towards expanding its power transformer factory and traction transformer facility. This investment will be carried out over a period of 4-5 years as part of a strategic growth plan.

 

Order inflow and revenue estimates may need to be upgraded while margin should hit 9.5 per cent or better. Higher capex is a factor also in valuations. HEIL will continue to benefit from energy transition initiatives across domestic and international markets.

 

But the stock is trading at extremely elevated triple digit current price to earnings ratio and over 90 times on expected FY26 earnings. Although the stock surged on the recent order, valuations factor in the positives.