Margin expansion, capex completion may drive more gains for CG Power

CG Power hits record highs on strong order inflows and capacity expansion, but rich valuations leave little room for execution misses

The stock of CG Power and Industrial Solutions has been hitting all-time highs and has gained 42 per cent over the last three months. The gains are on expectations that improved capacity utilisation and a strong order book will help the company drive double-digit annual growth. Further, strategic expansion into high-value and high-tech segments will help it tap the structural tailwinds from capex cycles, integration of renewables and railway modernisation.

 

At the current price, the stock is highly valued at an estimated 81 times FY27 earnings. This makes it vulnerable to any potential slowdown or further raw material cost inflation. The semiconductor business moving towards breakeven, and capex completion at its facilities, will improve cash flows, and this could provide valuation upside.

 

CG Power's FY26 results matched consensus with respect to revenue and operating profit, while beating Street estimates on earnings due to higher other income and a lower tax rate. Order inflows for the year stood at ₹19,600 crore (up 34 per cent Y-o-Y), driven by the power systems division.

 

Once ongoing capex is completed, capacity will increase to 110,000 MVA. Price hikes of nearly 17.5 per cent across FY26 offset raw material (RM) inflation. The outsourced semiconductor assembly and test (OSAT) division remains loss-making and losses should narrow from FY28 as the second phase of capacity expansion is completed by the end of CY26.

 

Consolidated revenue grew 25 per cent Y-o-Y to ₹3,400 crore in Q4FY26, driven by strong performance in the power systems division (up 50 per cent Y-o-Y), while industrial systems grew 2 per cent Y-o-Y. Gross margins expanded 230 basis points Y-o-Y to 32.1 per cent, while earnings before interest, taxes, depreciation and amortisation (Ebitda) increased 36 per cent Y-o-Y to ₹500 crore, with margins expanding 110 basis points Y-o-Y to 13.7 per cent. Net profit was up 34 per cent Y-o-Y to ₹400 crore, with margins at 11 per cent. Order inflow during the quarter was ₹5,300 crore (up 39 per cent Y-o-Y), taking the total order book to ₹17,100 crore (up 61 per cent Y-o-Y).

 

For FY26, revenue grew 25 per cent, Ebitda was up 25 per cent and net profit rose 27 per cent Y-o-Y. The Ebitda margin was flat Y-o-Y at 13.1 per cent. Operating cash flow (OCF) dipped 23 per cent Y-o-Y to ₹700 crore due to higher working capital requirements, while free cash flow (FCF) turned negative at ₹72.4 crore (versus a positive ₹490 crore in FY25) due to higher capex during FY26.

 

The power systems division delivered FY26 revenue growth of 46 per cent Y-o-Y to ₹5,100 crore, while profit before interest and taxes (PBIT) increased 68 per cent Y-o-Y to ₹1,100 crore, with a 290-basis-point Y-o-Y margin expansion to 21.9 per cent. Order inflow remained strong at ₹11,200 crore (up 69 per cent Y-o-Y), taking the backlog to ₹12,600 crore (up 91 per cent Y-o-Y), with demand across utilities, exports and data centres.

 

Capex has increased transformer capacity across the Gwalior and Bhopal plants to 65,000 MVA currently, and it will rise to 110,000 MVA by the end of CY26 with the commissioning of a greenfield facility. The company has price-variation clauses to pass on RM price hikes. The division could generate revenue growth in the mid-30s over FY26-28, with an EBIT margin of 22 per cent. Progress on 400 kV GIS commercialisation and 765 kV GIS development could be boosters.

 

The industrial systems division saw 6 per cent Y-o-Y growth to ₹6,700 crore in FY26. PBIT declined 16 per cent Y-o-Y to ₹600 crore, with a 230-basis-point Y-o-Y contraction in PBIT margin to 9.3 per cent. Order inflow declined 8 per cent Y-o-Y to ₹6,400 crore, although management highlighted healthy traction in motors, railways, exports and services. During the year, there were cumulative price hikes of 17.5 per cent in motors. Commodity inflation remains a risk, with ongoing margin pressure. One focus area is improving margins in the railways business.

 

CG Semi's G1 OSAT facility is operational with a peak capacity of 0.5 million units per day, while the G2 facility, with a capacity of 4.5 million units per day, will be completed by the end of CY26. The project is eligible for capital support under the India Semiconductor Mission. The approved project cost stands at ₹7,600 crore, including Central government assistance of ₹3,500 crore and additional state government support of ₹1,400 crore. Axiro strengthened design capabilities through the integration of the radio frequency (RF) business acquired from Renesas, which contributed $65 million in revenue during FY26. Management also indicated further investments in semiconductor design and AI. Ebitda breakeven is projected in FY28.

 

Better margins in power systems are expected and that is the main driver in the near term. Order inflows should grow at low double digits through FY27 and FY28. In the industrial segment, inflows will be supported by expansion in the motors and railways businesses. Overall revenue growth could be in the mid-20s, with the Ebitda margin moving to 14-15 per cent. The company is focused on maintaining margins and has done so while retaining market share.