CG Power (CGPOWER IN) Analyst meet takeaways

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INSTITUTIONAL EQUITY RESEARCH CG Power (CGPOWER IN) Analyst meet takeaways INDIA CAPITAL GOODS Company Update 22 November 2018 We recently interacted with the management of CG Power to better understand the disclosures on loans to group companies and get an update on the continuing operations of the company. In this report we present key highlights from the meeting. Loans and advances related: CG Power has loaned Rs 7.6bn to its group holding company (disclosed in 2Q) of which Rs 2.5bn was loaned in 1HFY19 and the balance was given in the past three years. The management expects to recover Rs 4bn of the Rs 7.6bn by March 2019; recovery timelines for the remaining loan are still not clear. CG is looking to refinance a third of its current debt (~Rs 28bn). One of its European subsidiary holding companies will raise low cost funds and repatriate these back to CG standalone. This will reduce the standalone debt, and loans and advances to the repatriating subsidiary. In this manner, by March 2019, CG hopes to halve its standalone debt to Rs 12bn (Rs 4bn from group holdco and Rs 8bn from refinancing). Discontinuing business related details CG and the proposed buyer of the Hungarian operations will resume full fledged operations of the Hungarian plant by December 2018. Financial closure of a large government contract by the new owner of the business, coupled with resumption of operations at the plant, will lead to the lenders giving an NOC, allowing for the sale of the business to go through (hopefully by March 2019). The management is actively debating the need to classify its operations in Ireland and Belgium as continuing ; these are currently part of discontinued operations. However, such a change would lead to a one time non cash loss of depreciation charges of these assets, as the current disclosure of discontinued losses are without considering any depreciation charges. Continuing operations related details CG Power is most upbeat about its industrial business (45% of sales). Growing market for railway products (traction motors and propulsion systems), new product offering in motors (IE 3&4), and market share gains in its drives business should help this segment achieve 20 25% CAGR in the next three years, in our view. CG expects its railways business to double in three years from Rs 10bn; likely to achieve this in FY19. Increasing product content per electric locomotive (to 33% from the 25%) and growth in annual manufacturing of electric locos by the Indian Railways (to 1,000 in 4 5 years from the current 300) should help CG achieve its target for the business. As its non compete clauses with LUCY Switch Gear and Crompton Greaves Consumer Electricals expires, CG is looking to introduce products such as pumps (for industrial usage), industrial fans, and ring main units. This should drive growth in revenues from new products over the next few years. Business outlook for power transformers is weak. However, manufacturing switch gears on behalf of the Indonesian JV would bring in US$ 40 50mn of new business for CG s power systems segment. Outlook and valuation While we are enthused by the performance of CRG s continuing operations, particularly in the industrial segment, we are concerned about the sustained deterioration in the quality of its balance sheet. Though the management did show a road map of its plans to improve its balance sheet (in our meeting), we would rather wait for this to play out. Hence, for want of greater clarity, we retain our Under Review rating. UNDER REVIEW CMP RS 40 / TARGET NA COMPANY DATA O/S SHARES (MN) : 627 MARKET CAP (RSBN) : 25 MARKET CAP (USDBN) : 0.35 52 WK HI/LO (RS) : 99 / 33 LIQUIDITY 3M (USDMN) : 3.0 PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Sep 18 Jun 18 Mar 18 PROMOTERS : 34.4 34.4 34.4 FII / NRI : 15.4 15.7 20.6 FI / MF : 32.6 29.2 29.1 NON PRO : 3.3 4.0 2.2 PUBLIC & OTHERS : 14.4 16.7 13.7 PRICE PERFORMANCE, % 1MTH 3MTH 1YR ABS 8.3 34.5 53.4 REL TO BSE 7.7 34.6 53.6 PRICE VS. SENSEX 240 200 160 120 80 40 0 Apr 16Oct 16Apr 17Oct 17Apr 18Oct 18 Crompton Source: Phillip Capital India Research KEY FINANCIALS Rs bn FY16 FY17 FY18 Net Sales 52,686 55,165 61,886 EBIDTA 4,303 4,424 4,550 Net Profit 1,678 1,446 494 EPS, Rs 2.7 2.3 0.8 PER, x 14.9 17.3 50.6 EV/EBIDTA, x 7.0 7.0 8.1 PBV, x 0.5 0.6 0.9 ROE, % 4.7 5.6 4.5 Debt/Equity (%) 33.2 36.5 69.3 Jonas Bhutta (+ 9122 6246 4119) jbhutta@phillipcapital.in Vikram Rawat (+ 9122 6246 4120) vrawat@phillipcapital.in BSE Sensex Page 1 PHILLIPCAPITAL INDIA RESEARCH

Financials Income Statement Net sales 55,054 52,686 55,165 61,886 Growth, % 60 4 5 12 Raw material expenses 37,062 36,115 38,868 44,094 Employee expenses 6,689 5,590 5,133 5,320 Other Operating expenses 6,211 6,678 6,739 7,923 EBITDA (Core) 5,092 4,303 4,424 4,550 Growth, % (16.8) (15.5) 2.8 2.8 Margin, % 9.2 8.2 8.0 7.4 Depreciation 2,447 1,717 1,429 1,492 EBIT 2,645 2,586 2,995 3,058 Growth, % (24.4) (2.2) 15.8 2.1 Margin, % 4.8 4.9 5.4 4.9 Interest paid 1,047 800 1,861 2,193 Other Non Operating Income 853 547 609 395 Pre tax profit 2,450 2,333 1,742 1,260 Tax provided 104 667 281 749 Profit after tax 2,554 1,666 1,461 512 Others (Minorities, Associates) 28 12 16 17 Net Profit 234 4,605 4,906 11,659 Growth, % 83.1 (35.0) (13.8) (65.8) Net Profit (adjusted) 2,582 1,678 1,446 494 Unadj. shares (m) 627 627 627 627 Wtd avg shares (m) 627 627 627 627 Balance Sheet Cash & bank 6,860 10,275 9,097 6,934 Debtors 30,699 20,770 18,772 20,092 Inventory 13,001 5,850 8,821 5,876 Loans & advances 0 0 0 0 Other current assets 20,318 43,504 45,173 38,763 Total current assets 72,487 80,409 81,915 71,665 Investments 2,751 2,303 2,039 1,454 Gross fixed assets 70,102 42,413 30,772 32,292 Less: Depreciation 28,778 16,536 13,726 15,218 Net fixed assets 42,366 26,774 17,661 17,798 Total assets 1,17,604 1,09,486 1,01,615 90,917 Current liabilities 45,245 44,369 41,574 43,042 Provisions 3,982 1,332 1,553 1,854 Total current liabilities 49,227 45,701 43,127 44,896 Non current liabilities 25,300 17,813 17,377 18,880 Total liabilities 74,526 63,514 60,504 63,776 Paid up capital 1,254 1,254 1,254 1,254 Reserves & surplus 41,725 44,718 39,857 25,888 Shareholders equity 43,078 45,972 41,111 27,141 Total equity & liabilities 1,17,604 1,09,486 1,01,615 90,917 Source: Company, PhillipCapital India Research Estimates Cash Flow Pre tax profit 2,450 2,333 1,742 1,260 Depreciation 2,447 1,717 1,429 1,492 Chg in working capital 1,529 9,633 5,215 9,803 Total tax paid 6,013 2,516 453 3,025 Cash flow from operating activities 6,723 608 5,400 5,076 Capital expenditure 10,222 13,876 7,684 1,629 Chg in marketable securities 1,401 1,600 43 52 Cash flow from investing activities 4,285 4,320 4,968 6,511 Free cash flow 2,438 3,712 432 1,436 Equity raised/(repaid) 0 0 0 0 Debt raised/(repaid) 3,038 5,638 264 3,780 Dividend (incl. tax) 601 0 0 0 Cash flow from financing activities 1,572 2,224 502 724 Net chg in cash 866 1,488 71 2,160 Valuation Ratios FY15 FY16 FY17 FY18 Per Share data EPS (INR) 4.1 2.7 2.3 0.8 Growth, % 83.1 (35.0) (13.8) (65.8) Book NAV/share (INR) 68.6 73.3 65.6 43.3 FDEPS (INR) 4.1 2.7 2.3 0.8 CEPS (INR) 8.0 5.4 4.6 3.2 CFPS (INR) 14.0 (13.5) (4.3) 15.0 DPS (INR) 0.8 Return ratios Return on assets (%) 2.9 1.9 2.5 1.9 Return on equity (%) 4.8 4.7 5.6 4.5 Return on capital employed (%) 7.6 4.7 6.6 4.0 Turnover ratios Asset turnover (x) 1.0 0.9 1.1 1.4 Sales/Total assets (x) 0.5 0.5 0.5 0.6 Sales/Net FA (x) 1.4 1.5 2.5 3.5 Working capital/sales (x) 0.3 0.5 0.6 0.4 Working capital days 124.5 178.4 206.4 127.9 Liquidity ratios Current ratio (x) 1.6 1.8 2.0 1.7 Quick ratio (x) 1.3 1.7 1.8 1.5 Interest cover (x) 3.2 4.1 2.0 1.6 Dividend cover (x) 5.1 Total debt/equity (%) 48.7 33.2 36.5 69.3 Net debt/equity (%) 32.7 10.9 14.4 43.7 Valuation PER (x) 9.7 14.9 17.3 50.6 Price/Book (x) 0.6 0.5 0.6 0.9 Yield (%) 2.0 EV/Net sales (x) 0.7 0.6 0.6 0.6 EV/EBITDA (x) 7.4 7.0 7.0 8.1 EV/EBIT (x) 14.2 11.6 10.3 12.1 Page 2 PHILLIPCAPITAL INDIA RESEARCH

Stock Price, Price Target and Rating History 120 100 80 S (TP 160) 60 N (TP 172) S (TP 160) N (TP 86) B (TP N (TP 180) 65) N (TP 59) N (TP 90) N (TP 92) N (TP 91) N (TP 91) N (TP 64) N (TP 56) 40 20 0 N 15 J 16 F 16 A 16 M 16 J 16 A 16 O 16 N 16 J 17 F 17 A 17 M 17 J 17 A 17 O 17 N 17 J 18 F 18 A 18 M 18 J 18 A 18 O 18 Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL 15% > to < +15% Target price is less than +15% but more than 15% SELL <= 15% Target price is less than or equal to 15%. Page 3 PHILLIPCAPITAL INDIA RESEARCH

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