CG Power And Industrial Solutions : Losing Its Steam
Despite being a market leader in India in its key product lines and a strong global presence with exports to many countries across the world, the company’s current ownership structure and other issues point towards underperformance
CG Power and Industrial Solutions Limited (CGPISL) is a global leader and pioneer in the management and application of electrical energy. It provides end-to-end products and solutions for the effective and sustainable use of power. With various manufacturing facilities located across Madhya Pradesh, Maharashtra and Goa, CGPISL manufactures a wide range of products. The company’s business is divided into two major business segments, namely, industrial systems and power systems. A market leader in India in its key product lines, CGPISL has a strong global presence with exports to many countries across the world.
The company is the largest manufacturer of low-tension motors in India, offering a range of 0.18 kW to 710 kW in multiple variants and standards and also customised configurations to suit all industrial sectors. CGPISL offers the most comprehensive solutions in rolling stock and signalling segment to Indian Railways, producing a wide and comprehensive range of traction motors and alternators, traction converters, auxiliary converters, propulsion systems and train control and management systems as well as railway signalling products.
Its drives and automation business comprises low-voltage AC drives (LV and MV), soft starters, shaft power monitors, solar drives, PLC and HMI under the ‘EMOTRON by CG’ brand, which is well-accepted in India, Europe and the Middle East. CGPISL re-launched its fast-moving electrical goods (FMEG) range of products in 2019 after a gap of three years. It consists of consumer electrical products like domestic and agricultural pumps and industrial and domestic exhaust fans. The company is one of the largest electric equipment manufacturers for the power and industrial sector and also offers turnkey solutions in power distribution and generation. It deals in manufacturing transformers (power and distribution transformers), switchgears (extra high-voltage and medium-voltage switchgears) and relay automation.
Sector Overview
India is the third-largest producer and consumer of power energy. With installed generation capacity of 391 GW as on September 30, 2021, the country’s non-fossil fuel generation assets account for 40 per cent of the total installed capacity. In order to make a massive transition towards solar energy, the country has set an ambitious target of more than quadrupling its solar generation capacity to 450 GW by 2030. The private sector’s share in the generation segment has steadily risen to breach 48 per cent as on September 30, 2021. By 2022, solar energy is estimated to contribute 114 GW, followed by 67 GW from wind power and 15 GW from biomass and hydropower. For 2022, the target for renewable energy has been elevated to 227 GW.
Until October 2021, the total thermal installed capacity in the country was recorded at 234.44 GW. Installed capacity of renewable, hydro and nuclear energy summed up to 103.05 GW, 46.51 GW and 6.78 GW, respectively. The power and utilities industry has gone through challenges in 2021 and made measurable progress and received clean energy encouragement from a new administration as well. The hard path is likely to persist in 2022 also – keeping costs lower while boosting clean energy, ensuring reliability and resiliency, and maintaining security. To overcome these hiccups, the electric power industry is predicted to continue to advance in its 3D transformation: decarbonisation, digitalisation, and decentralisation.
Financial Overview
The financial performance of the company shows that on a consolidated quarterly basis the net sales and other operating income increased to ₹ 1,551.01 crore in Q3FY22 as compared to ₹ 819.52 crore in Q3FY21, increasing by 89.26 per cent. The operating profit was recorded at ₹ 215.98 crore in Q3FY22 as compared to an operating profit of ₹ 111.58 crore in Q3FY21, gaining 93.57 per cent. Q3FY22 recorded a net profit of ₹ 545.06 crore as compared to net profit of ₹ 424.87 crore in the same quarter in the previous fiscal year, registering a gain of 28.29 per cent.
On the annual front, its net sales and operating income contracted by 42 per cent from ₹ 5,109.88 crore in FY20 to ₹ 2,963.95 crore in FY21. The operating profit was recorded at ₹ 218.90 crore in FY21 as compared to ₹ 44.65 crore in FY20. The net loss of ₹ 1,331.14 crore incurred in FY20 turned into net profit of ₹ 1,279.60 crore in FY21. Over the last five quarters, the promoters have reduced their stake from 53.18 per cent to 52.7 per cent while mutual funds have reduced their stake from 7.04 per cent to 5.77 per cent. In the year ended March 31, 2021, the company reported negative cash flow from operating activity amounting to ₹ 334.85 crore.
In the last five years the sales growth is observed to have declined from ₹ 9,011.09 crore to ₹ 2,963 crore. The total income has also dropped from ₹ 9,078 crore in March 2017 to ₹ 3,075.43 crore in March 2021. On a QoQ basis, in Q3FY22, net sales have grown by a mere 6.69 per cent. On a five-year basis, the company’s median price to book value ratio is 1.42 and the median PE ratio is 22.4. Currently, the company is trading above both the median price to book value and median PE ratio, indicating a situation of being overvalued. Promoter pledging of around 97 per cent also raises risk concerns.
Outlook
The country is presently in a state of power crisis and India’s supply of coal is running low while import prices of coal are high and rising – USD 140 per tonne. The demand is overcom- ing supply which is eventually impacting power generation in the country. Most plants in Tamil Nadu are dependent on imported coal and plants in Madhya Pradesh are going through transportation issues. Along with them, Maharashtra and Punjab are also under threat. This is opposite to the govern- ment’s previous claims of fulfilling the power demand surge.
The issue of low coal stocks at thermal power plants across a number of states is likely to continue till at least the end of April 2022. Despite increasing demand for power, the number of railway rakes being used to transport coal to powerhouses saw a decline in the first half of April. According to data published by Indian Railways, an average of 380.6 rakes of coal were trans- ported to thermal power stations in the initial two weeks of April as against an average of 408.9 rakes in March 2022. Based on the ownership structure which includes promoter pledging, promoter holding and institutional holding, the stock price of the company is likely to face volatile performance.
In the period of one year, the stock has zoomed in 179 per cent and is currently trading at a substantially higher price as compared to last one year’s trading sessions. The debt-to-equity ratio of the company appears to be higher than its peers. On the other hand, the interest coverage ratio also appears to be average in comparison with the other peer companies. Based on fundamental analysis, CG Power and Industrial Solutions appears to be overvalued on the basis of intrinsic value and may not be a good buying opportunity for investors. Based on its intrinsic value , CG Power and Industrial Solutions appears to be overvalued and may not be a good buying opportunity for investors. Hence, we recommend AVOID.