Whalesbook
Valuation Paradox Amid Growth
CG Power's recent financials show strong performance driven by infrastructure demand. The company's power systems segment delivered a 25% revenue increase to ₹3,442 crore. Yet, the market's high valuation, with a P/E ratio above 110x, suggests investors are betting on future success rather than current results. This P/E is much higher than typical for industrial electrical equipment.
Strong Orders Face Margin Pressure
The company's unexecuted order backlog has grown 61% year-on-year to ₹17,107 crore, providing revenue visibility through FY27. However, the industrial systems segment, a key part of the business, showed weaker growth of 2.3%. This is due to tough competition and a focus on lower-margin railway orders. While overall EBITDA margins improved by 60 basis points to 15.8%, this gain is vulnerable to how the company invests in non-core areas.
Risks in Semiconductor Push
A significant concern for investors is the cost of CG Power's expansion into semiconductor ATMP manufacturing. This venture reduced profitability in Q4, impacting margins by about 110 basis points. Unlike rivals like ABB India or Siemens, which focus on digital solutions, CG Power is diversifying into new technologies. Delays in the Sanand semiconductor plant or failure to secure major buyers could strain cash flow. Additionally, the company's working capital cycle has lengthened, with working capital days increasing from 35 to over 81, suggesting growth is supported by extending credit rather than operational gains.
Analyst Views Divided
Analysts hold mixed opinions. Some, like Nomura and Emkay Global, have raised price targets, citing strong demand for power grids and transformers. Others believe the stock is overvalued by 30% to 40%. As CG Power looks to FY28, its valuation depends on successfully scaling new businesses and managing raw material costs. Investors will watch if the power systems segment can support the costly entry into semiconductor manufacturing without hurting returns.