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We maintain BUY on CG Power & Industrial Solutions (CGPower) with a TP of Rs765 (unchanged) as the company remains a strong play on T&D and manufacturing. Q1FY26 results were broadly mixed, with revenue coming in line with the estimate and EBITDA missing by 8%. Consolidated revenue/EBITDA/PAT grew 29%/17%/12% YoY to Rs28.8/3.8/2.7bn, respectively. Both Industrial System and Power System segments saw strong revenue growth of 43% and 15% YoY. Industrial business profitability was impacted by a rise in input costs amid weak demand and an unfavorable mix. However, better profitability in Power System supported the overall EBITDA margin. The management expects to gain further market share in Industrial Motors, given consistent product launches and go-to-market strategy. Also, CG Power’s recent entry into OSAT provides it an early-mover advantage in India’s journey toward building a full-scale semiconductor manufacturing ecosystem.

Power Systems segment benefiting from cyclical upturn

The Power System segment witnessed all-round strong performance with the highest ever order inflow (+111% YoY at Rs35bn – mainly domestic), strong execution (+43% YoY revenue growth at Rs10.7bn) and 120bps YoY margin expansion. The management indicated that better price realization and operating leverage led to margin improvement. We expect the margin to sustain at a higher level, supported by the current cyclical upturn, which in turn is led by energy transition. Domestic demand remains robust and is likely to sustain for the next 4-5 years. With recently announced capacity addition plans to reach 85,000MVA in the next couple of years, the management remains confident of strong growth in exports as well.

Unfavorable mix impacted Industrial System profitability

The Industrial System segment revenue grew by 15% YoY to Rs16.9 bn. However, EBIT margin declined by 290bps YoY/80bps QoQ to 10.2%. The profitability was hit by an increase in input costs, weak demand in the Industrial motors, higher share of railways business (low margin), and losses in new businesses that are in investment mode. Order inflow also declined by 8% YoY during the quarter. Management indicated delays in meaningful recovery in demand for Industrial motors. However, new investments are likely to see improvement in profitability as operations scale up.

Valuation and view

Consolidated order book remains healthy at Rs131bn (+82% YoY), led by 62% YoY order inflow growth in the quarter. The company offers a robust play on Power T&D and Manufacturing with strong growth tailwinds. CG Power continues to report healthy return ratios, with RoE/RoCE likely to log at 34%/44% in FY27E. Our SOTP-based TP of Rs765 is a summation of 55x June-27E PER for the core business and Rs55/sh for the OSAT business. The stock is currently trading at FY26E/FY27E PER of 71x/52x (ex-OSAT).

KTAs from Earnings Call

Order Inflow and Backlog

• In the Industrial segment, the unexecuted order backlog was Rs2.9bn, up 19% YoY, and the Power Systems segment had an unexecuted order backlog of Rs9.1bn, up 97% YoY.
• On a consolidated basis, the unexecuted order backlog was Rs131bn, up 82% YoY.
• CG bagged an order for supply and service of 765kV Transformer Package from PGCIL. The order is Rs6.4bn, the highest single order received by the transformers business of CG.
• G.G. Tronics received a prestigious order towards “KAVACH” worth Rs1.5bn.
• CG secured the largest single order of Rs2.44bn for EHV Business from Techno Electric for supply of packaging instrument transformers, circuit breakers, and lightning arrestors.

Margins

• The company expects company-level PBT margin to be back at 14-15% within 12- 18months.
• In the Power Systems segment, margin was higher YoY at 21% due to better price realization, driven by robust underlying demand and better operating leverage.
• Industrial segment margin was negatively impacted (-290bps YoY) by the rise in commodity prices which couldn't be fully passed on to customers, the increasing the share of railway business, and the mix within it.
• To address margin pressure from material costs in the motors business, the company implemented a 5% price increase effective from 1 Jul.
• For Axiro (semiconductor business), the margin is currently in lower single digits during the transition year but is expected to reach double digits.
• In the railways business, there are challenges around fully recovering material cost increases due to the price variation clause in contracts.

Miscellaneous Points

• Employee costs increased by 52% YoY on a consolidated basis, primarily due to the addition of Axiro and CG Semicon’s operations.
• For CG Semicon specifically, the company has hired around 170 people who are currently training but are not yet generating revenue.
• The Axiro business has higher staff costs inherently, and there were additional upfront setup costs, including establishing an office in Bangalore.
• For the semiconductor business (CG Semi), the company has spent ~Rs3.83bn so far on capex.
• CG successfully completed QIP and raised Rs30bn.

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