emerging anew CG Power (Murugappa Group)

2020 Annual Report Analysis

CG Power is engaged in the business of power transformers, distribution transformers, switchgears and low-tension motors.

The Company’s two major business units include Power Systems and Industrial Systems.

CG’s customers are major utilities and industries in India and abroad, spanning power generation, transmission, distribution, renewable, oil and gas, cement, metals and mining and railways and transportation.

Power Systems:

CG Power manufactures an extensive range of high voltage transmission products. The product lines are: power transformers, switchgears and distribution transformers.

Products comprising Power Transformers, EHV Switchgears, MV Switchgears and Distribution Transformers. It also offers integrated solutions for network management.

The major customers are Power Grid, NPCIL, NTPC, Indian Railways, L&T, Sterling Wilson, SPML Infra, Siemens and Others.

Transformer is used in AC power distribution systems to safely step-up or step-down voltages to meet the incoming power requirements of connected equipment.

Smart Distribution Transformer:

CG Power developed a new Distribution & Power Transformer Monitoring System through IoT named as Smart Distribution Transformer (NxtGNTx). This system has been designed to effectively reduce the AT&C loss which is a challenge to the Indian Power Sector.

CG Power is the first Indian multinational to obtain approval for 800kV UHV Current Transformer.

The manufacture of 800 kV Bushings is supporting the ‘Make in India’ initiative as it is completely an import substitution. This adds up substantial global business potential and sales increase which was untapped for CG.

Switchgears:

Switchgear refers to a centralized collection of circuit breakers, fuses and switches that function to protect, control and isolate electrical equipment. CG command significant leadership in switchgears, and has over 25% market share across many product ranges.

Industrial Systems:

CG Power provides equipment and services to convert electrical energy for industrial applications.

Products consisting of high voltage (HV) motors ranging up to 25 MW; low voltage (LV) motors ranging up to 1.5 MW; fractional horse power (FHP) motors; direct current (DC) motors; AC generators up to 70 MVA range and AC drives up to 3 MW.

Industrial Systems Business Unit continued to remain profitable.
CG’s low-tension motors (LTM) continued to be the market leader.
It is the first Indian motor manufacturer to enter into the electrical vehicles motor market.

Low-Voltage Electric Motors:

Electric motors are estimated to consume about 65% of the electrical energy consumed by industry. CG has developed its entire range of Super Premium Efficient Motors with induction technology, which were typically imported from China. This is a fully in-house development of CG.

CG supported the ISRO-Chandrayan-3 project by developing and supplying a range of non-flameproof and flameproof motors.

Railways:

Indian Railways is migrating from diesel to electric locomotives and targets 100% electrification of rail routes. CG supplied 4000+ of AC traction motors to Indian Railway, 650+ Electric locomotives fitted with CG Traction Machines. More than a Million CG signalling relays and 50,000+ electrical point machines used for track changing operations.

Consumer Products:

CG Power’s non-compete agreement with Crompton Greaves Consumer Electricals ended in Jan 2019. CG Power now manufactures pumps, exhaust fans, industrial fans, cooler kits and starters.

Income Analysis

Net Sales (2019): ₹5,356 crore
Net Sales (2020): ₹3,169 crore

Debt:

CG Power has a debt of ₹2,933 crore. The Company’s former promoter Gautam Thapar and directors diverted around ₹3,200 crore. The company has initiated a recovery process.
CG Power has an order book worth ₹2,853 crore.

A New Management:

Mr. Vellayan Subbiah, MD, has over 23 years of experience and focus on cashflow and ROCE.
He holds a BTech from IIT Madras and an MBA from University of Michigan
He has worked with McKinsey.

Investors:*

– Promoters hold around 58.3% of the company
– HDFC MF holds 9.2% of the company
– Bharti holds 7.6% of the company
– KKR India holds 10% of the company
– Vanguard holds 1% of the company

In Aug 2020, Murugappa Group’s Tube Investments invested ₹700 crores to acquire 51% stake in CG Power. Tube Investments made an additional investment of ₹100 crore.

21-Aug-2020:
Super Investor Nemish Shah led Enam Holdings Pvt Ltd acquired additional 2.4 crore shares of CG Power, and the total share holding is 6.5 crore shares.

*Need to wait for the next shareholding to find out the exact numbers.

Valuation:

The profit margin is roughly 10 – 12% for similar companies. If CG Power can break-even in the next 4 to 5 years, it can make a profit before tax of ₹300 to ₹500 crore.

Even if you give one-time price to sales, CG Power can get a market cap of ₹3000 to ₹5000 crore. The current market cap is around ₹1,400 crore, and the current stock price is ₹22.

But there are lot of ifs…

Source: Company

Disclosure:

For educational purposes only. This is not a recommendation to buy or sell.

Corrections:
Sales, Promoters shareholding and valuation have been updated.

30-Sep-2020:
London-based hedge fund Habrok India Master LP bought 40,57,559 shares of CG Power at ₹24.01 per share.

27-Oct-2020:
Tube Investments (TI) believes that over a period of 5 years, it will be able to turnaround CG Power and Industrial Solutions — to a ₹5,000 crore top-line earning one with ₹500 crore profit before tax (PBT). Read more:
CG Power Hitting Revenue of Rs 5K Crore in 5 Years

TI wants to be a leading industrial player in India. TI sees CG Power becoming debt-free at the end of the five years. TI management estimates CG Power’s revenue as below:
– Electric Motors: ₹2500 crore
– Railways: ₹1000 crore
– Switchgears: ₹1000 crore
– Transformers: ₹500 crore

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