CG Power and Industrial Solutions Limited (CGPOWER) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to CG Power and Industrial Solutions Limited Q2 FY '27 Earnings Conference Call hosted by IIFL Capital Services Limited. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Renu Baid Pugalia from IIFL Capital Services Limited. Thank you, and over to you, ma'am.

Thank you, [indiscernible]. Very good afternoon, everyone. On behalf of IIFL Capital, we like to welcome the management team of CG Power for the second quarter FY '27 earnings call. From the leadership team today, we have with us Mr. Amar Kaul, Managing Director and CEO; Mr. Susheel Todi, Chief Financial Officer; Mr. Marais Nel, EVP, Drives and Automation and International Motors Business; Mr. Gaurav Makhija, Vice President, Switchgears and EPD Business; Mr. Dhananjay Bapat, Vice President, Railway Business; Mr. Jatinder Kaul, EVP, Motors Business, India Subcontinent; and Mr. Samit Khanna, Vice President, Consumer Products Business. With these words, I now welcome the management for the opening comments. Once again, Amar and the team, many congratulations for the strong results. And sir, over to you for the opening comments. Thank you.

Thank you. Thanks, Renu and rest of the team. Good afternoon, everyone, and welcome to the CG earnings call. At the outset, I'm pleased to share that CG has continued to build on the growth momentum delivering record high quarterly revenue, along with margin expansion. Our quarter 2 and H1 performance reflects the continued strength of our diversified portfolio different execution and continued focus on operational excellence, leveraging CG Edge, which is our operating rhythm. Our Q2 sales grew by 32% year-over-year and order intake grew by about 90% year-over-year and profit before tax grew by 37% year-over-year ensuring the positive leverage and also outpacing the revenue growth with about 180 basis points on the margin expansion. This makes it another one of the strongest quarter performance in the recent alts. Further, our orders remain robust with 90% growth year-over-year and order books strengthened further at INR 21,820 crores, offering multi-quarter visibility for the organization. Now as I go deeper into the stand-alone performance, aggregate sales for the quarter was at INR 3,505 crores, recording a growth of 31% year-over-year, PBT had a growth of 47% at INR 602 crores, which is 17.2% of sales as against INR 409 crores, which was 15.4% in Q2 in the previous year. So 180 bps better margin improvement year-over-year primarily driven by the Power Systems segment and also a contribution from our motors business as well. Return on capital employed annualized was at 27%. Order intake for the quarter was INR 8,016 crores, which is 90% growth year-over-year and unexecuted order backlog as of 30th September 2026 was INR 21,820 crores, which is 61% higher year-over-year. Now if I double-click on each segment going to the industrial segment first, strong growth across revenue and EDIT despite a dynamic cost environment. Aggregate sales for the quarter was INR 1,738 crores, which is 25% year-over-year, driven by strong growth across all the businesses. PBIT was at INR 164 crores, which is 9.4% of the sales against INR 135 crores in Q2 last year, which is 60 bps improvement in a sequential manner versus the previous quarters, driven by the margin expansion in motors. Order intake for the quarter was INR 1,758 crores, which is 12% year-over-year and unexecuted order backlog as of 30th September remains healthy at INR 2,856 crores, providing visibility for the coming quarters. Now if I double click on the Power Systems performance, there is a strong growth and further margin expansion, reflecting continued operating momentum and the robust demand. The great sales for the quarter was INR 1,769 crores with a sharp rise of 41% year-over-year, supported by the disciplined execution using our vehicle of PGH. PBIT was at INR 43 crores, which is 25% of sales as against INR 260 crores, which was 20.7% of sales in Q2 financial year '26. 430 basis points improvement year-over-year, underpinned by the strong price realization and better operating leverage amid resilient demand. Order intake for the quarter was INR 6,258 crores, which is under 27% growth year-over-year. And unexecuted order backlog as of 30th September was INR 18,964, which is 81% up providing a [indiscernible] visibility. With that, we continue to deep dive into our standalone performance, and I'll now move to the consolidated performance. And for consolidated results, it includes performance of our operating subsidiaries in Sweden, Germany and Netherlands, CG adhesive products, which is based in [indiscernible] semiconductor and other nonoperating subsidiaries. Aggregate sales for the quarter was up at INR [ 3,824 ] crores, a growth profit before tax was 44% higher at INR 559 crores, which is 14.7% of sales as against INR 88 crores, which is -- which was 13.3%. The margin expansion led by Power strong power performance, partially offset by continued talent investments that we are doing in our subsidiaries like CG, Semi and [indiscernible] which is the semiconductor business and the impact of about INR 35 crores, which is 90 bps. Return on capital employment for the quarter was 25%. Order intake for the quarter was 78% year-over-year at INR 8,435 and the unexecuted backlog as of quarter ending 30th September was 58%, up at INR 23,638 crores. Now some of the key events that I'd like to highlight is post today's Board [indiscernible] manufacturing capabilities with the rollout of first transformers from India largest transformation facility as a whole [indiscernible] on 4th of September. The greenfield facility was made operational within 13 months and is spread over 50-plus acres. This facility in India is one of the largest single location power transform manufacturing facility, built [ 1,220 ] kV to 1,200 TV class power transformers with the capacity to roll out power transformers every month, reaching its peak. And we are honored to have Honorable [indiscernible], who created the occasion of the first transfer rollout. [indiscernible] Semiconductor, which is a wholly owned subsidiary of CG acquired 100% of equity stake in Total Systems Private Limited for INR 16.4 crores, the transaction was completed on 20th of August and makes [indiscernible] wholly owned subsidiary of [indiscernible] engaged in the business of providing semiconductor and embedded engineering services company providing silicon design, verification and physical implementation, embedded software and Linux BSP development with edge AI engineering services to global semiconductor and electronics OEMs. Now this is a step forward in the direction of what I have been saying earlier into building our competence and capability in the design capability of semiconductors. CG's existing manufacturing facility in switchgear business is witnessing peak capacity utilization in view of the increasing order pipeline and growing demand for extra high-voltage products and in order to cater to the growing domestic and export demand, CG proposes to undertake the following capital expenditure projects. [indiscernible] which is based in number [indiscernible], the proposed project involves an investment of INR 300 crores to increase the manufacturing capacity of OIP bushings and transformer -- instrument transformers up to 800 kV by 4,236 equivalent units per year taking the total capacity of S1 unit to 11,436 equivalent units per year. The project will involve augmentation of manufacturing, assembly, testing and associated infrastructure. with production tenderly expected to be commenced within 30 to 36 months. S3, which is again at the same location in Nasdaq, Unit 2 Phase 2. Further to our disclosure dated 4th of June 2026, we wish to inform that the Board has approved an additional investment of INR 15.31 crores to enhance EH circuit breaker manufacturing capacity by 3,600 units annually at SC Unit 2 facilities, taking the total capacity to 10,800 units per annum. The proposed capacity addition is planned to be completed within a period of 6 to 9 months. Going to the GIS division in [ Will Oli ]. Further to our disclosure on 24th of July '26, we wish to inform that the Board has approved, which more enhancement of CapEx investment for the GS brownfield at [indiscernible], Nashik from INR 35.14 crores to INR 44.62 crores representing an additional investment of INR 9.45 crores. The enhancement primarily provides for procurement of 800 kV high-voltage testing system along with contingency to enable testing of 245 kV and 400 kV gas-insulated switch shares. Approximately 90% of the project assets are expected to be transferred to the infield facility when it comes up and is commissioned fully. Importantly, the capacity will increase from 228 equivalent base last year to 468 equivalent base as it matures. Above investments are part of greenfield investment proposed for [indiscernible] business. And the existing power transfer manufacturing facility, which we name as T3, is currently operating at its maximum capacity, and CG has taken as part of CGS, the lean manufacturing initiative and basis the work done by the teams there. The scope is to enhance the capacity by another 10,000 within the same facility. So taking TC's overall capacity to 75,000 MBA, given the current and projected order pipeline for the division, the Board has approved the capacity enhancement. The total estimated project investment is INR 68 crores net of taxes. The perfect is planned to be completed within a period of 12 to 15 months and is expected to significantly enhance our plants manufacturing capacity, enabling the division to meet the growing market demand and strengthen its competitive position. That sums up a summary of our financial performance and key events. Looking ahead, we remain focused on capitalization on the opportunities across power infrastructure, industrial manufacturing, railways, semiconductors and while continue to invest in technology, capacity and capabilities. We'll maintain our focus on the profitable growth, execution excellence and a long-term approach to value creation for all our stakeholders. With this, I conclude my opening remarks. The unaudited statements with detailed notes are available as part of its stock exchange filings and on our company website. Thank you for listening in, and back to you, Renu, for Q&A.

Sure. [indiscernible], we can open the session for Q&A, please.

[Operator Instructions] First question is from the line of [ Pat Mesh ] from Abacus.

Congratulation on great set of numbers. I just wanted to understand the new [indiscernible] facility, when we said 35 transformers per month, is it our peak potential? And what kind of transformer capacity, like 100 MB on summer or [indiscernible] Yes. Sir, I just wanted to understand, when we are saying that this [indiscernible] capacity at 35 units per month. So just wanted to, what specification of transformers are we talking about? And is that our peak output capacity?

Yes. This is a peak output capacity. And as I mentioned in my previous -- in the notes, it's the [indiscernible] ranging from 200 kV to 1,200 kV.

Okay. No. But when we say 35 units capacity, so that must be -- when you take into consideration of...

This is -- the way it is done is typically averaging it out as is the order pipeline that we have. So you take averaging out from the highest area, which is 1,200 kV to the smallest one and then average it out. So approximately, it comes to 35%. It could be 30%, also, it could be 40% also depending on what kind of orders you get. So this is a ballpark kind of figure.

Okay. So can we put it out in terms of total MVA produced in a month? Or can we have an idea on that number?

So right now, this calculation is based at approximately 70,000 MBA because that's the direction we are getting into.

Okay, sir. And on the commissioning front, was it difficult? Or is it there been any labor issue or a labor issue getting at the new plant at [indiscernible]?

You see the labor skill issue will happen if we don't plan it well. We have been working on this project for more than 2 years, even before we conceptualize. So from all our technical people to everybody, they were all hired merchant advance. And since we already have the existing plants, so a lot of these people were trained on the job in action for almost 6 months to 12 months. So all that investment has already gone inside the training development of people.

Next question is from the line of Ankur from HDFC Life.

First, on the order inflows in the Power Systems side, and we've seen this very strong growth. I think typically, you do about INR 3,500 crores of quarterly run rate. This quarter is closer to INR 600-odd crores. So if you could just help us understand where and what is this order? And are these -- anything recurring there? How are you seeing that?

So that's not recurring. I think it's a combination and again, if your question is hinting towards, is it specific to a sector or anything? No, it's not like that. It's a combination of -- if I look at the orders that have come in, it's right from utility companies to your AI to your data center. So it's a domestic exports. It's a combination of all of those. So it's not skewed towards one direction.

Sorry. So I mean, is there a large order there? Any large couple of thousand crore order there? Or is there a spread over...

No, it was extra material or material than it would have been, we would have informed the stock. So it was not material. But yes, I mean larger size of orders, yes, were there but not material that it justified reporting.

Okay. And then therefore, the last piece on this would be, can you kind of sustain this kind of momentum given the pipeline that is at this point?

I keep in every meeting I keep saying that future is right. So we look at it positively. So it depends on unless something is changing worldwide or which we cannot control, but yes, our efforts are on.

Perfect. Okay. And just the second question would be on the motor side. If you could just help us, especially on the LT Motors, which is our largest piece. What kind of price hikes have you really taken through over the last 6, 12 months? How much more remains to be done? And you did talk about some margin recovery on a Q-on-Q basis, right? So how is that kind of shaping up here? That's also [indiscernible]

Yes. So the price hike is it's a direct copulation of the way commodity has been increasing. So some of that has not been paying a good towards the favor of the industry. So we increased the prices upwards of 30% plus the last 12 months, if I look at it, will there be more increases immediately, I would say no because you have to see once the market is able to take and how much the commodity inflation is happening. So it's a pricing game technically that you might look at. But I think what is important is about price is also our operational excellence. If I see the good results done by the motors team business is fundamentally the work on CGH on the operational excellence that we have been doing, optimizing our portfolio, eliminating the waste in the system. I think that is giving much more results than really the price increase. Price increase is directly only nullifying the commodity inflation. But the improvement that you see is coming purely from the work done by our teams in motors.

And just on margins in this segment. Can we expect abreast given we've taken -- I'm hoping a lot of the price increases have been taken here?

So see -- so if you see industrial sequentially, we are improving consistently or at least 50, 60 basis points every quarter. And motors has already gone to double digits.

Okay. So it's more on the rail side. Is it that's kind of being...

Yes. It's the same story that even last quarter, I mentioned the same thing. So railways, I would say, even flat or it might go down as well. And that's a conscious decision. We could still be making the top line meet, but then we don't want it at the expense of bottom line. So we'll see as we are progressing our strategy work is happening on the railway side as well. So we might take a bit of a step back on that instead of just worrying about the top line and bleeding bottom line. We are working on the technology operation and build on the capabilities that we don't have there. So you might see a bit -- of course, we don't declare it, but then I'm sharing what I'm supposed to share is that for a year or so, we will not have huge improvements in the EV side because that's the time we want to use to build on our capabilities around technology and what is required from the market.

Next question is from the line of Rahul Gajare from Macquarie Capital. As there is no response, we will move on to the next question. The next question is from the line of Umesh Raut from Nomura.

Congrats for a very strong set of results. My first question is pertaining to, again, power system order inflow. So if you could help us with the number on domestic and export side separately? And what was the growth on a year-on-year basis in domestic power system and export power system in terms of orders?

Yes. Thanks, Umesh. Yes, the orders are definitely strong, but we don't give that split off between export and domestic. But yes, there's a good mix that -- the direction that we wanted is getting in that direction.

So any color on year-on-year growth at least on the export side, how it was during the second quarter in terms of inflows? And any color in terms of geographical mix as well as you are seeing traction in terms of export order in North America, Europe or any other market?

So I can maybe give you a flavor of percentage increase quarter-over-quarter increase is about 200% for the exports.

Understood. And geographical further?

No, that, I mean, you're asking me too many details my friend.

Yes. My second question is pertaining to Industrial segment, where if I look at subsidiary revenue number that has increased by about 10%. So is it fair to assume that we have started execution on coverage order side? Or is it pending for the quarter? .

Yes. No, no, coverage has not started yet, although the routine business is improving, but yes, cover should start very soon because most of the approvals are in place. We're just waiting for the final approval. So it should happen any time now definitely in the current quarter.

Next question is from the line of Harshit Patel from Equirus Capital Securities.

Congratulations on a great set of results. Firstly, on our CapEx, I think we have already spent about INR 600 crores in the first half of FY '27. And you have announced another INR 400 crores of CapEx across various projects. On top of the -- a lot of greenfield and brownfield projects are already going on. Could you just summarize on what will be our overall CapEx for FY '27 as well as FY '28 and of course, excluding the [indiscernible]

So if you look at our core business, we spent this first half around INR 550 crores to INR 600 crores. Maybe another we are looking at some INR 300 crores to INR 400 crores for this another 6 months. So maybe it will touch INR 1,000 crores for this year. And next year, again, that remains in a similar range, around INR 700 crores to INR 800 crores.

Understood. And this is excluding [indiscernible]

Correct.

My second question is on [indiscernible]. Could you help us with the first half of FY '27 performance in terms of either EBITDA or the PBIT margin? I believe, obviously, much of the revenues of the semiconductor segment will have come from [indiscernible] only. So if you can bifurcate the PBT between [indiscernible]

So if you look at the number, this is -- revenue number is only coming from the. And agri quarter 2, they were at breakeven point.

Understood, sir. Just lastly, looking to one. On the consumer business, if you can give us an update, the revenue currently and have you reached a breakeven level in this business or not yet? That will be my last question.

So consumer business, as you know, we restarted that a couple of years back. We are almost there because some months will be positive, some will be close to that. But it has been net, it has been positive, but we have been reinvesting the money that is being earned back into the marketing, as you know, it's a B2C business. So we are reinvesting it back into the business. And now we have the leadership change also there. We have a new leader running in Samit, who is on the call as well and he's looking at the overall strategy on this business and other additional product portfolio, any innovation that we can bring in. So yes, excited to see how it is going to grow in the future.

Next question is from the line of Sameer Thakur from AMBIT Capital.

Most of the questions are answered. But just on this coverage part. So I think there's still certification spending, right? And just on the time line of execution. So will it be there any risk of execution on coverage, if the approvals are delayed or just give your view on that?

Yes. The risk, I would say -- see, I think the basis where we stand on the project, I think this quarter, we should definitely get it and the production should commence including installation and commissioning of these coverages. Worst-case scenario, if -- to your question, if it goes, then definitely, there could be -- this could be in terms of some of the orders may lapse next quarter, end of next quarter, but it doesn't mean that it's lost kind of thing. It gets retendered and again, you will get it back. So that could be only -- but it's additional work. That's the only thing that I'm worried about.

Next question is from the line of Sumit Kishore from Axis Capital.

My compliments on the strong quarter. My first question is on CG Semi's G2 facility. What is the progress there? Are you on track to meet your time lines on commissioning? And could you give us some flavor of how the ramp-up is likely to happen over the next few quarters?

Yes. So on the G2, which is your question specific to G2, so the construction is progressing well. And we are targeting that qualification to commence middle of next year and the commercial production because it takes about 2 to 3 quarters to get the qualifications done. So I would say somewhere towards the end of '28 or '29 is where we should be seeing the commercial production.

Okay. And on G1, I mean, is there any sort of new customers that you have tied up? Or could you give us a flavor of how things are progressing on the initial products that got -- pieces that got rolled out?

Yes. So that's the work that's happening in salaries our business development team is continuously working on. And as you will know, this qualification time is very high. But yes, the work is continuously on that.

Okay. Just a repeat question on power system inflows, which kind of...

[Operator Instructions] Next question is from the line of Amit from UBS.

Congratulations on great set of results. Sir, I have a question on the overall capacity expansion and orders for that. Where are we in the journey of qualifications in U.S. [indiscernible]? Do you think your ordering is already reflecting orders from clients in U.S. who are large utilities or we will take time to get qualified because that's spread out market, we need to go utility viability. So any color on that?

Yes. I think your question is absolutely valid. And that's a long-term work that is happening in parallel. And as you know, it takes time. So that's happening in parallel. But again, that's not the only thing we are banking on for the American market.