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HDFC Securities Institutional Research Desk: Report on Hitachi Energy - Building on electrification

Posted On: 2023-03-24 12:59:25 (Time Zone: IST)

Parikshit D Kandpal, CFA, Institutional Research Analyst, HDFC Securities and Nikhil Kanodia, Institutional Research Analyst, HDFC Securities.

Looking at the government and private capex spending plans, Hitachi Energy India (HEI) seems to be one of the biggest beneficiaries of a large surge in power sector capex due to EVs, metro/high-speed rails, etc. HEI is one of the top technical players in the electrical engineering space having four business units namely, grid automation, grid integration, high voltage products and transformers. Its revenue is expected to expand through (1) grid automation and modernisation; (2) rail electrification; (3) expansion in the metro network; (4) rise of e-mobility; and (5) hyper growth in data centres. It has another INR 50bn revenue opportunity from Vande-Bharat ancillary orders. Given robust order inflows, we expect HEI FY22-25E EPS CAGR of 67.9%. We initiate on HEI with an ADD rating (given punchy valuation), with a TP of INR 3,438/sh, valuing the company at 38x Mar-25E EPS.

Robust growth drivers: HEI's sustainable energy solutions and products are expected to gain good traction, backed by India's target to be net-zero by 2070, robust order inflow from the metro and high-speed rail projects, electrification of balance 8,798 Rkms of Indian railways, growth in data centers, increased adaptability of the e-mobility ecosystem, modernisation and automation of existing grids.

Meeting export target well before time: HEI had guided for exporting a quarter of its OB in the long run. It has more than 20% of new OB from international demand for all the three quarters of FY23. It has orders from countries like Nepal, Bhutan, the Middle East, and America. Currently, ~80% of the HEI portfolio products are manufactured locally in India.

Services potential to grow to INR 20bn in long run: HEI expects an annual market potential for its services to be c.INR 20bn in the long run backed by its large installed base in the country. Further, it expects services to constitute 10- 15% of its order mix from current levels of 5% (Q3FY23).

Double-digit margin expected by FY25: The 9MFY23 EBITDA margin came in at 4.5% (-170bps YoY). With robust growth in export orders, focus on high[1]growth segments, local manufacturing and strong market potential from services orders, HEI expects the mid-term EBITDA margin in double digits.

Technical service agreement (TSA) expected to come down gradually: HEI pays a royalty of 3.5% of its revenue to Hitachi global for using its technical know-how. Further, it pays TSA to ABB for using its information system (IS) infrastructure. HEI has guided it would bring down TSA charges gradually as and when HEI deploys its own IS infra.

Robust OI; well-diversified order mix: The 9MFY23 order inflow (OI) came in at INR 55.5bn (+2.1x YoY), taking the order book (OB) to INR 72.3bn (~1.7x FY23E revenue), providing good revenue visibility in the near term. Segment[1]wise, the order mix is well-diversified into products/projects/services at 85/10/5%. Sector-wise, it is diversified into utilities/industries/transport and infra at 56/22/22%.

Shares of ABB Power Products and Systems India Limited was last trading in BSE at Rs. 3364.30 as compared to the previous close of Rs. 3249.55. The total number of shares traded during the day was 1573 in over 480 trades.

The stock hit an intraday high of Rs. 3433.20 and intraday low of 3198.80. The net turnover during the day was Rs. 5254381.00.

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