GE T&D: Profitable growth remains elusive

High one-off expenses dent operations in June quarter

The bad spell doesn’t seem to end for Alstom T&D or GE T&D as it has been rechristened after its acquisition by GE globally. After eight quarters of struggle to post revenue growth, GE T&D managed to grow its revenues by 12 per cent to Rs 855 crore in the June 2016 quarter (Q1). Despite this, huge one-off expenses amounting to Rs 243 crore forced the firm to end the June quarter at a loss (Rs 197 crore) against Rs 10 crore of net profit last year. With the new management taking charge, it decided to provide Rs 69 crore as bad debts and provide for Rs 183 crore towards litigation claims. As a result, operating margins, too, entered the negative zone in Q1.

With these one-offs registered in Q1, the management believes it has effectively addressed the probable pain likely from bad debts and litigation. However, the stock is yet to recover from the five per cent fall after results. Analysts polled on Bloomberg anticipated revenues of Rs 882 crore and net profit of Rs 30 crore from GE T&D in Q1. With results missing estimates by a huge margin, analysts at Emkay Global Financial Services have downgraded their FY17 earnings and net profit estimates by four per cent and 86 per cent, respectively, to Rs 3,670 crore and Rs 20 crore. Caution on the stock appears justified given the weak management commentary. Despite manufacturing a full range of power equipment in the 765 kilowatt (KV) and above capacities, GE T&D’s management sees limited opportunities in the traditional power generation market, while adding that market growth is still visible in the transmission and distribution domain.

  However, solar power could be the next big opportunity for GE T&D. After the acquisition, GE is likely to introduce its industrial and renewable products to spruce up its operations in India. But, it might take a few quarters for this to reflect in the financials. Until then, the silver lining is the robust order book of Rs 7,860 crore providing GE T&D earnings visibility for the next two years. What is also encouraging is that with the T&D orders constantly flowing in, GE T&D, too, saw a 14 per cent growth in order inflows in Q1 to Rs 800 crore. While these will help build revenues, profitable growth may be a few quarters away. This is why, five of eight analysts polled on Bloomberg recommend investors to hold on to their investment in the company.