What is the outlook for recent JVs in the semiconductor field?

In today’s article, we’ll take a look at a company with one of the most interesting transformation stories. We are looking for CG Power to provide end-to-end solutions to industries, utilities and consumers for the management and application of sustainable and efficient electrical energy.

History of CG power

We will first take a trip back in time, 100 years ago to 1919, when the Thapar family founded their multinational corporation in Delhi. This product line has established itself over the years in a variety of industries including paper, power, home appliances, industrial solutions, food processing and chemicals.

The group entered the power industry in 2008 and invested about Rs. 5,000Cr. Two power plants will be built in Madhya Pradesh and Chhattisgarh. All of these purchases were financed with debt.

In this case as well, the company recognized that the electricity industry was facing a number of challenges and that the group was having difficulty repaying the current debt of the utility.

The Thapar family deposited their shares with bankers as collateral for a loan they obtained in an effort to save the business.

turnaround

After Tube Investments in India (TII) paid Rs. 800 Cr. The tide is gradually starting to turn for CG Power’s 57% stake. A total of Rs. 1,100 Cr. The haircut received consent from 14 banks that lent to CG Power. Haircutting means giving up part of the loan to pay off remaining debt through the company’s operations.

TII is part of the Murugappa Group of Companies, which also owns businesses such as EID Parry, Carborundum and Cholamandalam Finance. Known for their strong leadership, this group is also called the “Tatas of the South.”

CG Power and Industrial Solutions Limited may not have the largest market capitalization, but it has seen an impressive share price growth of 55.81% over the last year. In just three years, the stock price soared nearly 700%. Therefore, we will take a look at the company’s future plans to understand whether the investment opportunity still persists.

CG Power Business Area

CG Power and Industrial Solutions Limited (“CG”)’s business operations are spread across two business segments: Industrial Systems and Power Systems.

industrial system

The company manufactures motors (LT/HT/FHP) and stampings, drives and automation, railway products and commercial products. The company is the largest manufacturer of low-efficiency motors and the first company in India to develop and supply a complete range of IE2, IE3 and IE4 efficiency motors in-house.

The company is also a pioneer in the manufacture of motors for hazardous areas, with a market share of over 60%. This segment contributed approximately 71% to the total revenue in fiscal 2023.

power system

In this segment, the company manufactures a wide range of transformers and switchgears. It is one of the largest manufacturers of electrical equipment for the power and industrial sectors and also provides turnkey solutions in power distribution and power generation.

We are India’s first 132kV green transformer manufacturer. We are also pioneers in introducing vacuum technology to India through our ultra-modern vacuum breaker manufacturing facility in Aurangabad. In fiscal 2023, nearly 29% of its revenue came from this segment.

CG Power’s finances

In FY 2023, CG Power & Industrial Solutions recorded revenue of ₹697.254 billion, up 27.2% from ₹5,4835.3 billion in FY 2022. After analyzing four years from FY2020 to FY2023, the company recorded a compound annual growth rate (CAGR) of 10.92%.

At the same time, there was a notable increase in net profit, which increased by 26.5% from ₹629.61 crore in fiscal 2022 to ₹796.33 crore in fiscal 2023. The company had suffered losses even before COVID-19, but returned to profit after TII acquired the company.

In FY23, CG Power and Industrial Solutions maintained favorable financial metrics with return on equity (ROE) of 44.28% and return on invested capital (ROCE) of 42.22%.

Over the past few years, management has successfully overcome the phase of addressing legacy issues. The company, which was struggling with severe financial constraints and increasing debt, became a debt-free company with a debt ratio of 0.01.

CG Power’s future plans

CG Power’s competitive advantages, domestic and international opportunities, and motivated leadership team should drive revenue growth and long-term compounding of profits.

Backed by a strong balance sheet, CG Power enjoys dominant market positions across all products and market segments. The company is placing greater emphasis on growing its addressable market with new products and markets, which will result in industry-dominant high double-digit sales growth and profits.

A 21% revenue CAGR (compound annual growth rate) for CG Power (300 basis points in exports) has also been projected by the company for FY 23-26, excluding inorganic growth in rail and industrial segments.

Advance to OSAT through JV

An agreement was recently signed between CG Power and Industrial Solutions, Renesas Electronics Corporation, a leading provider of advanced semiconductor solutions, and Stars Microelectronics (Thailand) Public Co, a Thailand-based outsourced semiconductor assembly and test (OSAT) provider. A joint venture for the construction and operation of OSAT facilities in India.

Renesas and Stars Microelectronics will hold equity capital of approximately 6.8% and 0.9% of the JV respectively, while CG will own 92.3% of the joint venture. In five years, the JV plans to invest ₹7,600 crore.

The JV plans to build a state-of-the-art manufacturing facility in Sanand, Gujarat with a production capacity of up to 15 million units per day. We plan to produce a variety of products, from cutting-edge packages such as FC BGA and FC CSP to existing packages such as QFN and QFP.

expansion investment

The company has spent capital expenditure of ₹662 crores as of Q3 2024. A plant has been constructed in Ahmednagar & Goa to produce low voltage motors with capacity doubling from 10 lacs per annum to 18 lacs per annum. The project will generate additional revenue of ₹3,260 crore at full capacity.

The soon-to-be-built power transformer plant in Bhopal will increase its capacity from 17,000 MVA to 35,000 MVA. The project will generate additional revenue worth ₹950 crores at full capacity.

conclusion

CG Power and Industrial Solutions has undergone an impressive transition under new ownership in recent years. With its massive debt and losses, the company has transformed into a profitable, debt-free business with strong growth prospects.

With its dominant market share, focus on new products and markets, and ongoing expansion plans, CG Power is poised for strong growth going forward. Over the next four years, management expects earnings to grow at a CAGR of 21%, excluding inorganic growth.

Given the positive outlook, attention is being paid to whether CG Power can continue its dazzling comeback story. What do you think about the future prospects of this Indian industrial giant? Can the growth momentum be maintained over the long term? Let us know in the comments below!

A work written by Nalin Surya S.

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