Rising Legacy Costs And Trade Barriers Will Impede Grid Modernization

Key Takeaways

• Rising R&D and compliance costs, plus legacy governance issues, threaten margins and limit necessary expansion or investment for future growth.
  
• Heavy reliance on traditional hardware exposes the company to digital disruption and shrinking market share from decentralized energy trends.
  
• Aggressive capacity expansion, strong order backlog, and entry into high-growth sectors position CG Power for sustained revenue and margin growth amid favorable industry trends.

Catalysts

Provides various solutions in India and internationally.

• The global acceleration of energy efficiency standards is likely to force CG Power to incur substantial capital and R&D expenditures to upgrade legacy product lines, especially as export customers demand advanced, digitally enabled solutions; these costs will likely erode future net margins and weigh heavily on long-term earnings growth.
  
• The company's hardware-centric approach leaves it structurally disadvantaged against competitors prioritizing digital and software capabilities in power infrastructure, automation and grid modernization, raising the risk of long-term revenue stagnation as the industry shifts towards integrated, AI-powered systems.
  
• Intensifying trade protectionism and geopolitical friction in major global markets such as Europe and North America threaten to restrict access or increase input costs for CG Power's industrial exports, compressing margins and undermining the scalable export growth that much of the current valuation assumes.
  
• The heavy dependence on traditional large-scale projects exposes the company to the rising threat of decentralized renewable energy adoption such as rooftop solar and microgrids, which will erode demand for established grid equipment and limit order inflows, driving down both top-line revenues and long-run market share.
  
• Historical governance and restructuring issues continue to tarnish CG Power's credibility and may impede access to low-cost capital for expansion or R&D; this risk will elevate the long-term cost base, restrict necessary investment and keep earnings growth below what current valuations require.

CG Power and Industrial Solutions Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on CG Power and Industrial Solutions compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming CG Power and Industrial Solutions's revenue will grow by 19.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.5% today to 10.1% in 3 years time.
• The bearish analysts expect earnings to reach ₹18.0 billion (and earnings per share of ₹11.78) by about August 2028, up from ₹10.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 75.5x on those 2028 earnings, down from 104.6x today. This future PE is greater than the current PE for the GB Electrical industry at 39.3x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.61%, as per the Simply Wall St company report.

CG Power and Industrial Solutions Future Earnings Per Share Growth

Risks

• Robust long-term demand trends, such as rapid urbanization, infrastructure spending, and strong T&D capex in India, are driving high order inflows and record order backlogs for CG Power, providing strong revenue visibility for several years ahead.
  
• The company is expanding capacity aggressively in its Power Systems division, with significant new plant investments anticipated to come online and meet rising demand, likely boosting sales and supporting sustained earnings growth.
  
• Participation in emerging, high-growth sectors such as Railways (KAVACH), EV motors, and semiconductors provides new avenues for value-added revenue streams and future margin expansion as these segments scale.
  
• Operational improvements, cost optimization, and price increases-especially as rivals follow CG Power's lead in LT Motor pricing-could drive margin improvement and result in improved net margins over time.
  
• Meaningful efforts to grow exports, along with capacity enhancement and service business development, position the company to benefit from global infrastructure, electrification, and grid modernization trends, supporting long-term topline and earnings growth.

Valuation

• The assumed bearish price target for CG Power and Industrial Solutions is ₹556.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of CG Power and Industrial Solutions's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹890.0, and the most bearish reporting a price target of just ₹556.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹178.7 billion, earnings will come to ₹18.0 billion, and it would be trading on a PE ratio of 75.5x, assuming you use a discount rate of 15.6%.
• Given the current share price of ₹665.95, the bearish analyst price target of ₹556.0 is 19.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.