HDFC Securities initiates coverage on Hitachi Energy with ‘Add’ rating

HEI currently trades at a higher valuation than most of the listed capital good players, the brokerage said while initiating coverage on HEI with an ‘Add’ rating and a target price of ₹3,438 per share.

“The higher valuation reflects the expectation of it achieving higher revenue from grid automation and modernisation, rail electrification, metro rail expansion, rise of emobility, hyper-growth in data centres, and services potential of ₹20 billion,” the note stated.

The brokerage expects that HEI can further rerate with the higher share of exports in the OB and margin expansion. Currently, we value the company at 38 times 1-year forward PE multiple, it said.

At the portfolio level, HEI has a tall expectation of the sector-wise market size growing by transport sector – 2-3 times, data centers – 4-5 times, renewables – 4-5 times, transmission – 2-3 times.

Royalty at 3.5%

HEI pays a royalty of 3.5 per cent of its revenue to Hitachi global for using its technical know-how.

Further, it pays a technical service agreement (TSA) to ABB for using its information system (IS) infrastructure. HEI has guided that it will bring down TSA charges gradually as and when HEI deploys its own IS infra.

Margin expansion

The 9MFY23 EBITDA margin came in at 4.5 per cent (-170 bps YoY). With robust growth in export orders, focus on high-growth segments, local manufacturing and strong market potential from services orders, HEI expects the mid-term EBITDA margin in double digits by 2025.

Annualised capex of ₹1 bn augurs well

With a clear mindset of supporting the expansion and delivering growth, HEI has incurred ₹3 billion as capex during the last three years.

Despite COVID, it continued its focus on expansion by building a new power quality factory in Dodaballapur, Bengaluru, and a dry bushing facility for transformers in Maneja in Vadodara, Gujarat.

Further, it expanded its feeder factories in the country which manufactures 80 per cent of the total global portfolio locally.

In order to cater to the new demand, HEI is anticipating expanding its traction transformation facilities in the country.

HEI has anticipated an annual capex run rate of ₹1 billion to cater to the needs of the fast-evolving energy landscape in the country.

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