Buy Schneider Electric; target of Rs 200: KR Choksey

KR Choksey's research report on Schneider Electric Infrastructure

Schneider Electric Infrastructure Ltd (SEIL) incorporated on March 12, 2011 is engaged in providing power equipment solutions. Company’s solutions are used by electrical distribution (utilities) and power generation companies along with electro-intensive industry, particularly, oil & gas. Over the last five years, Company has recorded muted revenue growth (0.8% CAGR) on account of structural issues in the industry. Despite facing perils, SEIL has sailed through tough times by providing solutions supported by its parent. SEIL’s core business includes: Systems (69% of FY16 revenue), Transactional Business (26% of FY16 revenues) and Services (4.8% of FY16 revenue). SEIL stands poised to benefit from the on-going power sector reforms, counter challenges as India’s power sector set to witness light of the day and the resultant improved demand.

ValuationThanks to the new government reforms, anticipated economic uptick followed by better industrial development and the resultant improved demand should bring the desired development in the power sector. With these imminent developments in place, SEIL stands poised to deliver steady revenue growth at 12% CAGR by FY19E on the back of its improved offerings of advanced automation solutions, establish self healing grids, unmanned stations, asset management solutions. While the current valuations fall in the higher orbit, we value SEIL on 32x EV/EBITDA on FY19E basis (expected EBITDA of INR 1557.1 mn). Notwithstanding its peers trading at a premium multiple (~ current avg multiple of 33x), the on-going re-structuring exercise indicate a turnaround story for SEIL justifying the premium fair value EV/EBITDA metrics. Hence we recommend a “BUY” on company with a target price of INR 200, implying 41% upside. At CMP of INR 142, SEIL is trading at 95x FY16 EV/EBITDA, 80x FY17E EV/EBITDA, 38x FY18E EV/EBITDA and 25x FY19E EV/EBITDA.