Markets
Hitachi is high on energy, but valuation is low on comfort
Summary
- As Hitachi Energy India Ltd sees a meteoric rise in stock prices, the company's focus on renewable energy and high voltage technology is reshaping its future. With a robust order inflow and a promising Ebitda margin expansion, the stakes are high.
Hitachi Energy India Ltd’s shares are up 14% this week, lifting the gains for 2024 so far to as much as 200%. Now, notwithstanding the growth outlook for capital goods companies, retail investors must note that multinational companies such as Siemens, ABB India and Hitachi will always remain expensive given they have low floating stock as promoter stakes in all three companies is 75% and institutional holding at more than 10%. Hitachi’s shares trade at nearly 100x estimated earnings for FY26, as per Bloomberg.
In a recent interaction with analysts, Hitachi said it had lined up ₹2,000 crore to capitalise on strong research and development opportunities in India and globally. The company also shared its outlook in view of increasing focus on renewable energy in India.
Hitachi’s product portfolio comprises high voltage direct current (HVDC) products and transformers. HVDC is the preferred technology to connect, dispatch, and trade renewable power as it helps reduce losses and provides more power while maintaining grid stability. The ministry of power has a transmission capital expenditure of ₹9.2 trillion lined up by 2032.
Furthermore, Hitachi's strong Japanese parentage means export opportunities are available too. For instance, a transmission order of ₹790 crore for the Marinus Link Project in Australia was allocated by the parent to Hitachi India in the first quarter of FY25. The advantage of having a strong parentage comes at a cost, though. Hitachi’s royalty and technology fees in FY24 stood at ₹190 crore, which appears quite substantial when compared to the company’s Ebitda of ₹349 crore.
Order inflow in the first quarter rose sharply by 113% year-on-year to ₹2,437 crore. A bulk of the bump in the order inflow was from the projects segment, where inflows tend to be lumpy in nature. Hence, it is better to look at annual order backlog, which is likely to be at ₹8,599 crore in FY25, as per an Antique Stock Broking report.
The brokerage has forecast FY25 revenue at ₹6,498 crore and Ebitda margin at 9.5%. For FY26, it estimates a sharp expansion in Ebitda margin to 13.5% as operating leverage kicks in. However, the margin outlook would also depend on how aggressively Hitachi bids to win more large-sized projects and any big rise in commodity prices, particularly steel.
To be sure, there could be potential delays in winning and execution of projects as the company has to deal with government intermediaries. Even if everything goes smoothly with a big expansion in Ebitda margin, as projected by Antique Stock broking, Hitachi's valuation is rich.
