CG Power — the grid pays for the chips

The State of Play

CG Power’s FY26 was a record on every line that matters: standalone sales of ₹11,331 crore (+21%), PAT up 39%, order intake of ₹17,574 crore (+30%), and an unexecuted backlog of ₹15,719 crore, up 59%. One segment did the heavy lifting — Power Systems (transformers and switchgear) grew sales 46% at a 21.9% margin with a backlog up 91% and, per the CFO, a ROCE “more than 100%” — while the larger Industrial Systems division ground through a margin squeeze and the new semiconductor venture burned ₹111 crore building India’s first big OSAT plant. The market pays 120x earnings for the combination: a booming grid business funding a chip option.

The Company

CG Power is the Murugappa Group’s 2020 rescue — Tube Investments took control of a company that had lost money five years running (a ₹1,331 crore loss in FY20, reserves negative) and rebuilt it into a debt-free electrical-equipment compounder. Two core divisions: Power Systems (power and distribution transformers up to 765 kV, switchgear, instrument transformers) riding India’s transmission build-out, and Industrial Systems — India’s largest LT motor maker (~38–39% share), drives, railway traction electronics and the KAVACH train-collision-avoidance business via subsidiary G.G. Tronics. The third pillar is new and audacious: CG Semi, a ₹7,584 crore OSAT (chip assembly-and-test) project in Sanand with ~₹4,900 crore of central and Gujarat government support, plus Axiro, the RF-chip design business bought from Renesas in April 2025.

Amar Kaul (ex-Ingersoll Rand) took over as MD & CEO in July 2024 under chairman Vellayan Subbiah. Promoters hold 56.36% (trimmed ~1.7 points around the June 2025 QIP); DIIs have more than doubled to 18% since 2023. The balance sheet carries ₹118 crore of borrowings against ₹7,655 crore of reserves, plus ~₹3,000 crore of parked QIP money — though FY26 free cash flow went slightly negative as receivables jumped from ~₹2,000 to ~₹2,900 crore and capex accelerated.

The Story So Far

Q1 FY26 (call: July 24, 2025) — a 56% order surge and ₹3,000 crore of fresh powder

The year opened with standalone sales up 25% and order intake up 56% to ₹4,764 crore — Power Systems’ quarterly inflow had jumped from a ₹1,800–2,000 crore trend toward ₹3,500 crore, which Kaul attributed to go-to-market expansion and win rates, “not compromising on margins.” The quarter’s trophies: a ₹641 crore 765 kV transformer package from Power Grid (the transformer division’s largest-ever single order) and a ₹3,000 crore QIP, three times oversubscribed. The promises laid down: existing transformer capacity doubling to 40,000 MVA by September; a new 45,000 MVA plant under construction; KAVACH running at “at least 100 installations a month, starting in the next couple of months”; the semiconductor mini-plant producing in CY26 and the main plant in CY27; and a company-level aspiration to “bounce back to 14%, 15% PBT margins.” On Power: “I am very, very bullish for even next 5 years… The capacity versus the demand gap will always stay there.”

Q2 FY26 (call: October 29, 2025) — Power carries, railways stumble, the fab opens

PAT rose 38% on sales up 17%, but the split widened: Power Systems sales +48% with margins up 310 bps and backlog up 104%, while Industrial fell 2% on railway project deferments and a supply stoppage, its PBIT margin sagging to 9.7%. The transformer capacity promise was kept on the day — 40,000 MVA live October 1 — and a new ₹748 crore greenfield switchgear plant was approved. The G1 OSAT facility opened near Ahmedabad in August (0.5 million units/day peak), with the 14.5-million-chips-a-day G2 targeted for end-2026. KAVACH slipped “about 1 month-1.5 months,” shipments now promised by end-December. Axiro was guided to ~$50 million for FY26. The inquiry pipeline, Kaul noted, was up 85% year-on-year.

Q3 FY26 (call: January 27, 2026) — the Tallgrass order and a 98% yield

Standalone sales rose 22% with PBT at 15.6% of sales — quietly reaching the “14–15%” aspiration within six months of it being set. Power Systems margins expanded another 378 bps to 21.4%. Then the headline, announced post-quarter: a ₹900 crore ($99 million) power-transformer export order from Tallgrass for a US hyperscale data center — the single largest order in CG’s history, 330 kV custom units, deliverable in 12–20 months from existing plants. Transformer capacity was now headed from 40,000 to 65,000 MVA “in the next 1 quarter or so,” with the board’s FY28 target of ~85,000 MVA to be hit “at least 1 year before.” The OSAT story produced its first hard datum — M1 running at 98–99% yield, “much better than what we anticipated” — with chip sales promised “on a small scale” within two quarters. KAVACH slipped again: passenger trials “about to start,” approvals and supplies expected within the quarter. Motors had taken ~17% of cumulative price hikes over nine months, absorbed “much better than our expectation.” On the Chinese-competition question, Kaul was blunt: new transformer capacity takes 24–36 months to build — “realistically 4 years, and we’ll talk after 4 years.”

Q4 FY26 (call: May 6, 2026) — a record year, and the chips inch closer

The year closed with Q4 standalone PAT up 49% and Power Systems posting a +50% quarter at a 23.8% margin. The full-year scorecard: order intake ₹17,574 crore, backlog ₹15,719 crore (consolidated ₹17,107 crore), consolidated sales ₹12,418 crore (+25%), consolidated PAT ₹1,232 crore (+27%) despite the ₹111 crore semiconductor drag. Capacity arithmetic kept compounding: the greenfield transformer plant commissions July–August 2026, taking total capacity to ~110,000 MVA by end-CY2026 — from ~18,000 MVA two years earlier. “It’s like Amrit Kaal for the power sector in India,” Kaul offered. The 400 kV Make-in-India GIS heads to commercialization in FY27; exports order bookings doubled (though exports remain only ~5% of sales — the FY25 annual report shows overseas revenue flat at ~₹970 crore despite years of export narrative); and on the US, “the tap is open” beyond Tallgrass. The semiconductor pillar: G2 on track for end-CY2026, Axiro finishing FY26 at ₹500 crore ($65 million), an ₹50 crore stake in AI-chip designer EdgeCortix, and OSAT chip revenue expected “in about two quarters” — the same two quarters promised in January. KAVACH: twelve passenger trials done, full completion “in 1–1.5 months,” a ~₹1,000 crore G.G. Tronics backlog waiting on it.

The ledger: said vs. delivered

Kept or beaten: every transformer-capacity milestone, on or ahead of schedule (40,000 MVA on October 1 as promised; the FY28 plan now targeted a year early; 110,000 MVA in sight); the 14–15% PBT aspiration, touched at standalone level by Q3; Power Systems margins “should go even better than” 20% — they did, 23.8% by Q4; Axiro’s revenue ($65 million against guidance that wobbled between $50 million and $64 million during the year); M1 OSAT production in CY26, early, at unplanned-for yields. Slipped, repeatedly: KAVACH — “100 installations a month in a couple of months” (July) became end-December shipments (October), became “approvals this quarter” (January), became “trials complete in 1–1.5 months” (May), with the ₹1,000 crore backlog still gated on approvals; OSAT first revenue, promised “in two quarters” twice in a row. Structurally unresolved: Industrial Systems margins, down from 12.1% to 9.9% across the year on railway pricing and commodity lag — flagged honestly each quarter, with the fix (services, new products, a railways turnaround under new leadership) still a promise. Worth tracking: receivables (+45% in a +21% revenue year) and the fact that FY26’s growth, like FY25’s, was overwhelmingly domestic despite the export drumbeat.

Where Things Stand

FY27 opens with the strongest revenue visibility in the company’s history — a ₹15,719 crore standalone backlog, transformer capacity tripling into a market where management sees the demand-supply gap persisting “up to ‘29, ‘30” even counting every announced competitor expansion, the Tallgrass order beginning execution, and domestic power orders ex-data-center still growing ~20%. The swing factors are the laggards: whether railways margins turn under new leadership, whether KAVACH finally clears its last approvals and converts its backlog, and — the big one — whether the semiconductor venture’s first chip revenue (due ~mid-FY27) begins to justify a ₹7,584 crore project and the 120x multiple that already assumes the grid boom and the chip option both pay off. The Power Systems engine, at least, has spent four straight quarters making the case that the first assumption is safe.

The Four Checks

1. Quality and moat. A good business with a real but time-limited edge. The moat is qualification and capacity in a supply-starved market: utility-grade transformers up to 765 kV need years of certification and customer trust, new capacity takes 24–36 months to build (“realistically 4 years,” per Kaul), and CG holds ~38–39% of India’s LT motor market alongside the Murugappa Group’s balance-sheet credibility. But this is electrical equipment, not a franchise — the advantage is partly cyclical scarcity, every competitor is adding capacity, and management’s own demand-supply-gap thesis runs “up to ‘29, ‘30,” which is a forecast, not a structure. The semiconductor venture has no moat yet, only a government subsidy and a 98% yield on a pilot line. Call it a decent moat with an expiry date that keeps getting argued about.

2. Returns on incremental capital and runway. Strong and visibly compounding. The June 2026 snapshot shows ROCE of 27% and ROE of 20.8%, with a 3-year ROE of 30.4% — and the marginal rupee is going into Power Systems, where the CFO claims ROCE “more than 100%” and capacity is tripling from ~40,000 toward ~110,000 MVA by end-CY2026 against a ₹15,719 crore backlog. The runway on the grid side is real for several years. The asterisk is the ₹7,584 crore OSAT project: it burned ₹111 crore in FY26, has produced no revenue despite two consecutive “two quarters away” promises, and its returns are unknowable — a large slug of incremental capital earning nothing yet. High returns where the money has gone so far; unproven where the biggest cheque is being written.

3. Capital allocation for the stage. Mostly textbook, with one big speculative line item. Reinvesting hard while returns are high is exactly right for this stage, and the execution record backs it — every transformer-capacity milestone hit on or ahead of schedule, a ₹748 crore switchgear greenfield approved, dividends resumed in FY23 and held at a sensible 17% payout while the balance sheet stayed near debt-free (₹118 crore of borrowings against ₹7,655 crore of reserves). Raising ₹3,000 crore via QIP at a triple-digit multiple was shrewd — selling expensive paper to fund cheap capacity. The quibbles: the semiconductor bet is a ₹7,584 crore diversification into a business CG has never run, softened but not justified by ~₹4,900 crore of government support; receivables grew 45% in a 21% revenue year; and working-capital days have roughly doubled to 82. No buybacks — at this price, correctly.

4. Price. Demanding by any measure. As of the June 2026 snapshot, the stock trades at ₹916 — 117x earnings, 17.9x book value, a 0.14% dividend yield — against consolidated FY26 EPS of ₹7.66 and operating margins that have sat in a 12–14% band for four years. The grid business is excellent and the backlog gives FY27 unusual visibility, but a 27% ROCE compounder at 117x requires both that the transmission boom outlasts every announced capacity addition and that a chip venture with zero revenue becomes worth a meaningful slice of a ₹1.44 lakh crore market cap. This is a price that assumes two stories pay off; only one of them has reported earnings.

Sources

• Concall transcripts (4): Q1 FY26 (Jul 24, 2025), Q2 FY26 (Oct 29, 2025), Q3 FY26 (Jan 27, 2026), Q4 FY26 + full-year (May 6, 2026) — BSE filings, converted to markdown.
• Annual reports (3): FY23 (turnaround year: dividend resumed after 7 years), FY24, FY25 (leadership transition to Amar Kaul; the Semiconductors segment carve-out; flat overseas revenue; ₹42.7 crore receivables write-off) — high-signal sections.
• Screener.in snapshot: consolidated quarterly and annual tables, ratios, shareholding — fetched 2026-06-05 (logged-out session).
• Research files: vault/Sources/Earnings/CG Power & Industrial Solutions Ltd/ — raw transcripts, AR sections, snapshot, per-document digests (not published).