Areva T&D- Better margins and volume-led growth, Sell: Anand Rathi

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Areva T&D
Better margins and volume-led growth, maintain Sell
 Improved profitability. Volumes supported by increased
capacity, robust orderbook and the higher share of products
business improved profitability in 3QCY10. However, we
maintain Sell on weaker outlook for the T&D sector due to
continued pricing pressure and keen competition.


 Volume-led growth in 3Q. Sales increased 42% yoy to `10.5bn
while net profit increased 181% yoy to `630m, owing to lower
base and margin expansion. Higher volumes owing to increased
capacity and favorable revenue mix with higher share of products
(60%) in revenue led to rise in growth and profitability.
 Margin expansion surprises. Operating margin expanded
412bps yoy due to higher volumes, cost control measures, flat
provisions and reversal (of `100m, leading to the 100-bp margin
expansion) of mark-to-market losses on forex derivatives.
 Orderbook robust. Order inflow declined 18% yoy to `8.5bn in
3Q but rose 3% yoy to `28.9bn in 9MCY10. Orderbook grew 8%
yoy to `49bn, giving revenue assurance for the next 3-4 quarters.
 T&D sector outlook still bleak. Pricing pressure continues due
to fewer orders, new entrants and keen competition. Management
postponed its expectation of recovery to 1HCY11.
 Valuation and risks. We value the stock at `227, based on 25x
CY11e EPS. Higher capacity utilization, price recovery and
favorable procurement policy by customers are key upside risks.