Areva T&D India– 3QCY2010 Result Update- Angel Broking

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Areva T&D India– 3QCY2010 Result Update

Angel Broking maintains a Sell on Areva T&D India  with a Target Price of Rs247.

Areva T&D (Areva) 3QCY2010 results were significantly ahead of our estimates.
Revenues registered 40% yoy growth to `1,048cr, while PAT surged by over 181%
yoy to `63cr. We had estimated sales and PAT at `864cr and `32cr, respectively.
Going forward, the pricing scenario continues to be grim on account of increased
competition and relaxation of pre-qualification norms by PGCIL. We maintain
our Sell recommendation on the stock.


Strong volume driven growth: Despite the price erosion of 10-15% in the T&D
segment, Areva managed to register 40% yoy rise in revenues to `1,048cr
backed by strong growth in volumes. EBDITA margins for the quarter also
expanded by 425bp to 12.7% on the back of lower staff cost and other expenses.
Other expenditure also included the reversal of mark-to-market losses on forex
derivatives of ~`10cr booked earlier. Consequently, net profit posted a sharp
jump of 181% to `63cr.

Outlook and Valuation: Acquisition of Areva’s global T&D business by Alstom &
Scheidner continues to play on the stock. The Alstom & Scheidner combine had
previously made an open offer at a price of `295.3, which was subsequently
withdrawn during 2QCY2010 pending the clearance from SEBI. Post the
clearances received from SAT, the same offer will now remain open between
November 6 -25, 2010. Management continues to maintain cautious outlook
given the pricing pressures, especially in the T&D segment on account of
increased competition from foreign JV’s and relaxation of pre-qualification norms
by PGCIL. At the CMP of `293, the stock trades at 30x CY2011E EPS. We
maintain a Sell on the stock.

Management’s view on the T&D market
- The T&D sector, which was growing at 20% p.a during CY2006, 2007 and
2008 slowed down during CY2009 and thereafter witnessed negative growth
in CY2010.
- Though the utility market continues to show positive growth, order flows from
PGCIL and NTPC were at much lower levels during CY2010 vis-à-vis CY2009.
- T&D market realisation during CY2010 continues to be lower than that of
CY2009. This has created strong pricing pressure in the last few quarters.
Over the past 18 months, the transmission and distribution (T&D) segments
have witnessed price erosions to the extent of 18% and 25%, respectively.
- Industry & Infrastructure sectors are yet to show positive growth in capex.
- Several large power plant projects are delayed due to issues involving land,
coal linkages.
- Koreans and Chinese suppliers continue to quote aggressive prices.



Sale process update
- In CY2009, Areva, the ultimate holding company, decided to exit global T&D
business. Consequent to the decision, Areva’s Executive Board has begun
negotiations with the Alstom & Schneider Consortium.
- On January 2010, the Indian management was informed about the share
purchase agreement that was signed between the Areva Group and Alstom &
Schneider Electric (subject to clearances from the EU Commission and other
authorities).
- On May 28, 2010, an open offer was made by Alstom & Schneider to acquire
up to 4.78cr shares constituting 20% of issued share capital of Areva T&D
India at `295.3/share.
- On June 7, 2010, the global sale process was closed after Alstom & Schneider
Electric obtained the required clearance from all the authorities.
- On July 20, 2010, the open offer was postponed till further notice due to
pending clearance of the open offer document.
- On October 16, 2010 SAT disposed the appeal in favour of the acquirers,
Alstom & Schneider, and on October 30, 2010 the acquirers re-launched the
open offer in which the offer date was revised, while the price remained
unchanged.
- The open offer will commence on November 6, 2010 and close on November
25, 2010.
- The date of closure of the open offer process is December 10, 2010.



Investment Concerns
Generation delays to impact T&D growth
Areva T&D's fortunes are directly linked to the growth of the Indian power sector. In
the present macro environment, though the power sector capex is relatively
resilient with majority of the projects being envisaged by the central and state
sector utilities, major worry for the T&D sector is generation capacity addition
delays. This is likely to adversely impact growth prospects of the T&D equipment
suppliers as the sector has a high degree of correlation with power capacity
addition. Notably, around 60% of the planned transmission expenditure for the
Eleventh Plan is directly associated with the concurrent addition in generation
capacity.


Margins to contract
During CY2010 -11, we expect EBITDA margin to settle at 10.5 – 11%, compared
to historic margins of 15% (3-year average from CY2007 to CY2009). This is
mainly on account of:
(1) Increasing contribution of systems segment, which entails higher bought-out
items and hence comparatively lower margins.
(2) Increasing competitive pressure in the market; management has also admitted
to price undercutting by some players to win orders.
(3) Over 80% of the company's contracts have a price variation clause (PVC);
hence, resultant benefits from lower commodity prices would be passed on.
Lower margins will spiral down to lower profitability; Net profit margins are
estimated to come in at 5.1% by CY2011, which has averaged around 8% (3-year
average from CY2007 to CY2009).


Outlook and Valuation
Acquisition of Areva’s global T&D business by Alstom & Scheidner continues to
play on the stock. The Alstom & Scheidner combine had previously made an open
offer at `295.3/share, which was subsequently withdrawn during 2QCY2010
pending the clearance from SEBI. Post the clearances received from SAT, the same
offer will now remain open between November 6-25, 2010. Management
continues to maintain cautious outlook given the pricing pressures, especially in the
T&D segment on account of increased competition from foreign JV’s and
relaxation of pre-qualification norms by PGCIL. At the CMP of `293, the stock
trades at 30x CY2011E EPS. We maintain our Sell recommendation on the stock.