Areva T&D:Positive surprise, but unlikely to sustain: JM Financial

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Positive surprise, but unlikely to sustain
�� Profits beat estimate by>100%; sales up 42%: Areva T&D India (ATD)
reported profits at `632mn, >2x street estimate and JMFe on robust volume
growth as sales grew 41.6% YoY to `10.5bn (JMFe `8.5bn). Fixed operating
expenses spread over higher volumes and discontinuation of provisioning for
certain turnkey projects helped Areva achieve strong operational profitability.
Lower interest costs (`144mn vs JMFe of `160mn) negated higher than
expected depreciation, thereby aiding net profits.


�� >200bps savings in RM/sales and staff costs boost margins: ATD reported
410bps YoY expansion in margin at 12.7% in 3QCY10 as c.210bps decline in
RM/sales and staff costs (% of sales) boosted EBITDA. Lower other expenses
(% of sales) and `100mn MTM forex gain on derivatives contracts positively
impacted EBITDA, which more than doubled at `1.3bn.
�� Order backlog up 8.3% at `49.2bn: ATD’s OB grew 8.3% YoY to `49.2bn with
power sector orders from PGCIL (>`1.4bn) and State Transcos like MSETCL
(`920mn) and WBSETCL (`570mn). Industrial/infra orders came from India
Bulls (generating transformers worth `1.5bn), Bajaj Infrastructure (e-BoP order
`630mn) and JSPL (MV panel worth `300mn).
�� Revise estimates upwards by 11-45%: We maintain sales estimate but raise
EPS estimate by 11.3% for FY12E and 44.7% for FY11E to account for better
3QCY10 profitability. Ordering activity from PGCIL will likely go up
considering it has done just `28.5bn in 1H11 vs `150bn planned. We also
introduce CY12E EPS of `12.4 (+29.8% YoY) with 17.7% sales growth.
�� Maintain SELL with revised TP of `250: With 16% earnings CAGR expected
over CY09-12E, we reduce 1-yr forward exit multiple to 20x (25x). We rollforward
to Dec’11 and revise TP to `250 (from `220 for Dec’10). Maintain
SELL on 15% downside on TP and un-sustainability of high growth and
margins in the ensuing quarters, as pricing pressures are likely to be
maintained. Powergrid’s Krishnapatnam HCTC Corridor-VI substation tender
relaxed PQ norms vs expectation of stringent conditions, allowing higher
competition. No. of bidders is likely to expand as they can now procure
substation equipment locally/internationally.