Areva T&D India – 4QCY2010 Result Update -Angel Broking

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Areva T&D India – 4QCY2010 Result Update

Angel Broking maintains a Reduce on Areva T&D India with a Target Price of Rs. 243.

Areva T&D (Areva) reported better-than-expected results for 4QCY2010. Revenue

for the quarter increased by 14% yoy to `1,327cr and (est. `1,177cr) and PAT

grew by 29% yoy to `88cr (est. `75cr). Order inflow for the quarter was down by

9% yoy due to delays in customer ordering and price fall. Going forward, the

pricing scenario is expected to be grim on account of delayed ordering and

increasing competition. We maintain Reduce on the stock.

Strong volume driven growth: Despite the price erosion on orders accrued during

CY2009 and CY2010, Areva managed to register 14% yoy rise in revenue to

`1,327cr backed by strong volume growth. Areva also managed to retain its

leadership position for the third year, even with the fall in market size and prices.

EBITDA margin for the quarter also expanded by 142bp to 13.4% as fixed

manufacturing and production costs were spread over large volumes.

Expanded margin and higher sales volume enabled the company to post a

29% yoy increase in PAT.

Outlook and valuation: Post the acquisition of Areva’s global T&D business by

Alstom-Schneider Electric consortium, the two business segments viz., transmission

and distribution, are likely to be separated and operated independently by Alstom

Grid and Schneider Electric, respectively. The modalities of the split and the

associated valuations are yet to be finalised. Absence of large orders from central

utilities and pricing pressures has been adversely affecting the company’s revenue

and profitability growth. Management continues to maintain a cautious outlook

given the pricing pressures and expects the current scenario to last for the next

couple of quarters. At the CMP of `267, the stock trades at 27.5x CY2011E EPS.

We maintain Reduce on the stock with a target price of `243.

Volume growth and cost-control measures drive profits: Post the turnaround

during 3QCY2010, Areva has been able to maintain growth in its revenue and

profitability during the current quarter also. The company reported 14% yoy growth

in revenue, 28% yoy growth in EBITDA and 29% yoy growth in PAT during the

quarter. Better cost control and cost optimisation enabled the company to reduce

its overall manufacturing and production cost. The company’s EBITDA margin for

the quarter expanded by 142bp to 13.4% as fixed overheads were spread over

large volumes.

Order inflow continues to remain a concern

Order intake during the quarter declined by 8.7% yoy to `1,295cr. For the year

ended 2010, order inflow was down by 0.7% to `4,185cr. Order backlog at the

end of CY2010 stood at `4,877cr, up 2.2%. Management attributes the dip in

order inflow to delayed ordering from central and state utilities. Competition from

overseas suppliers, viz. Chinese and Korean suppliers, continues to be strong and

has been affecting price realisations of domestic suppliers. However, management

expects the T&D market to revive by 2HCY2011.

Exhibit 3: Major orders received during the quarter

Utility segment

Power Grid (Jetpur) 400 kV extension substation `21cr

MSETCL (Substation at Deogaon Rangari) `35cr

MSETCL (Substation Packages) `92cr

Industry / Infrastructure

Essar Group (eBOP & 400kV substation) `310cr

L&T (eBOP for Visa Power) `120cr

Aditya Birla (Smelter package for Mahan) `50cr

Enercon India (DTR Package for windmill sites) `34cr

GMR (400 kV switchyard at Kamalanga) `26cr

Lanco Infratech (Power distribution) `25cr

Source: Company, Angel Research

Management’s view on the T&D market

􀂄 Central utilities have been delaying their orders on account of non-availability

of land on time, resulting in lower number of 765kV projects being finalised in

2010. (Less than 50% as compared to the CY2009 levels.)

􀂄 Ordering from state utilities remained flat during 2010 as compared to 2009.

􀂄 Industry and infrastructure sectors are yet to show positive growth in capex.

􀂄 Korean and Chinese suppliers continue to quote very aggressive prices in

transformers.

􀂄 T&D market realisation was lower in CY2010 as compared to CY2009,

creating strong price pressure during the latter part of CY2010. Management

expects price correction in the early part of CY2011.

􀂄 Management expects the T&D market to revive during the second half of

CY2011.

Investment argument

Generation delays to impact T&D growth

Areva's fortunes are directly linked to 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 central and state sector utilities,

the major worry for the T&D sector is generation capacity addition delays. This is

likely to adversely affect growth prospects of 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.

Outlook and valuation

Post the acquisition of Areva’s global T&D business by Alstom-Schneider Electric

consortium, the two business segments, viz. transmission and distribution, are likely

to be separated and operated independently by Alstom Grid and Schneider

Electric, respectively. Modalities of the split and associated valuations are yet to be

finalised. Absence of large orders from central utilities and pricing pressures has

been adversely affecting the company’s revenue and profitability growth.

Management continues to maintain a cautious outlook given the pricing pressures

and expects the current scenario to last for the next couple of quarters. At the CMP

of `267, the stock trades at 27.5x CY2011E EPS. We maintain our Reduce rating

on the stock with a target price of `243.