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India Equity Research Reports, IPO and Stock News
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AREVA T&D INDIA LTD
RECOMMENDATION: REDUCE
TARGET PRICE: RS.275
CY11E P/E: 29.6X
Numbers are largely in line with expectations though there is variance on
the revenue and profitability front. The management has highlighted
sluggish ordering, land issues and intense competition slowing down
revenue growth.
Order accretion continues to remain sluggish on delayed ordering from the
utilities and industry sector. CY10 order intake was flat.
Valuations are rich at 29.6x CY11E earnings. We arrive at target price of
Rs.275 (Rs.320 earlier), thus valuing the company at 30x CY11 earnings in
line with the trading multiples for Siemens and ABB. We maintain REDUCE
on the company.
Moderate revenue growth on the back of sluggish T&D spending
n Revenues for the quarter have grown 14% yoy in Q4 CY10, which is lower than
our expectations.
n Market for T&D equipment has been sedate in the face of intense price competition
among players. This has been the phenomenon for the past 1.5-2 years.
The sedate growth in T&D spending has delayed absorption of over-capacity in
the system leading to delay in recovery in industry profitability.
n The industry has also been highlighting instances of delays in customers taking
deliveries of equipments. This is resulting in overall slowdown in order execution
cycle.
Margins improved on higher throughput
n For the quarter, EBITDA margins expanded to 13.4% compared to 12.0% in Q4
CY09 due to better product mix and higher throughput. Other expenditure for
the quarter was at a much higher level.
n However, we note that industry-wide margins continue to be under pressure as
reflected by quarterly results of ABB, Voltamp and Emco.
n The management highlighted that price erosion has persisted in CY10 as well.
This comes despite commodity prices of copper and aluminum being higher in
CY10.
n The management highlighted that pricing has been so intense that in few 765
KV orders, the price bid of Korean/Chinese companies is even lower than the
raw material costs of the Indian manufacturer.
n Moreover, the price competition is not limited to a particular segment but is
spreading to other product segments as well.
n While commodity prices are ruling at higher levels, Areva has price-variation
clause for a majority of its orders and hence cost pressures can be managed.
However, the management is more concerned of the competitive scenario.
Order intake in Q4 lower due to absence of big-ticket orders
n Order intake for the quarter stood at Rs 12.9 bn down 9% yoy but up 51% sequentially.
For CY10, order intake was flat on sluggish ordering from PGCIL and
Industry sector as well as competition gaining market share.
n This can be judged by the number of 765 KV projects ordered in CY10, which
was less than 50% of those in CY09. Similarly, state utilities have also gone slow
on ordering for equipments.
n Order backlog stood at Rs 48.7 bn up 2% yoy, providing revenue visibility of 15
months.
n Ordering from Central Utilities has been delayed due to non-availability of land
on time.
n While the government utilities have slowed down their ordering, Private sector is
yet to show positive growth in Capex.
n Several 765 KV orders have gone to Koreans & Chinese suppliers who continue
to quote very aggressive prices in transformers.
n The PGCIL has also modified its ordering system, which has pushed finalization
of orders. As a result, several projects tendered in November 2010 have not
been awarded so far.
n Modifying bidding criteria, the PGCIL has now excluded circuit-breakers from the
Sub-station package. This has significantly reduced the entry barrier for non-T&D
players. As a result, competition is likely to increase from EPC players like Jyoti
Structures, KEC, Kalpataru Power, L&T etc.
n Thus the current and emerging scenario is not very encouraging for the T&D
equipment manufacturers.
Maintain Reduce
Valuations are rich at 29.6x CY11E earnings. We value the company at 30x CY11
earnings in line with the trading multiples for Siemens and ABB. We maintain REDUCE
on the company.
Following the global acquisition of Areva T&D by consortium of Schneider and
Alstom AG, the new acquirers came out with the mandatory open offer for 20%
stake for minority shareholders. On completion of the open offer, the promoter stake
in the company stands at 73.4%. With a view to further raise its share in the company,
the new management may come up with another open offer. This possibility
is likely to keep the stock price resilient despite deteriorating profitability and rich
valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
AREVA T&D INDIA LTD
RECOMMENDATION: REDUCE
TARGET PRICE: RS.275
CY11E P/E: 29.6X
Numbers are largely in line with expectations though there is variance on
the revenue and profitability front. The management has highlighted
sluggish ordering, land issues and intense competition slowing down
revenue growth.
Order accretion continues to remain sluggish on delayed ordering from the
utilities and industry sector. CY10 order intake was flat.
Valuations are rich at 29.6x CY11E earnings. We arrive at target price of
Rs.275 (Rs.320 earlier), thus valuing the company at 30x CY11 earnings in
line with the trading multiples for Siemens and ABB. We maintain REDUCE
on the company.
Moderate revenue growth on the back of sluggish T&D spending
n Revenues for the quarter have grown 14% yoy in Q4 CY10, which is lower than
our expectations.
n Market for T&D equipment has been sedate in the face of intense price competition
among players. This has been the phenomenon for the past 1.5-2 years.
The sedate growth in T&D spending has delayed absorption of over-capacity in
the system leading to delay in recovery in industry profitability.
n The industry has also been highlighting instances of delays in customers taking
deliveries of equipments. This is resulting in overall slowdown in order execution
cycle.
Margins improved on higher throughput
n For the quarter, EBITDA margins expanded to 13.4% compared to 12.0% in Q4
CY09 due to better product mix and higher throughput. Other expenditure for
the quarter was at a much higher level.
n However, we note that industry-wide margins continue to be under pressure as
reflected by quarterly results of ABB, Voltamp and Emco.
n The management highlighted that price erosion has persisted in CY10 as well.
This comes despite commodity prices of copper and aluminum being higher in
CY10.
n The management highlighted that pricing has been so intense that in few 765
KV orders, the price bid of Korean/Chinese companies is even lower than the
raw material costs of the Indian manufacturer.
n Moreover, the price competition is not limited to a particular segment but is
spreading to other product segments as well.
n While commodity prices are ruling at higher levels, Areva has price-variation
clause for a majority of its orders and hence cost pressures can be managed.
However, the management is more concerned of the competitive scenario.
Order intake in Q4 lower due to absence of big-ticket orders
n Order intake for the quarter stood at Rs 12.9 bn down 9% yoy but up 51% sequentially.
For CY10, order intake was flat on sluggish ordering from PGCIL and
Industry sector as well as competition gaining market share.
n This can be judged by the number of 765 KV projects ordered in CY10, which
was less than 50% of those in CY09. Similarly, state utilities have also gone slow
on ordering for equipments.
n Order backlog stood at Rs 48.7 bn up 2% yoy, providing revenue visibility of 15
months.
n Ordering from Central Utilities has been delayed due to non-availability of land
on time.
n While the government utilities have slowed down their ordering, Private sector is
yet to show positive growth in Capex.
n Several 765 KV orders have gone to Koreans & Chinese suppliers who continue
to quote very aggressive prices in transformers.
n The PGCIL has also modified its ordering system, which has pushed finalization
of orders. As a result, several projects tendered in November 2010 have not
been awarded so far.
n Modifying bidding criteria, the PGCIL has now excluded circuit-breakers from the
Sub-station package. This has significantly reduced the entry barrier for non-T&D
players. As a result, competition is likely to increase from EPC players like Jyoti
Structures, KEC, Kalpataru Power, L&T etc.
n Thus the current and emerging scenario is not very encouraging for the T&D
equipment manufacturers.
Maintain Reduce
Valuations are rich at 29.6x CY11E earnings. We value the company at 30x CY11
earnings in line with the trading multiples for Siemens and ABB. We maintain REDUCE
on the company.
Following the global acquisition of Areva T&D by consortium of Schneider and
Alstom AG, the new acquirers came out with the mandatory open offer for 20%
stake for minority shareholders. On completion of the open offer, the promoter stake
in the company stands at 73.4%. With a view to further raise its share in the company,
the new management may come up with another open offer. This possibility
is likely to keep the stock price resilient despite deteriorating profitability and rich
valuations.
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