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Areva T&D (AREV BO)
OW: Turning cautious on margin recovery
Areva reported weak Q2 earnings with muted outlook;
margin recovery remains subdued and seems distant
We lower our margin estimates by c130-170bp, driving an
EPS cut of c20%/15% for CY11/12e
We lower our TP to INR270 (before INR310) implying a
further de-rating of c15% over the next 12m; maintain OW
Areva T&D reported a weak set of Q2 CY11 earnings, missing consensus EPS estimate by
c16% in spite of in line performance on sales growth (c13%). EBITDA margins not only
declined y-o-y (c140bps) but also q-o-q (c60bp) to c7.8% in Q2. The order intake at INR9.6bn
remained weak and declined by c6% y-o-y, while order book of INR51.5bn largely remained
flat over the last quarter.
Margin recovery remains subdued: We view Areva T&D as a restructuring story, as in the
wake of abrupt margin erosion in CY09-10, the company has focused on several self-help
initiatives such as cost optimization, localization of design & production and exit from
underperforming distribution projects. We had expected margins to recover to c12-13% during
CY11-12e; however, such a recovery now seems difficult as the increasing downward
pressure on margins from the external factors (such as competition, pricing pressure, rising
input costs, interest rates etc) will most likely offset any benefit from cost optimization. In
fact, given weak performance in the first half this year, we believe EBITDA margin will most
likely fall another 50bps in CY11 compared to last year.
Outlook remains opaque, lower our CY11/12e EPS by c20%/15%: Mgmt maintained a
cautious tone on the business outlook and highlighted that order growth will at best be flat this
year, which is broadly in line with our expectations. However, commentary on pricing
remained significantly negative and it became apparent that margin recovery will not be as
swift as we had anticipated. Therefore at this stage, we keep our sales estimates unchanged but
we reduce our margin expectations for CY11e and CY12e by c170bps and c130bps thus
driving an EPS cut of c20% and c15%, respectively.
Lower our TP to INR270, maintain OW: Driven by our cautious view on margin recovery
and ‘sustainable’ margins, we have reduced our through cycle margin assumption in our EVA
valuation model to c10% from c11% earlier. This has driven a cut in our target price (TP) to
INR270 from INR310. On our new estimates, the stock is currently trading at c25.8x CY11e
PE and c20.8x CY12e PE compared to historical trading average of c35x (12m fwd PE for last
5 yrs). In our opinion, given the risks to margin recovery and a muted outlook in the near term,
the stock should de-rate further. Our TP implies that 12 months from now, the stock should
trade a 12m fwd PE of c21x on 24m fwd EPS of around INR13.0. Our TP implies a potential
return of 19.5%, hence we reiterate OW on the stock.
We lower our TP to INR270, maintain OW
We have taken a cautious view on margin recovery as the earnings are finding little support from
restructuring benefits and the competitive intensity will likely keep margins under pressure in the near
term for all the players in the sector, with Areva T&D being no exception. Hence we have reduced our
through cycle margin assumption in our preferred EVA valuation methodology to c10% from c11%
earlier, while we have kept our assumptions for target sales growth and WACC unchanged at c9.0% and
c12.1%, respectively. Consequently, we lower our target price to INR270 from INR310 earlier.
On our new estimates, the stock is currently trading at c25.8x CY11e PE and c20.8x CY12e PE compared
to historical trading average of c35x (12m fwd PE for last 5 yrs). In our opinion, given that the risks to
margin recovery have increased and the near term outlook for growth remains muted, the stock should derate further from the current levels. Our price target implies that 12 months from now, the stock should
trade a 12m fwd PE of c21x on 24m fwd EPS of around INR13.0.
Under HSBC’s research model, for stocks without a volatility indicator, the Neutral rating band is five
percentage points above and below the hurdle rate for India stocks of 11%. This translates into a Neutral
rating band of 6% to 16% above the current share price. Our 12-month target price of INR270 implies a
potential return of 19.5%, which is above the Neutral rating band; hence, we maintain our Overweight
rating on the stock.
Key investment risks
Increasing competition in the domestic T&D space
Adverse change in qualification requirements on future tenders
Weaker than expected improvement in the profitability
Poor valuation of the distribution business during de-merger
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Areva T&D (AREV BO)
OW: Turning cautious on margin recovery
Areva reported weak Q2 earnings with muted outlook;
margin recovery remains subdued and seems distant
We lower our margin estimates by c130-170bp, driving an
EPS cut of c20%/15% for CY11/12e
We lower our TP to INR270 (before INR310) implying a
further de-rating of c15% over the next 12m; maintain OW
Areva T&D reported a weak set of Q2 CY11 earnings, missing consensus EPS estimate by
c16% in spite of in line performance on sales growth (c13%). EBITDA margins not only
declined y-o-y (c140bps) but also q-o-q (c60bp) to c7.8% in Q2. The order intake at INR9.6bn
remained weak and declined by c6% y-o-y, while order book of INR51.5bn largely remained
flat over the last quarter.
Margin recovery remains subdued: We view Areva T&D as a restructuring story, as in the
wake of abrupt margin erosion in CY09-10, the company has focused on several self-help
initiatives such as cost optimization, localization of design & production and exit from
underperforming distribution projects. We had expected margins to recover to c12-13% during
CY11-12e; however, such a recovery now seems difficult as the increasing downward
pressure on margins from the external factors (such as competition, pricing pressure, rising
input costs, interest rates etc) will most likely offset any benefit from cost optimization. In
fact, given weak performance in the first half this year, we believe EBITDA margin will most
likely fall another 50bps in CY11 compared to last year.
Outlook remains opaque, lower our CY11/12e EPS by c20%/15%: Mgmt maintained a
cautious tone on the business outlook and highlighted that order growth will at best be flat this
year, which is broadly in line with our expectations. However, commentary on pricing
remained significantly negative and it became apparent that margin recovery will not be as
swift as we had anticipated. Therefore at this stage, we keep our sales estimates unchanged but
we reduce our margin expectations for CY11e and CY12e by c170bps and c130bps thus
driving an EPS cut of c20% and c15%, respectively.
Lower our TP to INR270, maintain OW: Driven by our cautious view on margin recovery
and ‘sustainable’ margins, we have reduced our through cycle margin assumption in our EVA
valuation model to c10% from c11% earlier. This has driven a cut in our target price (TP) to
INR270 from INR310. On our new estimates, the stock is currently trading at c25.8x CY11e
PE and c20.8x CY12e PE compared to historical trading average of c35x (12m fwd PE for last
5 yrs). In our opinion, given the risks to margin recovery and a muted outlook in the near term,
the stock should de-rate further. Our TP implies that 12 months from now, the stock should
trade a 12m fwd PE of c21x on 24m fwd EPS of around INR13.0. Our TP implies a potential
return of 19.5%, hence we reiterate OW on the stock.
We lower our TP to INR270, maintain OW
We have taken a cautious view on margin recovery as the earnings are finding little support from
restructuring benefits and the competitive intensity will likely keep margins under pressure in the near
term for all the players in the sector, with Areva T&D being no exception. Hence we have reduced our
through cycle margin assumption in our preferred EVA valuation methodology to c10% from c11%
earlier, while we have kept our assumptions for target sales growth and WACC unchanged at c9.0% and
c12.1%, respectively. Consequently, we lower our target price to INR270 from INR310 earlier.
On our new estimates, the stock is currently trading at c25.8x CY11e PE and c20.8x CY12e PE compared
to historical trading average of c35x (12m fwd PE for last 5 yrs). In our opinion, given that the risks to
margin recovery have increased and the near term outlook for growth remains muted, the stock should derate further from the current levels. Our price target implies that 12 months from now, the stock should
trade a 12m fwd PE of c21x on 24m fwd EPS of around INR13.0.
Under HSBC’s research model, for stocks without a volatility indicator, the Neutral rating band is five
percentage points above and below the hurdle rate for India stocks of 11%. This translates into a Neutral
rating band of 6% to 16% above the current share price. Our 12-month target price of INR270 implies a
potential return of 19.5%, which is above the Neutral rating band; hence, we maintain our Overweight
rating on the stock.
Key investment risks
Increasing competition in the domestic T&D space
Adverse change in qualification requirements on future tenders
Weaker than expected improvement in the profitability
Poor valuation of the distribution business during de-merger
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