Areva T&D (ATD IN) N: Management commentary turning positive HSBC Research,

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Areva T&D (ATD IN)
N: Management commentary turning positive
 Increasing activity from Power customers, railways likely to
improve; competition becoming healthy, prices stabilising
 Proposed demerger imminent; likely to bring in cross selling
& cost synergies; impending asset sale may neutralise debt
 Valuation appears full; need visibility on margin improvement;
maintain N and TP of INR220
We recently met with Mr Abhishek Mani, Investor Relations head, at Areva T&D. Below,
we highlight some of the key takeaways from the meeting.
Business outlook improving: After years of bearishness, Areva’s tone on business
outlook is now turning positive. The company noted that the order pipeline remains strong
with increased activity from SEBs (through PPP model), Power Grid (new Chairman has
strong focus on execution) and national utilities (c15% of total generation capex is T&D
related). In addition, management noted that competition is finally returning to healthy
levels and pricing seems to have stabilised. Other than the Power sector, demand for T&D
equipment is also likely to improve from the Railways sector, with a lot of orders in the
pipeline for Metro projects as well as dedicated freight corridors. Areva estimates the
current railway T&D market to be around a mere INR5bn but believes it is likely to grow
sharply over the next couple of years.
Proposed demerger imminent, likely to drive growth & margin improvement: The
demerger of the Transmission and the Distribution divisions is likely to become effective over
the next four to six weeks, after which, both these businesses will be separately listed on the
exchange. Transmission is likely to benefit from Alstom’s global sourcing initiative
(cUSD2bn requirement per annum), which should drive both growth & margin improvements
of c200-300bp. Distribution, on the other hand, will focus on cross selling and cost synergies
with Schneider to improve margins from mid-single digit to low double digits. This may also
entail restructuring the business. In addition to these synergies, the businesses are likely to
benefit from the impending asset sale (as part of the restructuring at Areva T&D), which
should draw proceeds of cINR5bn, making these companies largely debt neutral.
Valuation appears full, maintain Neutral with a positive bias: Given the difficult
business environment, we would like to obtain more visibility on order pipeline and see
some sustainable improvement in margins before we start factoring in a brighter outlook
in our numbers. We keep our estimates unchanged and at c20.4x CY12e PE, as we find
the valuation relatively rich. However, we think there remains upside potential to earnings
as well as trading multiples if the company is able to deliver earnings improvement on the
back of synergies and restructuring post demerger. Hence, we maintain our Neutral rating
on the stock and target price of INR220. Our TP is derived from our preferred EVA
valuation methodology and implies a 12-month forward target multiple of c17x on 24-
month forward estimated EPS of INR12.9.