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Alstom T&D India (ATD IN)
Upgrade to OW(V): Better outlook, cheaper valuation
Unlike peers, Alstom’s order book strengthens; improving
execution & positive commentary alleviates concerns
Stable execution likely to drive margin stability; reducing
debt should accelerate EPS growth to c20-25%
Recent weakness (down c30% in 3mths) offers good entry
point; upgrade rating to OW(V) from UW(V); increase TP to
INR190 from INR180
Order book strengthens, improving execution alleviates concerns: Alstom T&D reported a
strong set of Q4 FY12 (Mar YE) earnings driven largely by improvement in delivery pick-ups
and hence stronger execution. On top of it, the order inflow also saw significant improvement
and almost doubled q-o-q in spite of very weak industrial and power generation activity in Q4.
This strong performance is quite contrary to that reported by Alstom T&D’s peers such as
ABB and Siemens, and underlines the benefit of company’s relatively better end market mix
(i.e. higher gearing to structurally improving transmission capex) at this stage of the cycle.
Hence, while Alstom’s peers have seen their order book erode, Alstom’s order book has
increased to a record level of INR46.8bn and provides more visibility (c1.5x FY12 sales) than
its peers. This strong backlog is likely to drive a double digit sales growth in FY13-14 even if
execution rate remains similar and inflows grow only c10-12% in FY13-14.
Execution drives margin improvement as we’d hoped: A key reason behind Alstom’s
weak performance in Q3 FY12 was project & delivery pick-up delays, which not only
reduced sales but also margins. Thankfully, we saw both improving in the fourth quarter,
and management noted that customers were quite supportive in delivery pick-ups and
even pricing seems to have bottomed in the recent bids. While we still see downside risk
to the latter, we believe improvement in the former is a clear positive. We believe that a
stable execution rate and the operational excellence program can help the company offset
pricing pressure on new orders if it worsens. Hence, we expect margins to at least remain
stable from here on, if not expand significantly. We currently forecast a marginal 30bps
improvement during FY13-14. In addition, the P&L should benefit from reducing finance
cost as net debt unwinds, thus accelerating EPS growth to c20-25%
Recent weakness offers good entry point, upgrade to OW(V) from UW(V): We have
only modestly increased our FY13e EPS to INR7.1 (c5%) and TP to INR190 (c6%).
However, the stock is down c30% in last three months, underperforming the sector by
c12%. The stock now trades at c19.9x FY13 PE compared to its peers’ average of c37.5x
and in our opinion provides a good entry point, particularly as the outlook is improving.
We believe that a healthier order book, better end market mix and unwinding debt will
help Alstom outperform its peers in the medium term; hence we upgrade the stock to
OW(V) from UW(V). Our TP is derived from our preferred EVA valuation methodology
and implies a 12m forward target multiple of c22.3x PE on FY14e EPS of INR8.5.
Key takeaways from the earnings call
Q4 Performance
Almost zero activity in the Power Gen and Industrials segment during Q4 FY12 (Mar YE);
transmission markets continue to do well
Highest ever proportion of 765kV orders in the quarterly order inflow; expect future orders to be
increasingly skewed towards extra high voltage (765kV AC and 800kV DC)
Improvement in delivery pick-ups by customers drove execution; collections also improved in the
quarter driving working capital improvement
Pricing seems to have bottomed but limited visibility on any sort of correction; the impact of
increasing competition from Chinese is yet to be seen
Exports were limited as opportunities remain scarce
Outlook
Power Grid capex is likely to drive sector orders; expect ordering activity to be more linear in the 12th
plan compared to the backend loaded nature of ordering in previous plans
Several SEBs scaling up the substation voltage levels to 200/400kV and some to even 765kV, which
is expected to drive demand for Alstom’s products
Power Grid is likely to work along with SEBs (through JVs or MoUs) to strengthen sub-transmission
network (i.e. link between Power Grid and DisComs) which will drive state orders in future
Alstom is currently L1 on Champa Kurukshetra 800kV HVDC link, which was bid by Power Grid
and being funded by ADB. The final decision is likely to come by Jun-July. The order will be shared
with the parent but no details were given
Have opened the bid for sale of a couple of land parcels, which may complete over the next quarter;
didn’t provide the potential sale proceeds
Others
Order book split remains 50:50 in terms of systems vs. products orders; Power Grid now contributing
more than 20% of the order inflows
The order book remains well diversified and top 10 customers contribute only c40% while top 20
customers contribute c80%
Capex target for FY13 is around INR600-700m, but this may go up in case order inflows are strong
Trying to realign production to account for potential delays in customers’ project. This is likely to
help in optimizing inventories and prioritize/stabilize execution
There was a general understanding between Schneider and Alstom at the time of Areva’s execution
that Schneider would focus on sub-66kV market while Alstom would focus on 66kV and above;
however there was no non-compete agreement between the two firms
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Alstom T&D India (ATD IN)
Upgrade to OW(V): Better outlook, cheaper valuation
Unlike peers, Alstom’s order book strengthens; improving
execution & positive commentary alleviates concerns
Stable execution likely to drive margin stability; reducing
debt should accelerate EPS growth to c20-25%
Recent weakness (down c30% in 3mths) offers good entry
point; upgrade rating to OW(V) from UW(V); increase TP to
INR190 from INR180
Order book strengthens, improving execution alleviates concerns: Alstom T&D reported a
strong set of Q4 FY12 (Mar YE) earnings driven largely by improvement in delivery pick-ups
and hence stronger execution. On top of it, the order inflow also saw significant improvement
and almost doubled q-o-q in spite of very weak industrial and power generation activity in Q4.
This strong performance is quite contrary to that reported by Alstom T&D’s peers such as
ABB and Siemens, and underlines the benefit of company’s relatively better end market mix
(i.e. higher gearing to structurally improving transmission capex) at this stage of the cycle.
Hence, while Alstom’s peers have seen their order book erode, Alstom’s order book has
increased to a record level of INR46.8bn and provides more visibility (c1.5x FY12 sales) than
its peers. This strong backlog is likely to drive a double digit sales growth in FY13-14 even if
execution rate remains similar and inflows grow only c10-12% in FY13-14.
Execution drives margin improvement as we’d hoped: A key reason behind Alstom’s
weak performance in Q3 FY12 was project & delivery pick-up delays, which not only
reduced sales but also margins. Thankfully, we saw both improving in the fourth quarter,
and management noted that customers were quite supportive in delivery pick-ups and
even pricing seems to have bottomed in the recent bids. While we still see downside risk
to the latter, we believe improvement in the former is a clear positive. We believe that a
stable execution rate and the operational excellence program can help the company offset
pricing pressure on new orders if it worsens. Hence, we expect margins to at least remain
stable from here on, if not expand significantly. We currently forecast a marginal 30bps
improvement during FY13-14. In addition, the P&L should benefit from reducing finance
cost as net debt unwinds, thus accelerating EPS growth to c20-25%
Recent weakness offers good entry point, upgrade to OW(V) from UW(V): We have
only modestly increased our FY13e EPS to INR7.1 (c5%) and TP to INR190 (c6%).
However, the stock is down c30% in last three months, underperforming the sector by
c12%. The stock now trades at c19.9x FY13 PE compared to its peers’ average of c37.5x
and in our opinion provides a good entry point, particularly as the outlook is improving.
We believe that a healthier order book, better end market mix and unwinding debt will
help Alstom outperform its peers in the medium term; hence we upgrade the stock to
OW(V) from UW(V). Our TP is derived from our preferred EVA valuation methodology
and implies a 12m forward target multiple of c22.3x PE on FY14e EPS of INR8.5.
Key takeaways from the earnings call
Q4 Performance
Almost zero activity in the Power Gen and Industrials segment during Q4 FY12 (Mar YE);
transmission markets continue to do well
Highest ever proportion of 765kV orders in the quarterly order inflow; expect future orders to be
increasingly skewed towards extra high voltage (765kV AC and 800kV DC)
Improvement in delivery pick-ups by customers drove execution; collections also improved in the
quarter driving working capital improvement
Pricing seems to have bottomed but limited visibility on any sort of correction; the impact of
increasing competition from Chinese is yet to be seen
Exports were limited as opportunities remain scarce
Outlook
Power Grid capex is likely to drive sector orders; expect ordering activity to be more linear in the 12th
plan compared to the backend loaded nature of ordering in previous plans
Several SEBs scaling up the substation voltage levels to 200/400kV and some to even 765kV, which
is expected to drive demand for Alstom’s products
Power Grid is likely to work along with SEBs (through JVs or MoUs) to strengthen sub-transmission
network (i.e. link between Power Grid and DisComs) which will drive state orders in future
Alstom is currently L1 on Champa Kurukshetra 800kV HVDC link, which was bid by Power Grid
and being funded by ADB. The final decision is likely to come by Jun-July. The order will be shared
with the parent but no details were given
Have opened the bid for sale of a couple of land parcels, which may complete over the next quarter;
didn’t provide the potential sale proceeds
Others
Order book split remains 50:50 in terms of systems vs. products orders; Power Grid now contributing
more than 20% of the order inflows
The order book remains well diversified and top 10 customers contribute only c40% while top 20
customers contribute c80%
Capex target for FY13 is around INR600-700m, but this may go up in case order inflows are strong
Trying to realign production to account for potential delays in customers’ project. This is likely to
help in optimizing inventories and prioritize/stabilize execution
There was a general understanding between Schneider and Alstom at the time of Areva’s execution
that Schneider would focus on sub-66kV market while Alstom would focus on 66kV and above;
however there was no non-compete agreement between the two firms
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