Areva T&D India; Allcargo Global Logistics :: Kotak Securities (PDF link)

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http://www.kotaksecurities.com/pdf/dmb/MorningInsight21022012.pdf


AREVA T&D INDIA LTD
RECOMMENDATION: REDUCE
TARGET  PRICE:  RS.158
C12 P/E: 27.2X



ALLCARGO GLOBAL LOGISTICS
RECOMMENDATION: BUY
TARGET  PRICE:  RS.190
CY12E P/E: 7.4X

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

Reduce AREVA T&D INDIA : TARGET PRICE: RS.228 :: Kotak Sec

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AREVA T&D INDIA LTD
PRICE: RS.194 RECOMMENDATION: REDUCE
TARGET PRICE: RS.228 CY12E P/E: 25.7X
q The company has presented separate numbers for the continuing part of
the business (Transmission) and discontinuing operations (distribution).
q The T&D industry continues to witness low market growth but PGCIL
spending has remained healthy. A silver lining has been that decline in
product prices appears to be closer to bottoming out, which is a positive
signal for the margins.
q In the near-term, the T&D equipment industry would continue to face demand
and cost pressures. Hence we remain negative on the sector.
q We maintain Reduce on the stock with a target price of Rs 228 per share
(Rs 245 earlier).

Areva secures orders worth `400cr :Angel Broking,

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Areva secures orders worth `400cr
Areva T&D India (Areva) has won a contract from Rajasthan Rajya Vidyut Prasaran
Nigam Ltd. (RRVPNL). Valued at `400cr, the contract work includes turnkey
construction of 765kV substation including extra high voltage (EHV) transformers
and reactors. It also includes a long-term maintenance contract for the substation.
While this high-value order is an added positive; it does little to alter our view on
the company.
Delay in generation projects (on the back of deepening fuel crisis, environment
clearance, weak merchant realizations and poor health of SEBs, among others) is
likely to postpone the associated T&D spending both from PGCIL and the SEBs
(leading to lower order inflows). In addition, Chinese and Korean competition
continues to be unabated – suppliers continue to dump products in the Indian
market at cheap prices (price erosion of 20-25%). This is giving tough competition
to local players in India (read Areva, Crompton and ABB). Considering these
factors, the market leadership of the company and margin improvement thesis
(notably, on the declining trend) does not augur well.
The stock currently trades at rich valuations of 26.7x and 18.9x CY2011E and
CY2012E EPS, respectively. Given the negatives surmounting the T&D space, the
stock seems to be fairly valued and upside from the current level seems limited.
Hence, we continue to remain Neutral on the stock.

Areva T&D India – No respite in sight ::RBS

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ATD's medium-term business outlook does not look encouraging to us given a significant
increase in competition intensity, leading to lower new orders and lower price realisation on
existing and new orders. Earnings downgrades are prevalent, and we believe the risk to CY12-13
consensus forecasts is high. Sell.

Stiff competition in the Indian T&D equipment market
The fortunes of the Indian T&D equipment space (ABB, Areva, Crompton Greaves, Siemens, etc)
have been on the wane over the past three years; large domestic capacity expansion in
anticipation of significant demand coincided with an influx of Chinese and Korean players that
dumped 765 kV transformers/reactors at prices 20-25% lower than those of Indian
manufacturers, rendering them uncompetitive. Given a lack of policy support (import duty), Indian
T&D equipment players’ business fortunes will likely continue to suffer.
Analysis of PGCIL order awards presents a bleak picture
Our analysis of order awards from the Power Grid Corporation of India (PGCIL), presents a bleak
picture, with the industry’s total addressable market size being only Rs35bn-45bn pa and with 20
players vying for the small pie (Chinese/Koreans have 15% market share in FY11F versus 30% in
FY10). Industry margins have been under pressure and in our view will likely continue to be weak
given low probability of an increase in market size (at least in the medium term) and a medium to
high probability of the Chinese/Koreans continuing to sell their products aggressively within the
Indian market.
Areva’s order inflow has been weak for the past two years
Areva’s order inflows in CY09 and CY10 were 5% and negative 0.7%, respectively.
Notwithstanding weak macro and micro environments, we project 10% order inflow growth
(1HCY11 at 9%) for CY11-12, and 20% thereafter. Despite that, our CY11, CY12 and CY13
earnings forecasts are 5%, 27% and 39% lower than Bloomberg consensus, respectively. An
order inflow miss would likely lead to consensus earnings downgrades, which has been a
recurring phenomenon for the past few years.
We initiate with a Sell, target price Rs190
Our DCF-based target price is Rs190, implying a target PE multiple of 20.5x CY12F earnings and
10.4x EV/EBITDA. Risk-reward looks unfavourable. Sell.

ATD: Upside to margin unlikely to materialize  HSBC Research,

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ATD: Upside to margin

unlikely to materialize

 With a weak order book and significant pricing pressure from
competition, the anticipated margin recovery is likely to be muted
 We lower our CY11-12 EPS estimates by 8-14%, c15-18% behind
consensus; this brings down our TP to INR235 from INR270
 We expect the stock to remain range bound unless there is more
clarity on the demerger; downgrade to Neutral from OW


Investment thesis
Areva T&D is largely a domestic T&D play. But
given its weak order intake last year (-c1%) and
anticipated weakness in domestic transmission
orders this year, we believe revenue growth will
likely remain muted this year at c4% and improve
modestly to c12% the year after.
More importantly, we are now turning increasingly
cautious on the anticipated margin recovery at
Areva T&D given that both Siemens and Crompton
have reported significant margin erosion in face of
competition. In such an environment, we believe it
will be difficult for Areva to report any substantial
improvement in margins. We also note Areva
reported a margin decline of c60bp q-o-q and
c140bp y-o-y in 2Q of CY11.
Consequently, we have reduced our margin
expectations, with our forecast of the EBITDA
margin cut from c12.2% to c10.4% for CY11 and
from c12.5% to c11.0% for CY12. As a result, we
have lowered our EPS estimates by c14% for
CY11 and c8% for CY12. This places our EPS
estimates c15-18% below consensus, with
disappointment on margins potentially acting as
the driver of downgrades. On the flip side, betterthan-
expected profitability in the coming quarters
remains a key upside risk to our estimates.
Based on our new estimates, the stock is currently
trading at 29.0x CY11e PE and c21.9x CY12e PE
compared to its historical average 12m forward
PE of c33x for the last 5 years. We think this
discount to the historical average is justified as:
market conditions have deteriorated significantly
and the possibility of the parent company further
increasing its stake has diminished considerably.
Given our earnings downgrade, we have reduced
our target price for Areva T&D to INR235 from
INR270 earlier. Our target price is derived from
our preferred EVA valuation methodology and
implies that 12 months from now the stock should
be trading at a 12-month forward PE multiple of
c19.7x on 24-month forward EPS of INR11.9.


We note that the demerger of the transmission and
distribution business at Areva will take place over
the next 6 months and until more clarity emerges
on this process and the valuation, the stock will
most likely remain range-bound. Hence, we
downgrade the stock to Neutral from OW.
We highlight the key bull and bear factors below.
Bull factors
 Key beneficiary of domestic transmission
growth as the company has strong presence
on the power grid
 Margins should be supported by increasing
localization and the company’s restructuring
 The announced demerger of the distribution
business is likely to lead to de-leveraging of
the balance sheet
 The company is likely to benefit from
Alstom’s transmission equipment sourcing
requirement
Bear factors
 Low exposure to other EPC growth areas,
either domestically or internationally
 Increasing competition in the 765kV
substation space could impair margin recovery
 Valuation not attractive


Little clarity on the demerger process or the
proceeds it will generate
Valuation
Our target price of INR235 is derived from our
preferred EVA valuation methodology, assuming
a target sales growth of c9%, through-cycle
operating return margin of c9.5% and WACC of
c12.1%. Our target price implies that 12 months
from now, the stock should be trading at a 12-
month forward PE of c19.7x on 24-month forward
EPS of INR11.9.
Under HSBC’s research model, for stocks without
a volatility indicator, the Neutral rating band is
5ppt above and below the hurdle rate for India
stocks of 11%. This translates into a Neutral
rating band of 6% to 16% around the current share
price. Our 12-month target price of INR235
suggests a potential return of c7% (excluding
dividends), which is within the Neutral rating
band; hence, we downgrade our rating on the
stock to Neutral from OW.
Risks
We highlight the key risks related to our
investment case on ATD below:
Upside risks
 Significant pick-up in execution
 Better-than-expected improvement in margins
 Early conclusion of the ongoing demerger
Downside risks
 Delay/cancellation of domestic transmission
projects
 Excessive pricing pressure

for industry detail and other company:

Indian Capital Goods - EPC space offers better value picks ::HSBC Research

Areva secures orders worth `40cr ::Angel Broking,

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Areva secures orders worth `40cr
Areva T&D (Areva) has won a contract from Reliance Power for turnkey design and
construction of 220kV substation. The order valued at `40cr is for the proposed 350MW
Doorsar Solar Power Plant in Rajasthan. This plant is India’s largest solar power project.
The turnkey contract involves design and construction of the substation, including
transformers, control, protection, monitoring systems and civil works of the plant. This
order falls in the base-order category, and we expect the company to witness base/low
value orders as a bigger portion of order inflows for the current quarter. This will
categorically lead to a dip in order backlog growth, thereby raising concerns on future
visibility. In addition, we believe the near-term outlook will be challenging – ordering
activity in the T&D space is likely to be muted given the overall malaise in the T&D space.
The stock currently trades at rich valuations of 27.9x and 19.7x CY2011E and CY2012E
EPS, respectively. Given fewer triggers, the stock seems to be fairly valued and upside from
the current level seems limited. Hence, we continue to remain Neutral on the stock.

Areva T&D India secures orders worth `220cr ::Angel Broking,

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Areva T&D India secures orders worth `220cr
Areva T&D India has won a contract for constructing two 765kV sub-stations valued at
`220cr from Bhopal Dhule Transmission Co. Ltd. (subsidiary of Sterlite Technologies Ltd.).
This will refill the order book up to some extent; however, concerns loom as order inflows
have been dismal in the T&D segment. Similar to the previous quarter, we believe that the
company is likely to witness base/low value orders as a bigger portion of order inflows for
the current quarter. This will categorically lead to a dip in order backlog growth, thereby
raising concerns on future visibility. In addition, we also believe the near-term outlook will
be challenging – ordering activity in the T&D space is likely to be muted given the overall
malaise in the T&D space. The stock currently trades at rich valuations of 27.4x and 19.3x
CY2011E and CY2012E EPS, respectively. Given fewer triggers, the stock seems to be
fairly valued and upside from the current level seems limited. Hence, we continue to
remain Neutral on the stock.

Areva T&D : Turning cautious on margin recovery ::HSBC Research,

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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

Credit Suisse,::Areva T&D - 1Q below estimates; overall T&D competitive environment remains challenging

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Areva T&D India Ltd----------------------------------------------------- Maintain UNDERPERFORM
1Q below estimates; overall T&D competitive environment remains challenging


● Areva T&D reported weak March quarter results with PAT ~51%
below estimates. We were expecting EBITDA margins to range in
early teens this year, given the cost actions by Areva T&D in the
past, expected improvement in utilisation rates and no ramp up in
costs; however, EBITDA margin of 8.4% was impacted by an
unusual increase in other expenses.
● Order inflow in 4Q of ~Rs13 bn was up 29% YoY but largely in
line with estimates. Order book at ~Rs52 bn grew only 4% YoY
and is indicative of revenue performance over the next few
quarters. Management’s commentary also suggests that market
environment in 4Q was challenging due to pricing decline and low
market growth (due to postponement in power, industrial and infra
ordering activities).
● We believe that given the tough operating environment it could be
difficult for Areva T&D to grow order inflows in FY11 and this
could impact the street’s earnings estimates. We note that Areva
T&D has also announced the demerger of its distribution business
as that has been globally sold to Schneider. We maintain our
UNDERPERFORM rating

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.

AREVA T&D - reduce: Moderate revenue growth on the back of sluggish T&D spending; Kotak Sec

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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.

Angel Broking, Result Review -Areva T&D India

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Result Review
Areva T&D India
Areva T&D India announced its 4QCY2010 results, which were ahead of our estimates.
The company posted top-line growth of 14.4% yoy to `1,327cr, above our expectation of
`1,177cr. On the operating front, the company reported margin expansion of around
142bp to 13.4% (12%) for 4QCY2010. Strong top-line growth coupled with increased
margins led to PAT growth of 29.4% yoy to `29.4cr for 4QCY2010. The stock is currently
under review. We will revise our estimates post the conference call with the management.

Result Preview - Areva T&D India :: Angel Broking,

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Result Preview

Areva T&D India

Areva T&D India is scheduled to announce its 4QCY2010 results. The top line is expected to

post muted growth of 1.5% yoy to `1,177cr. On the operating front, we expect margins to

expand by around 66bp yoy to 12.7%. Net profit is expected to increase by 10.7% yoy to

`75cr. Currently, we maintain Sell on the stock with a Target Price of `260 and will revisit

our estimates post the conference call.

Areva T&D India- Profitability improving, but recovery still distant; retain Sell : Anand Rathi

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Areva T&D India
Profitability improving, but recovery still distant; retain Sell
We expect Areva to see a muted CY10, given recovery to CY05-08
growth & profitability levels still distant, even though early signs
of revival are visible. We maintain Sell on weak sector outlook,
expectation of recovery deferred to 2HCY11 and rich valuation.

Areva T&D India– 3QCY2010 Result Update- Angel Broking

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Areva T&D India– 3QCY2010 Result Update

Angel Broking maintains a Sell on Areva T&D India  with a Target Price of Rs247.

Areva T&D (Areva) 3QCY2010 results were significantly ahead of our estimates.
Revenues registered 40% yoy growth to `1,048cr, while PAT surged by over 181%
yoy to `63cr. We had estimated sales and PAT at `864cr and `32cr, respectively.
Going forward, the pricing scenario continues to be grim on account of increased
competition and relaxation of pre-qualification norms by PGCIL. We maintain
our Sell recommendation on the stock.

Areva T&D- Better margins and volume-led growth, Sell: Anand Rathi

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Areva T&D
Better margins and volume-led growth, maintain Sell
 Improved profitability. Volumes supported by increased
capacity, robust orderbook and the higher share of products
business improved profitability in 3QCY10. However, we
maintain Sell on weaker outlook for the T&D sector due to
continued pricing pressure and keen competition.

Areva T&D:Positive surprise, but unlikely to sustain: JM Financial

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Positive surprise, but unlikely to sustain
�� Profits beat estimate by>100%; sales up 42%: Areva T&D India (ATD)
reported profits at `632mn, >2x street estimate and JMFe on robust volume
growth as sales grew 41.6% YoY to `10.5bn (JMFe `8.5bn). Fixed operating
expenses spread over higher volumes and discontinuation of provisioning for
certain turnkey projects helped Areva achieve strong operational profitability.
Lower interest costs (`144mn vs JMFe of `160mn) negated higher than
expected depreciation, thereby aiding net profits.