Stock Market Result Update on Areva T&D India for 2QCY2011 with a Neutral recommendation.
Areva T&D India (Areva) reported a weak performance for 2QCY2011. The top line grew by 12.8% yoy to `999cr (est. `1,009cr), but EBITDA margin declined by 158bp yoy to 7.8% (est. 9%). Consequently, PAT declined by 18.5% yoy to `26cr (est. `33cr). The company’s profitability is strained mainly due to continuous pricing pressure in the T&D segment, which is expected to persist on account of increasing competition. We continue to remain Neutral on the stock.
Modest growth; margin dented: The company’s revenue grew by 12.8% yoy to `999cr (`885cr), driven by higher sales volume during the quarter. Material cost as a proportion of sales remained nearly flat on a yoy basis at 67.6%; however, higher other expenses during the current quarter (15.7% vs. 13.8% in 2QCY2010) led to a 158bp yoy decline in the EBITDA margin to 7.8%. Consequently, EBITDA declined by 4% yoy to `78cr. Interest expense rose by 33.1% yoy to `16cr (`12cr). The combination of weak operating results and higher interest expenses dragged the bottom line down by 18.5% yoy to `26cr (`32cr).
Outlook and valuation: Tough operating environment has caused dismay for T&D equipment players. Order book growth has been affected by heightened competition in the T&D space. This is likely to result in moderate growth in CY2011, despite some short-cycle orders (lower execution period) adding to the order book shelf. Further, near-term outlook seems challenging – ordering activity in the T&D space is likely to be muted given the overall malaise in the T&D space. We remain cautious on the above concerns and believe the stock would trade sideways until the T&D segment posts a meaningful recovery. At the CMP, the stock trades at 28.2x CY2011E EPS and 20.1x CY2012E EPS. We believe the stock is fairly valued and, given fewer triggers, upside from the current level seems limited. Hence, we continue to remain Neutral on the stock.
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