Stock Market Result Update on Areva T&D India for 2QCY2011

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.

Result Update on Areva T&D India for 1QCY2011

Areva T&D (Areva) posted good set of results for 1QCY2011 aided mainly by lower base. The top line and bottom line grew strongly, but EBITDA margin was lower than our estimates. Revenue increased by 28.1% yoy to `995cr (`777cr), while PAT grew by nearly eight-fold to `29cr (`3cr). Order inflow increased by 23.1% to `1,253cr. Going forward, the pricing pressure in the T&D segment is expected to continue due to increasing competition, which weighs heavily on the stock. Hence, we continue to remain Neutral on the stock.

Strong volumes drive growth: Higher sales volume during 1QCY2011 compared to lower volumes amid execution issues in 1QCY2010 helped Areva deliver 28.1% yoy growth in revenue to `995cr (`777cr). EBITDA margin for the quarter also expanded by 273bp to 8.4% as fixed manufacturing and production costs were spread over large volumes. Higher sales volume and margin expansion enabled Areva to post nearly eight-fold yoy growth in PAT to `29cr (`3cr).

Outlook and valuation: Central utilities have been delaying their orders on account of non-availability of land on time, resulting in lower number of 765kV projects being finalised. Ordering scenario from state utilities has also remained flat. Further, Korean and Chinese suppliers continue to quote very aggressive prices in transformers. While the growth trajectory looks promising with a decent order book of `5,204cr (1.1x CY2011E revenue), we remain cautious on the above concerns and believe the stock will trade sideways until the T&D segment revives post 2HCY2011 as guided by the management. At the CMP of `264, the stock trades at 29.6x CY2011E EPS and 22.3x CY2012E EPS. Historically, the stock has traded at an average P/E of 28x. We believe the stock is fairly valued and, hence, we continue to remain Neutral on the stock.