| Areva T&D: Power play | |
| Shobhana Subramanian / Mumbai July 02, 2009, 2:32 IST | |
The Areva stock was up 8 per cent on Wednesday with the company’s parent putting the group’s transmission and distribution (T&D) business on the block. Given the potential for the growth of the power sector in the country, Areva’s is an attractive business. The stock has had a fairly good run in the past six months, gaining 60 per cent to the Sensex’ 46 per cent.
 However, the company has gone through a bit of a rough patch — the T&D equipment player saw its net profit fall by 5 per cent to Rs 51.4 crore in the March 2009 quarter even though the top line was up a very strong 67 per cent.
A part of the erosion in the operating profit margins, of nearly 400 basis points to just under 13 per cent, was the result of the high cost of inputs. That’s despite the fact that a fairly large chunk of the contracts have escalation clauses built into them.
What’s also happening at Areva is that the business model is undergoing a change – the company is turning itself into a T&D solutions provider from an equipment supplier.
The management believes the turnover will grow faster though the company will have to live with lower operating margins because margins on such projects are typically 3-4 per cent lower than those on product supplies. In other words, the 16 per cent operating profit margin (opm) that Areva posted in 2008, which was nearly 200 basis points lower than that in 2007, is unlikely to be sustained.
Nevertheless the company is a good play on the shortage of power in the country and there are likely to be several contenders for the India stake. At the current price of Rs 363, the company’s market capitalisation works out to Rs 8,687 crore.
However, the stock has scaled a high of Rs 1,830 in the past though the estimates for growth and profitability would have been higher at the time. Once the economy revives, however, Areva should do well again.
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