Margin pressure amid price competition

Areva T&D’s performance in the March quarter exceeded expectations, but was mainly aided by a lower base in the same quarter last year, followed by order book execution (especially short-cycle projects) and operating efficiencies due to increased capacity. Revenues jumped 28 per cent year-on-year (y-o-y) to Rs 995 crore.

MARCH QUARTER: PRICING PRESSURE
Operating profit margin (OPM) and net profit margin (NPM) jumped 304 basis points (bps) and 246 basis points to 8.4 per cent and three per cent, respectively, as the company had witnessed record low margins in the March 2010 quarter. Substantial jump in other expenditure and taxation was compensated by better control over other operational expenses and fixed costs. However, sequentially, margins remained under pressure (down 500 basis points and 372 basis points, respectively), which indicates continued price competition.

Order inflows jumped 23 per cent to Rs 1,253 crore, but remained flat sequentially. However, the order book was up by five per cent y-o-y to Rs 5,200 crore due to weak order inflows in the past few quarters coupled with robust execution.
 

LOW BASE, EXECUTION BOOST
(Standalone figures in Rs crore)	Year Ended 10-Dec	Quarter Ended 11-Mar
Net sales	4036.98	994.91
% change y-o-y	12.66	28.10
PBIDTA	440.89	83.71
% change y-o-y	6.99	89.60
Net profit	186.74	28.78
% change y-o-y	-2.74	729.40
EPS (Rs)	7.81	-
Source: Capitaline                                  Compiled by BS Research Bureau

The outlook for order inflows and order book continues to be worrying and analysts do not expect the performance reported by the company in the last quarter to continue due to tough market conditions, which has stayed for last six months.

OUTLOOK
Competition, due to a slowdown in transmission and distribution spending, postponement of large projects, (across power, industry and infrastructure segments), thanks to rising cost scenario and excess capacity, has heightened and is spreading to other segments, including the high growth-led high voltage segment (765 kV), where Areva has market leadership.

Consequently, the trend of slowing order inflows, substantial price erosions and margin pressure is expected to continue in the near to medium term. On the flip side, at Rs 259.55, the stock could get support, despite its high valuation of 30 times 2011 calendar year average estimated earnings due to expectations of another open offer from new parent (Alstom-Schneider), which now holds 73 per cent in the company.