Areva T&D: Improving outlook

The market is awaiting more details regarding the realignment of the company’s India operations.

Areva reported a strong revenue growth of 23.5 per cent year-on-year to Rs 1,160 crore for the fourth quarter ended December 2009, reflecting the beginning of economic and industrial growth. For the calendar year 2009, too, net sales increased 23.5 per cent to Rs 3,583 crore, ahead of peers and aided by execution of the strong order intake in CY08 (up 27 per cent).

Cumulative order inflow in CY09 rose 5 per cent, partly reflecting a 15-30 per cent fall in the pricing of T&D projects due to tight competition. However, the fall appears to have stabilised. Sequentially, order inflow increased 37 per cent, while it rose 81 per cent year-on-year to Rs 1,418 crore. Hence, at December-end, order backlog was higher 17 per cent year-on-year at Rs 4,772 crore.

The order outlook appears to be improving with the Power Grid launching 15 tenders in 2009. The spur in 2010 would be coming from state utilities and the power generation projects. The icing would be a possible jump start in the industrial capex cycle, especially in the metals and mining sectors. Around 80 per cent of orders have a price variation clause, analysts say.

Meanwhile, with pricing at trough levels, profit margins are still below peaks. Areva’s earnings before interest, tax, depreciation and amortisation (Ebitda) margins dipped 480 basis points to 11.7 per cent in CY09, partly due to under-recovery of costs in new factories. The outlook seems to be improving and Areva should start deriving productivity gains from the brownfield facilities. Areva inaugurated eight facilities last year, which resulted in outstanding debt rising 64 per cent to Rs 770 crore and interest costs surging 90 per cent.

Profit before tax and extra-ordinary items fell 20 per cent to Rs 300 crore in CY09 (down 13 per cent year-on-year to Rs 98 crore for the quarter). Even as extra-ordinary costs were lower in CY09, net profits fell 15 per cent to Rs 192 crore. A write-back of such costs helped Areva post higher year-on-year profits in the quarter.

Globally, the sale of T&D assets of parent Areva to Alstom-Schneider consortium has been an overhang on Areva T&D India’s stock, as the market is awaiting more details regarding the India operations realignment.

Post-results, the stock didn’t react much and closed at around Rs 270 level on Monday and Tuesday. However, it ended 4.1 per cent higher at Rs 281 on Wednesday, which is perhaps explained by Areva announcing receipt of a Rs 120-crore order. Currently, it is valued 27 times analyst CY10 estimates.

Additional reporting with  Sunaina Vasudev and Jitendra Kumar Gupta