Areva T&D: No pricing power

The Areva T&D stock has given up about 21 per cent since the start of July. The very average results for the June 2009 quarter have left the Street disappointed. The fact that the global transmission and distribution (T&D) business has been put on the block hasn’t helped.

Without doubt, the company operates in a high-growth area but the space is highly competitive, especially with some Korean players in the fray. Also, the three key players, Siemens, ABB and Areva, have been creating capacity and will be looking to utilise it to the maximum, which means prices will continue to be under pressure. Moreover, Areva’s business model itself is being rejigged — it is transforming itself into a T&D solutions provider from a pure equipment supplier.

While that will help the top line, operating margins will be far more subdued than they have been in the past. In other words, the 16 per cent operating profit margin (OPM) that Areva posted in 2008, nearly 200 basis points lower than that registered in 2007, will be hard to achieve.

The T&D player’s revenues in the June quarter were up 27 per cent to Rs 788 crore, but the OPM slipped sharply by over 400 basis points to 13.6 per cent. What’s worse is that order flows were weak— they fell about 50 per cent, though it’s true that there was a high base effect. The tough business environment will keep the stock price subdued and any upside will result from the global sale of the T&D division, expected later this year, and the subsequent open offer in India.