Areva T&D: Weak currents

The December quarter was probably the weakest but even otherwise, 2008 wasn’t really a very good year for Areva T&D. The company, which makes products that are used to regulate and transmit electricity, bagged orders worth Rs 4,000 crore during the year, an increase of 37 per cent.

That was quite creditable except for the fact that, in the last quarter, orders came off by 44 per cent. Things might start looking up with transmission and distribution(T&D) players, such as Power Grid Corporation, expected to commision some projects this yea. But it’s possible there could be some delays.

Nevertheless, even if the downturn in the economy means fewer orders for Areva in the near term, over a longer period the firm should do well. After all, the company has been gaining share in the T&D equipment segment; a study by Citigroup puts the firm’s market share in 2008 at 22.4 per cent, way above the 15 per cent that it enjoyed in 2007. Competitor ABB, on the other hand, appears to have yielded some ground in the T&D space---its share was down from 20 per cent in 2007 to 19 per cent in 2008.

However, there’s no doubt the competition for the few projects will be keen and so Areva’s revenues in 2009 may be higher by just about 20 per cent. In 2008 revenues were up 31 per cent to Rs 2,655 crore. Also, profits which grew just under 5 per cent in 2008 to Rs 226 crore, might not gain momentum. One reason for this is that Areva typically passes on the benefit of lower cost of raw material prices to its clients and therefore, it may not gain fully from the fall in input costs.

In fact, in 2008 Areva saw its operating margins come off by 200 basis points to 16.5 per cent, though that was way better than ABB’s margin of 11.3 per cent. Areva’s net profit may also be depressed by higher interest costs—the company is implementing three greenfield projects for which it has borrowed money.