areva t&d ru1 qcy2010-260410

1

1QCY2010 Result Update I Capital Goods

April 26, 2010

Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539

Investment Period 12 Months

Stock Info

Sector Capital Goods

Market Cap (Rs cr) 6,619

Beta 1.2

52 WK High / Low 386/199

Avg. Daily Volume 276,141

Face Value (Rs) 2

BSE Sensex 17,745

Nifty 5,322

Reuters Code AREV.BO

Bloomberg Code ATD@IN

Shareholding Pattern (%)

Promoters 72.2

MF/Banks/Indian FIs 14.4

FII/NRIs/OCBs 1.3

Indian Public 12.1

Abs. (%) 3m 1yr 3yr

Sensex 5.7 56.6 24.7

Areva T&D (2.2) 28.0 17.1

Areva T&D India reported a dismal 1QCY2010 performance, which was well below our estimates, both on the top-line and bottom-line fronts. The company reported a 10.7% and 93.2% yoy de-growth in revenues and net profit, respectively. Currently, the stock trades at rich valuations of 28.0x CY2011E EPS. We downgrade the stock to Sell, with a Target Price of Rs218. Margin Erosion plays a spoilsport: Areva T&D India posted a top-line de-growth of 10.7% yoy to Rs777cr (Rs870cr) for 1QCY2010, on the back of slower-than-expected execution of the outstanding order book. Management stated that several large projects could not be billed during the quarter and were delayed on account of customer site related issues. On the operating front, the company extended its weak performance in 1QCY2010, reporting a sharp dip in its EBITDA margin by 707bp to 5.4% (12.5%). This was primarily driven by a combination of factors, including increased competitive pressures in the last year-and-a-half, ramp us costs associated with new factories, higher provisioning of a few systems projects, and a derivatives-related mark-to-market adjustment (~Rs9cr). The raw material cost increased by 145bp to 73.1% (71.6%) of net sales. The depreciation expense almost tripled to Rs24cr on account of newer capacities. Consequently, the net profit for the quarter plunged by 93.2% yoy to Rs3cr (Rs51cr), which was well below our estimates. Outlook and Valuation Uncertainty with regards to the possible reorganisation of Areva T&D India’s business (after the acquisition of Areva T&D at the global level by the Consortium of Alstom-Schneider) continues to weigh heavily on the stock. Besides, competitive pressures are expected to continue to keep a check on the company’s margins, with several domestic and overseas players bidding aggressively. At the CMP, the stock trades at 28.0x CY2011E EPS. We downgrade the stock to Sell.

Key Financials Y/E Dec (Rs cr) CY2008 CY2009 CY2010E CY2011E

Net Sales 2,641 3,566 3,887 4,650

% chg 31.6 35.0 9.0 19.6

Adj Net Profit 219 191 135 237

% chg 1.2 (12.7) (29.3) 75.2

EBITDA (%) 16.1 11.3 8.9 10.5

Adj EPS (Rs) 9.2 8.0 5.6 9.9

P/E (x) 30.3 34.7 49.0 28.0

P/BV (x) 9.1 7.6 6.8 5.7

RoE (%) 34.4 24.0 14.7 22.2

RoCE (%) 29.2 17.0 11.7 17.6

EV/Sales (x) 2.7 2.0 1.8 1.5

EV/EBITDA (x) 16.6 18.1 20.5 14.3 Source: Company, Angel Research

Areva T&D India Performance Highlights

SELL CMP Rs277 Target Price Rs218

Puneet Bambha Tel: 022 – 4040 3800 Ext: 347

E-mail: [email protected]

April 26, 2010 2

Areva T&D I 1QCY2010 Result Update

Order Book The order backlog came in at Rs4,975cr, up 17.5% yoy. The order inflows for the quarter were up 2.9% yoy to Rs1,016cr (Rs987cr). Among the significant orders received by the company during the quarter include an Rs400cr order from the Uttar Pradesh Power Transmission Corporation, for a 765kV EHV substation at the Anpara “D” thermal power plant. Exhibit 1: Order Backlog Trend

Source: Company, Angel Research Sale process update With regards to the sale process of Global Areva T&D, the management updated that on March 26, the European Commission antitrust authorities gave their the clearance for the joint acquisition by Alstom-Schneider. The closing of transaction is however, subject to approvals of competent authorities in some countries. Exhibit 2: 1QCY2010 Performance

Y/E Dec (Rs cr) 1QCY10 1QCY09 % chg CY09 CY08 % chg

Net Sales 776.8 869.9 (10.7) 3,583.2 2,655.1 35.0 Raw Material 567.5 622.8 (8.9) 2,492.6 1,725.8 44.4 (% of Net Sales) 73.1 71.6

69.6 65.0

Employee Cost 85.8 65.1 31.8 292.4 209.1 39.8 (% of Net Sales) 11.0 7.5

8.2 7.9

Other Expenses 81.3 73.2 11.1 379.4 281.2 34.9 (% of Net Sales) 10.5 8.4

10.6 10.6

Total Expenditure 734.6 761.1 (3.5) 3,164.4 2,216.1 42.8 EBITDA 42.3 108.8 (61.1) 418.8 439.0 (4.6) EBITDA (%) 5.4 12.5

11.7 16.5

Interest 13.4 12.3 9.6 57.9 30.2 91.9 Depreciation 23.7 8.0 194.8 61.1 34.0 79.6 Others 0.0 (8.3) (100.0) (8.3) (39.3) (79.0) Profit before Tax 5.2 80.3 (93.6) 291.5 335.5 (13.1) (% of Net Sales) 0.7 9.2

8.1 12.6

Total Tax 1.7 28.9 (94.1) 101.0 120.7 (16.3) (% of PBT) 32.9 36.0

34.7 36.0

Adjusted PAT 3.5 51.4 (93.2) 190.5 214.8 (11.3) (% of Net Sales) 0.4 5.9

5.3 8.1

Extraordinary Items

1.6 11.5 (86.5) Reported PAT 3.5 51.4 (93.2) 192.0 226.3 (15.2)

Source: Company, Angel Research

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April 26, 2010 3


Outlook and Valuation Uncertainty with regards to the possible reorganisation of Areva T&D India’s business (after the acquisition of Areva T&D at the global level by the Consortium of Alstom-Schneider) continues to weigh heavily on the stock. Besides, competitive pressures are expected to continue to keep a check on the company’s margins, with several domestic and overseas players bidding aggressively. The management stated that the price fall is still continuing and contrary to earlier expectations the hopes of early revival in the sector have not been met. During CY2009-11E, we expect the company to register top-line and bottom-line CAGR of 14.2% and 11.3%, respectively. At the CMP, the stock trades at 28.0x CY2011E EPS. We expect the stock to underperform and downgrade the stock to Sell, with a Target Price of Rs218. Exhibit 3: 12-month Forward Rolling P/E Band

Source: C-line, Angel Research

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April 26, 2010 4


Profit & Loss Statement (Rs cr) Y/E December CY2007 CY2008 CY2009 CY2010E CY2011E

Net Sales 2,006 2,641 3,566 3,887 4,650

Other operating income - - - - -

Total operating income 2,006 2,641 3,566 3,887 4,650

% chg 24.9 31.6 35.0 9.0 19.6

Total Expenditure 1,648 2,216 3,164 3,540 4,160

Net Raw Materials 1,267 1,726 2,493 2,780 3,278

Other Mfg costs 227.5 281.2 379.4 408.2 465.0

Personnel 153.7 209.1 292.4 352.5 416.5

Other - - - - -

EBITDA 357.9 425.1 401.5 347.3 490.3

% chg 70.6 18.8 (5.6) (13.5) 41.2

(% of Net Sales) 17.8 16.1 11.3 8.9 10.5

Depreciation& Amortisation 23.1 34.0 61.1 96.4 103.9

EBIT 334.8 391.1 340.4 250.9 386.4

% chg 75.2 16.8 (13.0) (26.3) 54.0

(% of Net Sales) 16.7 14.8 9.5 6.5 8.3

Interest & other Charges 6.6 29.8 57.9 69.3 57.0

Other Income 15.0 13.9 17.3 19.9 23.7

(% of PBT) 4.4 3.7 5.8 9.9 6.7

Others - - - - -

Recurring PBT 343.2 375.1 299.8 201.6 353.1

% chg 70.1 9.3 (20.1) (32.8) 75.2

Extraordinary Expense/(Inc.) - 28.1 6.8 - -

PBT (reported) 343.2 347.0 293.0 201.6 353.1

Tax 126.9 120.7 101.0 66.5 116.5

(% of PBT) 37.0 34.8 34.5 33.0 33.0

PAT (reported) 216.3 226.3 192.0 135.0 236.6

Add: Share of earnings of associate - - - - -

Less: Minority interest (MI) - - - - -

Prior period items - - - - -

PAT after MI (reported) 216.3 226.3 192.0 135.0 236.6

ADJ. PAT 216.3 218.8 191.0 135.0 236.6

% chg 70.0 1.2 (12.7) (29.3) 75.2

(% of Net Sales) 10.8 8.3 5.4 3.5 5.1

Basic EPS (Rs) 45.2 9.2 8.0 5.6 9.9

Fully Diluted EPS (Rs) 9.0 9.2 8.0 5.6 9.9

% chg 70.0 1.2 (12.7) (29.3) 75.2

April 26, 2010 5


Balance Sheet (Rs cr) Y/E December CY2007 CY2008 CY2009 CY2010E CY2011E SOURCES OF FUNDS

Equity Share Capital 47.8 47.8 47.8 47.8 47.8

Preference Capital - - - - -

Reserves& Surplus 499.9 675.9 817.5 924.6 1,110.8

Shareholders Funds 547.7 723.7 865.4 972.4 1,158.7

Minority Interest - - - - -

Total Loans 101.2 469.2 767.6 617.6 467.6

Deferred Tax Liability (28.3) (38.7) (10.0) (10.0) (10.0)

Total Liabilities 620.7 1,154.2 1,623.0 1,580.0 1,616.3

APPLICATION OF FUNDS

Gross Block 319.4 373.9 1,050.3 1,152.2 1,227.2

Less: Acc. Depreciation 182.7 210.4 245.5 341.8 445.7

Net Block 136.7 163.4 804.8 810.3 781.5

Capital Work-in-Progress 58.6 450.0 51.9 50.0 25.0

Goodwill 32.4 32.4 32.4 32.4 32.4

Investments 0.0 0.0 0.0 0.0 0.0

Current Assets 1,459.1 2,160.1 2,875.9 2,676.7 3,620.5

Cash 23.0 45.1 132.5 101.8 80.6

Loans & Advances 134.7 281.6 317.4 330.4 395.3

Other 40.8 258.3 447.5 388.7 465.0

Current liabilities 1,066.2 1,651.6 2,142.0 1,989.4 2,843.0

Net Current Assets 393.0 508.5 733.9 687.3 777.4

Mis. Exp. not written off - - - - -

Total Assets 620.7 1,154.2 1,623.0 1,580.0 1,616.3

Cash Flow Statement (Rs cr) Y/E December CY2007 CY2008 CY2009 CY2010E CY2011E Profit before tax 343.2 347.0 293.0 201.6 353.1

Depreciation 23.1 34.0 61.1 96.4 103.9

(Inc)/Dec in Working Capital (183.7) (93.4) (138.0) 15.9 (111.4)

Less: Other income 15.0 13.9 17.3 19.9 23.7

Direct taxes paid 130.0 131.2 72.3 66.5 116.5

Cash Flow from Operations 37.5 142.6 126.5 227.4 205.4

(Inc.)/Dec.in Fixed Assets (127.8) (445.8) (278.3) (100.0) (50.0)

(Inc.)/Dec. in Investments 9.7 - - - -

Other income 15.0 13.9 17.3 19.9 23.7

Cash Flow from Investing (103.1) (431.9) (261.0) (80.1) (26.3)

Issue of Equity - - - - -

Inc./(Dec.) in loans 97.9 368.0 298.4 (150.0) (150.0)

Dividend Paid (Incl. Tax) 50.4 50.4 50.4 28.0 50.4

Others (11.3) (6.3) (26.1) - -

Cash Flow from Financing 47.5 317.7 248.0 (178.0) (200.4)

Inc./(Dec.) in Cash (29.4) 22.1 87.4 (30.7) (21.3)

Opening Cash balances 52.5 23.0 45.1 132.5 101.8

Closing Cash balances 23.0 45.1 132.5 101.8 80.6

April 26, 2010 6


Key Ratios Y/E December CY2007 CY2008 CY2009 CY2010E CY2011E Valuation Ratio (x) P/E (on FDEPS) 30.6 30.3 34.7 49.0 28.0

P/CEPS 27.6 26.2 26.3 28.6 19.4

P/BV 12.1 9.1 7.6 6.8 5.7

Dividend yield (%) 3.3 0.7 0.7 0.4 0.7

EV/Sales 3.3 2.7 2.0 1.8 1.5

EV/EBITDA 18.7 16.6 18.1 20.5 14.3

EV / Total Assets 10.3 5.9 4.4 4.5 4.3

Per Share Data (Rs)

EPS (Basic) 45.2 9.2 8.0 5.6 9.9

EPS (fully diluted) 9.0 9.2 8.0 5.6 9.9

Cash EPS 10.0 10.6 10.5 9.7 14.2

DPS 9.0 1.8 1.8 1.0 1.8

Book Value 22.9 30.3 36.2 40.7 48.5

Dupont Analysis

EBIT margin 16.7 14.8 9.5 6.5 8.3

Tax retention ratio 0.6 0.7 0.7 0.7 0.7

Asset turnover (x) 4.2 3.0 2.7 2.6 3.1

RoIC (Post-tax) 44.5 28.8 16.8 11.2 17.1

Cost of Debt (Post Tax) 8.0 6.8 6.1 6.7 7.0

Leverage (x) 0.1 0.6 0.7 0.5 0.3

Operating RoE 49.7 41.6 24.7 13.7 20.4

Returns (%)

RoCE (Pre-tax) 64.8 42.5 24.1 15.6 24.0

Angel RoIC (Pre-tax) 82.1 65.2 32.7 17.8 26.7

RoE 46.5 34.4 24.0 14.7 22.2

Turnover ratios (x)

Asset Turnover (Gross Block) 7.2 7.6 5.0 3.5 3.9

Inventory / Sales (days) 46.5 45.5 39.2 40.0 40.0

Receivables (days) 146.6 150.4 142.7 140.0 138.0

Payables (days) 114.9 120.6 130.2 130.0 125.0

Working capital cycle (ex-cash) (days) 67.3 64.0 61.6 55.0 54.7

Solvency ratios (x)

Net debt to equity 0.1 0.6 0.7 0.5 0.3

Net debt to EBITDA 0.2 1.0 1.6 1.5 0.8

Interest Coverage (EBIT / Interest) 50.5 13.1 5.9 3.6 6.8

April 26, 2010 7


Research Team Tel: 4040 3800 E-mail: [email protected] Website: www.angeltrade.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this

document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to

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and should consult their own advisors to determine the merits and risks of such an investment.

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inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company

may or may not subscribe to all the views expressed within.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as

opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals.

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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section).

Disclosure of Interest Statement Areva T&D

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies’ Directors ownership of the stock No

4. Broking relationship with company covered No

Note: We have not considered any Exposure below Rs 1 lakh for Angel and its Group companies.

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946

Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059. Tel : (022) 3952 4568 / 4040 3800

areva t&d ru1 qcy2010-260410

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