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Areva T&D: Pricing receives a thrashing - Views on News from Equitymaster

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Areva T&D: Pricing receives a thrashing

Jul 29, 2009

Performance summary
  • Net sales grow by 26% YoY during 2QCY09 (financial year ends December 2009).
  • Operating margins contract by 5.1% during the quarter, owing to higher raw material and employee costs (both as percentage of sales).
  • Net profits fall by 23% YoY during the quarter. This was chiefly due to substantially higher interest expenses as also higher depreciation charges in this period.

Financial performance
(Rs m) 2QCY08 2QCY09 Change 1HCY08 1HCY09 Change
Net Sales 6,234 7,883 26.4% 11,298 16,333 44.6%
Expenditure 5,070 6,812 34.3% 9,285 14,174 52.6%
Operating profit (EBITDA) 1,164 1,071 -8.0% 2,013 2,159 7.3%
Operating profit margin (%) 18.7% 13.6%   17.8% 13.2%  
Other income 2 - -100.0% 2 - -100.0%
Depreciation 62 115 86.4% 120 195 62.0%
Interest 42 163 285.1% 71 285 302.5%
Profit before tax 1,062 794 -25.3% 1,824 1,679 -7.9%
Extraordinary income/(expense) (68) (36)   (8) (118)  
Tax 348 257 -26.2% 628 545 -13.2%
Profit after tax/(loss) 647 501 -22.5% 1,188 1,015 -14.5%
Net profit margin (%) 10.4% 6.4%   10.5% 6.2%  
No. of shares (m)       239.1 239.1  
Diluted earnings per share (Rs)*#         8.7  
P/E ratio (x)*         36.7  
* On a trailing 12-months basis
# Adjusted for exceptional items

What has driven performance in 2QCY09?
  • The growth in sales was led primarily by the company’s successful performance in utilities and industrial areas. Areva managed to maintain its leadership in the extra high voltage segment of the transmission and distribution (T&D) business by winning 4 major orders from Power Grid Corporation for delivery of 765 kV substations, thus helping achieve a 26% YoY growth in sales during 2QCY09. The company’s order backlog at the end of the June 2009 stood at Rs 42 bn, which was about 1.6 times its CY08 sales.

  • Areva’s operating margins contracted by 5.1% YoY during 2QCY09. This was mainly led by higher costs of raw materials and higher employee costs during the quarter (as percentage of sales).

  • On the back of the contraction in operating margins, substantially higher interest expenses and higher depreciation charges on account of the commissioning of its new factories, Areva’s net profits recorded a fall of 23% YoY during the quarter.

What to expect?
At the current price of Rs 319, the stock is trading at a multiple of 36.7 times its trailing 12 months earnings. The company has so far in 2009 commissioned eight new factories which have already started commercial production. As far as the company’s business from various customer segments is concerned, the utility market is stable currently with a good level of projects from Power Grid, and some SEBs also increasing their investments. However, orders from industry are suffering with market growth negative at this point of time. Most of the existing contracts are getting delayed due to cash flow problems with the many industrial customers. Demand from the infrastructure sector too is seeing negative growth like that from the industrial sector. Although it may be noted that many of these postponed orders are expected to be booked in the next two quarters of this calendar year. Another factor adversely affecting demand for T&D equipment has been the general elections causing major ordering decisions to be postponed by the government sector.

Pricing too took a beating. The company has seen about a 15% to 20% fall in pricing in its transmission segment since the start of 2009. The distribution segment has seen an even more severe decline with prices falling by about 25% to 30% in this segment. One of the main reasons for this fall in prices was a certain amount of panic amongst competitors in the face of the slowdown and recessionary prices which lead to an erosion in pricing. Going forward, the company is looking towards aggressive expansion in the extra high voltage domain.

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