Areva T&D: In the eye of the storm - Views on News from Equitymaster

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Areva T&D: In the eye of the storm

Aug 24, 2009

The transmission and distribution equipment industry has been facing rough seas recently. With some of the major players in this space seeing a drastic contraction in margins and fall in their profits in 1QFY10, we thought it imperative to dig deeper to find out exactly what is affecting the industry. With that in mind, we recently met up with Areva T&D, one of the larger players in the T&D (transmission & distribution) equipment manufacturing space in India. Below are the excerpts from that meeting.

On the business environment: Capital expenditure from the private sector is a cause for concern for Areva T&D currently, mainly on account of the market growth in the industrial sector which continues to be negative. In fact, most of the existing contracts have been facing delays due to cash flow problems with the most industrial customers. Demand for T&D equipments from the infrastructure sector too is witnessing degrowth.

The only factor that is stabilising the market currently is the demand from the state electricity boards/utilities which continues to be steady. Further, while Areva T&D has a good amount of projects with Power Grid (PGCIL), some state electricity boards (SEBs) have also increased investment which helped the company in the face of the shaky demand from the private and industrial sectors.

On a change in strategy: Areva T&D, two years back, had no presence in the projects business. Now, in a matter of just two years, almost 50% of the company’s revenues come from this business which offers complete turnkey (EPC) solutions for substations. This marked shift in the business profile of the company comes on the back of popular demand from customers.

There has been a trend towards large private and utility customers wanting complete turnkey solutions from one company instead of giving separate segments of a project to separate companies for execution. Thus Areva T&D felt the need to move towards providing entire systems solutions, which has evidently been very beneficial for the company considering the magnitude of business it now gets from this kind of work. As for the other subdivisions of its business, roughly 35% of its business now comes from products, 14% from automation and 1% from services, which provides management and maintenance of T&D infrastructure.

On pricing and margins: Amidst capacity expansion by most T&D companies in expectation of higher demand, and the actual scenario of anemic demand, players in the industry have resorted to decreasing their prices to attract business. Consequently, this has led to a pressure on the margins of most companies. Areva T&D too has been a victim of this scenario. Its transmission segment has seen a 15 to 20% price fall since January 2009, while its distribution segment has witnessed an even more severe price fall of 25 to 30%.

Though the company’s management expressed to us the extreme uncertainty on margins in the short term, demand for T&D equipment in India continues to be robust. As such, the feel that we have got from our interaction with the managements of a few companies in the space is that demand is likely to start picking up in the second half FY09.

On competition: As per the company, Areva T&D commands about 19% market share in the Indian T&D business. The company faces competition from all players in the industry including ABB, Siemens, Crompton Greaves, Emco, IndoTech Transformers, Transformers and Rectifiers, Voltamp Transformers etc. in terms of the organized players. The T&D industry also comprises of a large number of unorganised smaller companies, which usually offer small capacity equipment and enjoy lesser reputation than the bigger players.

As far as the larger players are concerned, Crompton Greaves differs from Areva T&D to the extent that it does not have a substantial systems/projects business, and has a larger focus on distribution equipment and not transmission equipment. ABB and Areva T&D both enjoy substantial localization in the manufacturing of products, which works in their favour in having lower costs. Siemens imports a large amount of its requirements and thus is different in that respect. Other than that, according to Areva’s management, the technology used by the three players is roughly on the same plane.

On Areva T&D (global) being up for sale: With respect to Areva, the global parent of Areva T&D (global), looking to sell its T&D business, the company indicated that Areva T&D India which comes under Areva T&D (global), would also change hands under the sale. The parent company has already invited bids for the same and is currently vetting its various options. The bidding process is still on and all bids should come in by October, and further a decision in all likelihood would be reached by December this year. After the sale, though whether to delist Areva T&D India or not will be the prerogative of the new owner of the company, Areva’s management expressed to us the low probability the new owner of the company taking such an action.

What to expect?
At the current price of Rs 303, the stock is trading at a P/E of 30 times its trailing twelve months earnings. We shall soon initiate coverage on the company subsequent to which we would be in a position to throw more light on the stock’s valuations and future prospects.

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