The power sector has long been viewed as a haven of relative calm in a stormy market, a belief based on continuing investment and reflected in the Areva T&D India Ltd stock trading at a pricey 19 times trailing earnings. The company’s earnings for the December quarter, however, leave much to be desired.
Profit after interest but before exceptional items fell to Rs112.45 crore compared with Rs138.49 crore in the year-ago period, a drop of 18.8%.
Higher raw material cost was the chief reason, aided by increased employee cost, depreciation and interest cost.
For the full year, profit after interest but before exceptionals went up from Rs343 crore to Rs375 crore, a rise of Rs32 crore, but Rs26 crore of the increase in post-tax profits is on account of a change in the company’s accounting policy. Similarly, while net sales for the full year increased by Rs634 crore or 31%, a change in revenue recognition norms accounted for Rs210 crore of the increase.
While it’s true that power utilities continue to do well, industrial investment has obviously slowed drastically and Areva T&D’s industrial business has been affected.
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The fourth quarter has been a game-changer, seen from the fact that the company’s profit after interest but before exceptionals, which was flat in the September quarter, dropped so precipitously in the December quarter.
The company’s order backlog was Rs4,095 crore at the end of December, lower than what it was at the end of September. When announcing its third quarter results, the company had said its order intake for the nine months ending September was 113% higher than that for the corresponding period a year ago. For all of 2008, however, the company says order growth is down to 37%. ABB Ltd had also reported a slump in order intake in the fourth quarter.
Looking head, Areva T&D may well benefit from lower raw material costs and higher volumes as increased capacity comes on stream in April. But in view of its dismal results for the last quarter and the slowdown in order intake, which will show up as lower revenue growth in future, there is no reason for it to trade at such a high valuation. Nor is there any reason why it should trade at a premium to ABB.
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Graphics by Ahmed Raza Khan / Mint