Areva T&D has been one of the fastest growing company in the Indian T&D sector. Revenues have doubled in the past two years despite transfer of non-T&D business portfolio.
In the previous year, there was a slowdown in ordering activity from PGCIL. However, the $600 million loan approval from the World Bank, ordering activity from PGCIL has improved in the current year. In the first quarter of CY08, order inflows have grown 95% y-o-y to Rs8,430 million.
Areva has embarked on an aggressive capacity expansion programme which will see its transformer capacity increasing from 15000 MVA to 50000 MVA.
However, margin estimates for FY09 have been reduced in view of the inflationary conditions. Interest charges for CY09 have also been raised in view of the Rs7 billion capex that would be partly funded through debt.
We expect borrowings to rise from Rs1 to Rs3.5 billion in CY08. Accordingly, our CY08 and CY09 earnings estimates stand reduced by 5% and 11%.
At the current price, Areva is trading at 21.2x and 17.8x CY08 and CY09 earnings respectively. Earnings are expected to grow at a CAGR of 21.2% over the next two years. We value the stock at 21x CY09 earnings reflecting a PEG of 1x and a target price of Rs1,421. We maintain HOLD.