Despite a better-than-expected December (fourth) quarter performance, the outlook for Areva T&D India Ltd seems weak. For Q4, the transmission and distribution (T&D) firm reported 9% lower order inflows from a year ago. Further, in its recent presentation, the company stated that it expects a pick-up in orders only in the second half of 2011, as opposed to earlier expectations of an increase from the March quarter itself. The end-December order book of around Rs4,800 crore was up barely 2% from the previous year and implies revenue visibility of 12-14 months.
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This is worrisome and justifies the drop in Areva’s share price, which initially spiked 5% on the announcement of results. The initial euphoria was driven by the 14.4% year-on-year (y-o-y) and 27% quarter-on-quarter growth in revenue to Rs1,327 crore. The management, however, clarified that the revenue surge was due to delayed orders booked during the quarter.
Higher sales volumes also helped to spread the fixed costs leading to better operating profit margin (OPM), especially since the company has now transferred all production to its new facility at Vadodara. Analysts believe Areva could, in the medium term, sell the older facilities in Chennai and Noida, which could release cash.
Meanwhile, improved control, mainly on raw material and staff costs, translated into a 140 basis points rise in OPM to 13.4%. Consequently, operating profit for Q4 rose 28% y-o-y and net profit growth was 29% y-o-y, in line with analysts’ consensus estimates.
But Areva’s shares underperformed the broader market over the last calendar year, like most peers in the power distribution and equipment space. “Lack of orders from Power Grid Corp. of India Ltd, coupled with the deferment of big-ticket orders from the private sector, are dampeners for the near term,” says John Perinchery, an analyst at Angel Broking Ltd. Price erosion with severe competition from Chinese and Korean firms adds to the concerns.
What buoyed the stock in December was the open offer price of Rs295.30 apiece in the month made by the new owners, the Alstom-Schneider combine, which acquired Areva’s global business last year. However, the offer was unsuccessful as it garnered only 1.2% of the equity, which raised the management’s holding to around 73.4%.
Analysts do not rule out the possibility of another buy-back, though the management denied any plans to delist the firm for now. But what is certain is the intent to split the business into two entities—transmission, which comprises 70% of the present business, and distribution, which comprises 30%. How Areva goes about this could impact future valuation. That said, the stock is trading at about 27 times 2011 earnings. Rich valuation and bleak market conditions leave little room for appreciation in the share price.
Graphics By Yogesh Kumar/Mint
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