Alstom Project India Ltd (APIL)’s Q3’09 revenue jumped 35.3% y-o-y to Rs5.4 billion primarily due to better execution. On the other hand, operating margin contracted 92 bps (y-o-y) to 7.96%.
APIL has not received any substantial new orders in FY09. Given that most of the orders for the 11th Five-Year plan have already been awarded, we expect the order book to decline in the upcoming quarters.
As a result, we have maintained our revenue contraction to the tune of 15–18% and 4–6% for FY10 and FY11, respectively. Thereafter, we expect revenues to surge, given the potential of the power sector in India.
India has always remained a power deficit country. There is a growing need to not only develop the conventional sources of energy but also develop non-conventional sources such as nuclear and hydro power.
The country plans to increase its nuclear power generation from the current 4,100 MW to 52,000 MW by 2020 and APIL is expected to be a major beneficiary of this exercise.
This is because we believe that the Company is well equipped to manufacture nuclear equipment by using its existing plant in Vadodara, Gujarat, which manufactures hydroelectric power generating components at present.
Outlook and valuation
We have upgraded our revenue growth for APIL post FY11 on account of the country’s inclination towards building non-conventional sources of energy.
At the current market price (CMP), the stock trades at a forward P/E of 18.2x and 21.5x for the revised FY09E and FY10E earnings, respectively.
Based on DCF valuation, assuming a WACC of 17.6% and a terminal growth of 5%, we have arrived at a fair value estimate of Rs292, resulting in a downside of ~2% over CMP of Rs297.2. We maintain our HOLD rating on the stock.