Multinational companies in the capital goods industry have shown increased interest in Indian operations in the last couple of years. Yet, inflationary pressures, coupled with severe competition from other Asian and domestic counterparts, have led to contraction of profit margins for some.
Areva T&D India Ltd’s June quarter results mirror this picture. Operating profit margin fell about 158 basis points from a year earlier. Areva took a beating both ways as raw material prices and other expenditure surged, and prices of capital equipment fell 20-25%. Analysts say this was the fallout of the firm bidding aggressively and sacrificing profit margins to gain market share in the power transmission and distribution (T&D) space in fiscal 2010.
Also See | Lackluster Show (PDF)
Project completion and billing of low-margin orders translated into poor operating margins, which in turn depressed operating profit, down 6% from the year-ago period. This was in spite of the 12% year-on-year jump in revenue. Net profit, too, fell 19% from the year-ago period.
The grim outlook will weigh down future valuations. The Areva management was far from optimistic about any improvement in the near to medium term in a recent analysts’ call. Pricing challenges could continue. Also, the year so far has seen sluggish order inflows from the T&D segment and the situation may remain so in the near term. In fact, reports suggest that pricing pressure could increase in future as even contracting firms are likely to be allowed to bid for projects awarded by firms such as Power Grid Corp. of India Ltd.
Meanwhile, the high interest rate regime is expected to weaken demand from the industrial sector. Order inflow for the June quarter was 6% lower than a year ago, with the total backlog of Rs 5,200 crore amounting to a little over a year’s revenue. About 70% is in the transmission segment and the balance in the distribution segment.
Given the lacklustre performance and outlook, several brokerages have cut Areva’s earnings estimates by about 30-40% for 2012. Its shares have underperformed the capital goods index of BSE in the past six months. Following changes in ownership, Areva SA and Schneider Electric SA together own about 73.4% of the equity. Any open offer made to acquire shares from the public—a trend seen among multinational capital goods companies in India in the recent past—could take the stock higher.
Graphic by Naveen Kumar Saini/Mint
We welcome your comments at firstname.lastname@example.org