Stock analysis - Areva T&D

Cut your exposure of Areva T&D (Areva) is the recommendation by stock broker Angel stock broking.

Areva T&D (Areva) reported better-than-expected results for 4QCY2010. Revenue for the quarter increased by 14% yoy to Rs.1,327cr and (est. Rs.1,177cr) and PAT grew by 29% yoy to Rs.88cr (est. Rs.75cr). Order inflow for the quarter was down by 9% yoy due to delays in customer ordering and price fall. Going forward, the pricing scenario is expected to be grim on account of delayed ordering and increasing competition. Angel stock broking has recommended to reduce exposure.

Strong volume driven growth:
Despite the price erosion on orders accrued during CY2009 and CY2010, Areva managed to register 14% yoy rise in revenue to Rs.1,327cr backed by strong volume growth. Areva also managed to retain its leadership position for the third year, even with the fall in market size and prices.

EBITDA margin for the quarter also expanded by 142bp to 13.4% as fixed manufacturing and production costs were spread over large volumes. Expanded margin and higher sales volume enabled the company to post a 29% yoy increase in PAT.

Outlook and valuation:
Post the acquisition of Areva’s global T&D business by Alstom-Schneider Electric consortium, the two business segments viz., transmission and distribution, are likely to be separated and operated independently by Alstom Grid and Schneider Electric, respectively. The modalities of the split and the associated valuations are yet to be finalised. Absence of large orders from central utilities and pricing pressures has been adversely affecting the company’s revenue and profitability growth.

Management continues to maintain a cautious outlook given the pricing pressures and expects the current scenario to last for the next couple of quarters. At current stock price of Rs.267, the stock trades at 27.5x CY2011E EPS. It is advisable to reduce on the stock with a target price of Rs.243.