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Areva T&D India (updated - 02 July 2009)
The Areva stock was up 8 per cent on Wednesday with the company’s parent putting the group’s transmission and distribution (T&D) business on the block. Given the potential for the growth of the power sector in the country, Areva’s is an attractive business. The stock has had a fairly good run in the past six months, gaining 60 per cent to the Sensex’ 46 per cent.

However, the company has gone through a bit of a rough patch — the T&D equipment player saw its net profit fall by 5 per cent to Rs 51.4 crore in the March 2009 quarter even though the top line was up avery strong 67 per cent.

A part of the erosion in the operating profit margins, of nearly 400 basis points to just under 13 per cent, was the result of the high cost of inputs. That’s despite the fact that a fairly large chunk of the contracts have escalation clauses built into them.

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Areva T&D India (Updated - Mar 2009)
The December quarter was probably the weakest but even otherwise, 2008 wasn’t really a very good year for Areva T&D. The company, which makes products that are used to regulate and transmit electricity, bagged orders worth Rs 4,000 crore during the year, an increase of 37 per cent. That was quite creditable except for the fact that, in the last quarter, orders came off by 44 per cent. Things might start looking up with transmission and distribution(T&D) players, such as Power Grid Corporation, expected to commision some projects this yea. But it’s possible there could be some delays.

Nevertheless, even if the downturn in the economy means fewer orders for Areva in the near term, over a longer period the firm should do well. After all, the company has been gaining share in the T&D equipment segment; a study by Citigroup puts the firm’s market share in 2008 at 22.4 per cent, way above the 15 per cent that it enjoyed in 2007.

What’s also happening at Areva is that the business model is undergoing a change – the company is turning itself into a T&D solutions provider from an equipment supplier.
The management believes the turnover will grow faster though the company will have to live with lower operating margins because margins on such projects are typically 3-4 per cent lower than those on product supplies. In other words, the 16 per cent operating profit margin (opm) that Areva posted in 2008, which was nearly 200 basis points lower than that in 2007, is unlikely to be sustained.

Nevertheless the company is a good play on the shortage of power in the country and there are likely to be several contenders for the India stake. At the current price of Rs 363, the company’s market capitalisation works out to Rs 8,687 crore.
However, the stock has scaled a high of Rs 1,830 in the past though the estimates for growth and profitability would have been higher at the time. Once the economy revives, however, Areva should do well again.
source - BS

Competitor ABB, on the other hand, appears to have yielded some ground in the T&D space---its share was down from 20 per cent in 2007 to 19 per cent in 2008.

However, there’s no doubt the competition for the few projects will be keen and so Areva’s revenues in 2009 may be higher by just about 20 per cent. In 2008 revenues were up 31 per cent to Rs 2,655 crore. Also, profits which grew just under 5 per cent in 2008 to Rs 226 crore, might not gain momentum. One reason for this is that Areva typically passes on the benefit of lower cost of raw material prices to its clients and therefore, it may not gain fully from the fall in input costs. In fact, in 2008 Areva saw its operating margins come off by 200 basis points to 16.5 per cent, though that was way better than ABB’s margin of 11.3 per cent. Areva’s net profit may also be depressed by higher interest costs—the company is implementing three greenfield projects for which it has borrowed money.
source - BS

Areva T&D India (updated - 11 Aug 2009)
The Areva T&D stock has given up about 21 per cent since the start of July. The very average results for the June 2009 quarter have left the Street disappointed. The fact that the global transmission and distribution (T&D) business has been put on the block hasn’t helped.

Without doubt, the company operates in a high-growth area but the space is highly competitive, especially with some Korean players in the fray. Also, the three key players, Siemens, ABB and Areva, have been creating capacity and will be looking to utilise it to the maximum, which means prices will continue to be under pressure. Moreover, Areva’s business model itself is being rejigged — it is transforming itself into a T&D solutions provider from a pure equipment supplier.

While that will help the top line, operating margins will be far more subdued than they have been in the past. In other words, the 16 per cent operating profit margin (OPM) that Areva posted in 2008, nearly 200 basis points lower than that registered in 2007, will be hard to achieve.

The T&D player’s revenues in the June quarter were up 27 per cent to Rs 788 crore, but the OPM slipped sharply by over 400 basis points to 13.6 per cent. What’s worse is that order flows were weak- they fell about 50 per cent, though it’s true that there was a high base effect. The tough business environment will keep the stock price subdued and any upside will result from the global sale of the T&D division, expected later this year, and the subsequent open offer in India.
source - BS