Investors with a three-four year perspective can consider phased exposure to the stock of power equipment and engineering play, Alstom Projects India. Traction in the company's transportation segment, the French parent's focus on the Indian unit as a global sourcing hub, and a likely unlocking of value from a planned demerger of the boiler business, buttress our recommendation.

The stock is 50 per cent below our ‘book profits' recommendation in October 2010. At the current market price of Rs 345, the stock trades at 12 times in expected per share earnings for FY-13. This includes the earnings from the yet-to-be demerged boiler business.

The valuation, although seemingly at a premium to power equipment plays such as BHEL, is not really stiff for two reasons: One, Alstom Projects is a more diversified play than BHEL, with wider presence in power engineering procurement and construction (EPC) contracts, hydro power space and transportation systems. Two, similar to many other MNCs that are cash-rich, Alstom Power Projects has traditionally enjoyed price-earnings multiple upward of 20 times. While that valuation is unlikely to return, a marginal premium, compared with peers, may continue, given its diversified portfolio.

Demerger

Last year, Alstom Projects India's French parent decided to bring its global boiler business under a joint venture with Chinese power major, Shanghai Electric. As part of this venture, the existing boiler business in India will be demerged into a subsidiary, Alstom Boilers India. Investors in Alstom Projects India will receive one share of Rs 5 each in Alstom Boilers India for every share held in the former.

The boiler segment accounted for close a fifth of total sales for FY-12 after a sharp pick-up in the fourth quarter.

We see a few benefits arising from this venture: One, the French parent has traditionally sewn together new JVs directly, not involving its Indian company. This time around, investors of the Indian unit will also benefit from the venture.

Two, Shanghai Electric is a competitive equipment player. Together, Alstom may be able to bid aggressively in the boiler space. Three, this unit may also bid globally or be used as a sourcing hub by the parent for its projects elsewhere. To this extent, the boiler company's prospects seem bright.

That said, the French parent has a direct tie-up with BHEL for super-critical projects. This has raised concerns about the future of the to-be-formed boiler subsidiary. But it is noteworthy that the BHEL tie-up is only for super-critical technology and not sub-critical boilers.

Besides, Alstom Projects India receives orders from BHEL for components for super-critical boilers. This has translated into the Alstom Projects India leveraging upon its French parent's local joint ventures as well.

Also, according to tentative power capacity additions for the 12{+t}{+h} Plan, 62 per cent of the thermal projects are expected to use sub-critical technology. That leaves plenty of scope for the Alstom-Shanghai Electric joint venture. But investors will have to wait for at least two years for benefits to accrue from this impending venture.

Rail opportunities

Alstom Projects India has been a serious player in the rail transport system. It won orders worth Rs 900 crore for the Chennai Metro works and had earlier supplied signalling systems for Delhi and Bangalore Metros. It recently also won a contract from the Jaipur Metro, thus establishing its dominant position in supplies for rail systems.

While this segment's revenue for FY-12 saw a dip, booking of Chennai Metro revenues can be expected to drive sales in FY-13.

Two other areas where Alstom is a dominant player are in the supply of equipment for hydro and gas power projects. But massive delays by the government in executing such orders postpone revenue visibility. Similarly, uncertainties in gas allocation make gas power projects subject to risks. Nevertheless, these two segments hold potential to drive growth for the company.

Alstom Projects expanded revenue by a healthy 15 per cent annually from the boom year of FY-07 to Rs 2420 crore in FY-12. But net profits expanded at a poor 9 per cent annually over this period to Rs 168 crore.

But increased revenue booking from Chennai metro orders as well as a good pick-up in performance in the fourth quarter in the power segment are expected to drive profits to comfortable double-digits.

The fourth quarter, in fact, saw net profit jump 63 per cent over a year ago, suggesting faster pace of execution. Order book, which is likely to have crossed Rs 6,000 crore now, is healthy enough to support revenue growth over the next two-three years.

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