Alstom T&D India: HOLD

Shareholders of power transmission company, Alstom T&D, can hold the stock with a three-year perspective. While stiff valuations may cap upside in the near term, takeover by the Alstom combine and demerger of distribution business have helped the company focus on the power transmission space. Surge in orders, especially in the high-end transformer space, also provides improved earnings visibility.

At the current market price of Rs 186, the stock trades at 34 times its annualised earnings for 2011-12. The company had a 15-month year ending March 2012, as it was changing its accounting year from December to March.

While Alstom T&D has traditionally traded at a premium to local transmission and distribution (T&D) players as a result of its MNC status, the valuation gap is high compared with large players such as Crompton Greaves. Fresh investments can be avoided at this valuation.

Changed hands

The global T&D business of France-based Areva was taken over by the Alstom-Schneider Electric combine in 2010. As a result, the Indian unit, Areva T&D, was split — with Alstom taking over the transmission business (Alstom T&D) and Schneider Electric gaining control over the distribution business (Schneider Electric Infrastructure).

Shareholders of erstwhile Areva T&D would have received equal shares in the above two companies, which are now listed. There appears a general understanding between the two firms that Alstom T&D would focus on orders over 66kV, while Schneider Electric will focus on low-voltage products below 66kV.

What has changed for Alstom T&D since the takeover? One, Alstom T&D had focussed and won more orders in high voltage power equipments such as 765kV transformers. Two, it has seen a marginal improvement in its EBITDA margins compared with a year ago. Focussing on higher voltage products also provides scope for improving profit margins. Three, it is likely to sell some land parcels and reduce debt. These changes hold potential to improve earnings over a 2-3 year period.

The order game

Unlike peers such as ABB and Siemens which saw lacklustre order flow activity, Alstom T&D witnessed pick-up in order flows from late FY-12. Orders from Power Grid Corporation of India provided a fillip to its order book.

In fact, in March alone, the company won Rs 500 crore of orders. The orders that it won, especially in the 765 kV transformer segment, saw severe competition from the Chinese.

The Chinese players garnered almost 50 per cent of orders in this segment even as Alstom T&D expanded its market share to 22 per cent from merely 3 per cent a year ago, gaining at the cost of local competitors. While this does imply that Alstom T&D could have been aggressive in its bids; higher volumes gained thus may still make up for competitive pricing in a segment that is shaping up as a volume play. Several State electricity boards, for instance, are expected to scale up their grid transmission voltages to 220kV, 440 kV and even 765 kV.

In all, order book expanded over 40 per cent year-on-year to Rs 4,700 crore in March 2012. That’s about 1.4 times annualised revenue for FY-12, providing reasonable revenue visibility. Order book split is 50:50 in favour of power systems and product orders.

Alstom T&D has also been leveraging on its parent’s technology to bag unique orders in India. It recently commissioned India’s first digital substation (that brings smart grid intelligence to the substation) using parent Alstom’s support.

At the time of the reorganisation, the parent company had indicated its intent to source products from Alstom T&D’s local units for projects abroad.

While Alstom T&D has managed robust order flows, thanks to orders from PGCIL, slowdown in industrial capex has meant lower industrial orders.

Hence, order flows may not continue at the current pace. Besides, while PGCIL may be all set to award orders, delays in power projects as a result of either land issues or coal linkages may slow the pace of award.

Financials

Sales for the 15-month period ending March 2012 stood at Rs 4,129 crore and net profits at Rs 152.5 crore. As the numbers are not comparable with that of the previous year because of the demerger, we looked at quarterly growth. Sales expanded by 49 per cent in the March-2012 quarter over the December 2011 quarter, while net profits jumped 50 per cent. However, these strong numbers come after slowdown in delivery in the December quarter as a result of delays from the customer end.

When compared with the September 2011 quarter, earnings for March expanded by a more modest 13 per cent. EBITDA margins, which had dipped in the December quarter again due to poor sales, bounced back to 11.6 per cent in March.

Alstom T&D has reportedly opened bids for certain land parcels it holds. Proceeds from this could reduce the current debt equity ratio of 0.7 times.

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