Areva T&D India Ltd.

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1 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 August 11, 2011 COMPANY RESULTS REPORT REVIEW Areva T&D India Ltd. Margin woes to continue till volume improves HOLD CMP Analyst Piyush Nimgaonkar Nifty: 5,138; Sensex: 17,059 Target Price Rs228 Rs224 Potential Upside/Downside (2)% Key Stock Data Sector Bloomberg / Reuters Relative to Sensex Source: Capitaline Capital Goods ATD IN / AREV.BO Shares o/s (mn) Market cap. 54,516 Market cap. (US$ mn) 1,204 3-m daily average vol. 28,321 Price Performance 52-week high/low Rs350/216-1m -3m -12m Absolute (%) (8) (14) (22) Rel to Sensex (%) 0 (6) (16) Shareholding Pattern (%) Promoters 73.4 FIIs/NRIs/OCBs/GDR 1.3 MFs/Banks/FIs 13.7 Non Promoter Corporate 2.3 Public & Others Areva T&D Sensex Summary Areva T&D India's (Areva) Q2CY11 performance was below our expectations. While revenue was up 12.8% YoY to Rs9.9 bn, it was a tad lower that our estimate of Rs10.2 bn led by slower project execution. EBITDA margin contracted ~137bps YoY to 7.8% due to 28.5% YoY growth in other expenditure. Consequently, earnings declined 18.5% YoY to Rs263 mn (IDBIest Rs375 mn) due to higher interest cost for the quarter. The management has indicated that T&D market is expected to remain flat with many generation projects getting delayed. Areva continues to experience pricing pressure in its Substation/Transformer segments on the back of heightened domestic and Chinese/Korean competition. The management raised concerns over 1) lower than expected pick-up in PGCIL tenders 2) fewer SEB tenders owing to financial issues 3) no visible signs of abatement of funding and land acquisition issues and 4) weak Industry growth leading to lower private capex. While we maintain our CY11/12 revenue estimates, we cut our CY11/12 EPS estimates by 17%/13% to Rs2.2/2.9 bn respectively, owing to higher than anticipated interest cost and other expenditure. At CMP of Rs228, the stock trades at 24.6/18.6x on our CY11/12 EPS estimates of Rs9.3/12.3 respectively. In the last quarter, the stock has corrected ~14%. Consequently, we upgrade Areva to HOLD with lower DCF based target price of Rs224 (Rs231) on account of a) intensified competition in the 765KV segment with entry of small players through JV route b) PGCIL s lower than anticipated 765KV tendering leading to flat order inflow c) higher than anticipated interest cost. Result Highlights O/B stagnant; execution to pick-up Areva s O/B remained flat (up 1% YoY) at Rs51.5 bn (1.1x CY11E revenue) with order intake at Rs9.5 bn for Q2CY11. The company still maintains its view that PGCIL order inflows will pick-up only post Oct-Nov 2011, leading to lesser order inflows for H1CY11. Areva is banking heavily on the MV and lower voltage Industry segment to make-up for lower PGCIL orders. The company expects volume to pick-up in transformer (765 & 400KV) and GIS segment in H2CY11. Going forward, the company expects project execution to improve with full ramp up of new facilities by Dec-11. Table: Major orders Q2CY11 State Utilities MSETCL (220KV Substation) 530 Industry/ Infrastructure Lanco Infratech (765KV Vidarbha Substation) 700 Nalco (Pot Control system) 540 Hindalco (ETC & Switchyard package) 500 Abhijeet Projects (400KV Substation at Lathehar) 350 Reliance Infrastructure (MV package) 440 Doosan Projects (PT and MV package) 350 St Gobain (Power Distribution package) 260 Total 3,670 Table: Financial snapshot Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) PE (x) EV/EBITDA (x) RoE (%) RoCE (%) CY09 35,832 4, , CY10 40,370 4, , CY11E 48,444 5, , CY12E 57,164 6, ,

2 Margins to be under pressure till meaningful volume pick-up In last 30 months, Areva has witnessed 25%/30% price erosion in its transmission and distribution segments, respectively. Despite that the company delivered 26% revenue CAGR over CY07-10 led by strong volume growth. However, earnings CAGR was (6)% owing to intensified competition from domestic and Chinese/Korean players over the same period. Thus, the management deliberately focused on the MV segment (220 and 440KV) and relatively smaller (Rs0.4-1 bn) industry orders in order to improve capacity utilization over last few quarters. However, going forward, realizations are expected inch-up only on meaningful and sustainable improvement in PGCIL/SEBs tendering activity. Figure: Margin profile over last 12 quarters 20.0% 16.0% 12.0% 8.0% 4.0% 0.0% Q3CY08 Q4CY08 Q1CY09 Q2CY09 Q3CY09 Q4CY09 Q1CY10 Q2CY10 Q3CY10 Q4CY10 Q1CY11 Q2CY11 EBITDA margins Net margins Outlook and Valuation Areva management expects the T&D market to remain flat over the next year. It continues to witness lower PGCIL tendering activity for its mainstay 765KV segment (substation and transformer). The new PGCIL norms related to large transmission substations and transformers, which favored domestic facilities has added to competition from mid-voltage transformer companies through JV route. Thus, heightened competition doesn t seem to be abating any time soon leading to sustained margin pressure. SEB order inflows have also failed to pick-up in the medium segment. Thus, we expect some respite for Areva to come only in H2CY11 if HV segment picks up meaningfully. While we maintain our CY11/12 revenue estimates, we cut our CY11/12 EPS estimates by 17%/13% to Rs2.2/2.9 bn respectively, owing to higher than anticipated interest cost and other expenditure. At CMP of Rs228, the stock trades at 24.6/18.6x on our CY11/12 EPS estimates of Rs9.3/12.3 respectively. In the last quarter, the stock has corrected ~14%. Consequently, we upgrade Areva to HOLD with lower DCF based target price of Rs224 (Rs231) on account of a) intensified competition in the 765KV segment with entry of small players through JV route b) PGCIL s lower than anticipated 765KV tendering leading to flat order inflow c) higher than anticipated interest cost. 2

3 Table: Quarterly snapshot (standalone) Year-end: December Q2CY10 Q3CY10 Q4CY10 Q1CY11 Q2CY11 YoY (%) Sales & Services (Net) 8,855 10,477 13,270 9,949 9, COGS 6,379 7,175 9,013 7,255 7, Employee costs Other Expenditure 1,224 1,225 1,507 1,340 1, EBITDA 815 1,332 1, (4.0) EBITDA margins (%) (1.37) Depreciation Total Expenditure 8,265 9,390 11,718 9,358 9, Profit Before Int & Tax 590 1,087 1, (6.0) Interest Profit Before Tax , (18.9) Provision of current tax (164) (313) (455) (143) (132) (19.6) Profit After Tax (18.5) Net margins (%) Basic EPS (Rs) (18.5) 3

4 Financial Summary Profit & Loss Account Cash Flow Statement Net sales 35,832 40,370 48,444 57,164 Growth (%) Operating expenses (31,644) (36,019) (43,368) (50,888) EBITDA 4,188 4,351 5,076 6,275 Growth (%) (1.5) Depreciation (611) (936) (995) (1,023) EBIT 3,577 3,415 4,081 5,253 Interest paid (579) (600) (746) (835) Other income Pre-tax profit 3,097 2,816 3,337 4,420 Tax (1,010) (949) (1,124) (1,489) Effective tax rate (%) Net profit 2,087 1,868 2,213 2,931 Adjusted net profit 2,087 1,868 2,213 2,931 Growth (%) (31.7) (10.5) Shares o/s (mn nos) Profit After tax 1,920 1,868 2,213 2,931 Add. Depreciation & amortization ,023 Cash flow from w/c changes (1,380) (2,864) (1,475) 443 Cash flow from Operating activities (a) 1,482 (84) 1,733 4,397 (Purchase)/Sale of fixed assets (2,783) (815) (91) (372) Cash flow from investing activities (b) (2,760) (808) (91) (372) Unsecured loan Secured loan 2,984 1, Dividend paid (499) (500) - - Cash flow from financing activities (c) 2, Change in Cash & Cash Eq. (a+b+c) 859 (111) 2,442 4,826 Opening Cash & Cash Eq ,310 1,199 3,641 Closing Cash & Cash Eq. 1,310 1,199 3,641 8,467 Balance Sheet Financial Ratios Net fixed assets 8,903 8,939 8,036 7,385 Investments Other non-curr assets Current assets 28,743 35,740 43,036 52,674 Inventories 3,790 4,808 5,514 6,478 Sundry Debtors 15,994 21,400 25,217 28,190 Cash and Bank 1,310 1,199 3,641 8,467 Loans and advances 3,174 3,192 2,692 2,492 Total assets 37,746 44,681 51,074 60,061 Shareholders' funds 8,667 10,023 12,236 15,167 Share capital Reserves & surplus 8,189 9,545 11,758 14,689 Total Debt 7,676 8,957 9,757 10,557 Secured loans Unsecured loans 7,676 8,957 9,757 10,557 Other liabilities 7,676 8,957 9,757 10,557 Curr Liab & prov 22,519 26,690 30,140 35,751 Current liabilities 21,420 25,663 29,042 34,298 Provisions 1,099 1,027 1,097 1,453 Total liabilities 29,096 34,620 38,799 44,855 Total equity & liabilities 37,746 44,681 51,074 60,061 Book Value (Rs) Adj EPS (Rs) Adj EPS growth (%) (31.7) (10.5) EBITDA margin (%) Pre-tax margin (%) ROE (%) ROCE (%) Turnover & Leverage ratios (x) Asset turnover (x) Leverage factor (x) Net margin (%) Net Debt/Equity (x) Working Capital & Liquidity ratios Inventory days Receivable days Payable days Valuation PER (x) Price / Book value (x) PCE (x) EV / Net sales (x) EV / EBITDA (x) Dividend Yield (%)

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