Thursday, April 16, 2009


Areva T&D India is the subsidiary of the France-based Areva Group, which is a world-wide leader in the nuclear power business and the third largest player in the global Transmission & Distribution (T&D) space. The Indian subsidiary has been gradually gaining market share over the last few years and has now edged past ABB to achieve the Number 1 position in the Indian T&D market in 2008. However, in the current challenging scenario, several headwinds emerging due to the unfavourable macro-economic environment are taking its toll on the entire Capital Goods Sector including Areva T&D. At the current price of Rs214, the stock is quoting at 19.2x and 15.7x CY2009E and CY2010E EPS respectively, which we believe is expensive. Against this backdrop of an unfavourable broader environment, we Initiate Coverage on the stock, with a Reduce rating and Target Price of Rs177.

* Economic Slowdown weighs heavily on the Sector: Post a strong GDP growth of more than 9% for three consecutive years, the Indian economy has shifted to a lower growth trajectory of around 6-7% atleast for the next couple of years. The Corporate capex plans are also showing signs of deceleration with an increasing number of projects either being shelved or deferred. Hence, in the near term there would be a rising pressure both on future order inflows as well as execution of the current order book for the entire Sector.

* Areva T&D vulnerable to slowdown: Areva T&D too, with around 35-40% private sector orders cannot remain completely immune from the slowdown. In terms of end customer classification as well, the mix for the company stands at 50:50 for Utility and Industrial. Again, the industrial clients are expected to be hit the hardest in wake of the ongoing slowdown.
* Generation delays to impact T&D growth: In the present macro environment, though the Power Sector capex is relatively resilient with majority of projects being envisaged by the Central and State sector utilities, major worry for the T&D Sector is delays in the generation capacity addition. The execution rate even for the current Plan period is pretty dismal with around 54% of projects already running behind schedule.

To see full report: AREVA