Friday, May 8, 2009

>Indian T&D companies (HSBC)

Number trends: Are things improving in the T&D space?

■ New order inflow is the only silver lining, and is up on a q-o-q basis

■ However, the results continue to be muted, with margins on a declining trend along with RoCE

■ Reiterate UW(V) rating on ABB India with TP of INR335

The big three T&D companies (ABB India (UW (V)), Areva T&D (Not Rated), and Siemens
India (Not Rated)) have declared their March 2009 results, which guide towards some key trends on which we believe investors should focus.

New order inflow: the only silver lining. This quarter indicated a reversal of the q-o-q decline trend in order inflows, with new order inflow up for ABB (+83%) and Areva (+23%). However, order inflow on a y-o-y basis was down overall, though up for Areva (ABB -15%, Areva 15% and Siemens -21% y-o-y); hence, future revenue growth will be a challenge, in our view. The order inflow mix, as expected, was mainly driven by government entities such as Power Grid Corp (PGCIL). We expect it will be a while before private sector orders pick up.

Operating margin will likely continue to disappoint. The benefit of lower commodity prices
has been visible with raw material/sales (RM/sales) declining 191-459bp for most companies (except Areva). This benefit was negated by higher other expenses, impacting the overall margin by 129-288bp. The exception was Siemens, which reported a 400bp margin improvement, due to a base effect (Siemens had a few loss-making projects impacting March 2008 results), as well as writedowns of provisions. We expect higher competition and pricing pressure to keep margins in check for the next 2-3 quarters.

Return ratio matrix to be impacted. However, this growth has not come cheap. It has
affected the operating matrix, with lower operating margins and higher working capital, resulting in lower returns on capital employed (RoCE). Also, higher capex undertaken last year has impacted the overall capital employed.

Reiterate UW(V) rating on ABB India, given the current premium valuation. Key concerns remain competition from its peers like Areva, which is gaining market share. Key upside risks to our rating include an uptick in order inflows from the industrial segment, and a higher level of outsourcing from the company’s global parent.

To see full report: INDIAN T&D COMPANIES