The Hindu Business Line : Areva T&D : Buy

An investment may be considered in the Areva T&D stock at Rs.550. Our recommendation is underpinned by its solid performance over the past three quarters, a substantial expansion in profitability levels and the further scope for margin expansion, once it hives off non-core businesses. A sharper focus on transmission and distribution business may also support rich valuation levels.

The enhanced level of interest shown by its new global parent in Indian operations is an added positive.

The parent company plans to scale up investments in Areva's Indian operations.

As it also plans to step up sourcing from India for the global network, Areva T & D could move to a new growth trajectory over a one-to-two year period. Exports are likely to rise to about to 20 per cent of revenues; they now account for 12 per cent.

The likelihood of introduction of new products from the parent's wide product portfolio may also enable Areva to increase its market share in the domestic market.

The proposed hiving off of Areva's non-T&D business, which is likely to be completed over the next year, could also free up resources for the core business. The non-T&D business contributes 17 per cent to sales and 13 per cent to profits.

The loss of revenues could be offset to an extent by the merger of two privately held companies - Areva T&D Lightning Arresters and Areva T&D Instrument Transformers.

The stock trades at a discount to its peers ABB and Siemens.

Areva appears to be capable attaining a similar growth trajectory, though on a smaller scale.

This makes it an attractive proxy play on large-scale investments that are likely in the power sector.

We expect the company to post above 40 per cent earnings growth over the next couple of years.

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