The Hindu Business Line : Areva T&D: Buy

Restructuring-aided focussed growth plans, support from parent company and bright prospects in the domestic power transmission and distribution (T&D) segment augur well for Areva T&D's earnings growth. We have a call outstanding on the stock made at Rs 550 in March and reiterate our buy with a 2-3 year perspective. The stock trades at 17 times its CY07 likely earnings and is at a discount to peers such as ABB and Siemens.

Areva T&D's road map now appears more focused after the hive-off of its non-T&D business activities of motor and energy meters to the Alstom Group. At the same time, it has merged T&D related businesses such as instrument transformers. The company's comparable T&D operating profit margins for the September quarter works out to 11.5 per cent as against the 7 per cent range a year earlier.

The company's parent Areva of France plans to invest about Rs 250 crore over the next three years in its Indian unit. With a high asset turnover ratio, this investment alone can translate to revenues of over Rs 1,000 crore. The parent also views the Indian operation as a sourcing base for supply of components and products to other units worldwide. Further, Areva T&D can also leverage from the parent's global presence in the transmission business. This can translate to increased export revenue.

With the nuclear utility power segment still at a nascent stage of evolution in India, Areva T&D's plan to set up a separate unit locally for nuclear power plants, once the US Congress approval for the same comes through, will give the company a head start in this segment. Areva's operating and net profits have more than doubled for the nine months ended September 2006. Its cash rich position and close to zero debt also reinforce its investment plans. Sharp rise in key raw materials-copper, CRGO remain a primary risk to our recommendation.

Vidya Bala

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