Alstom T&D, a leading power transmission and distribution equipment company, has won several orders in the past month, especially in the high voltage segment. This has led to a 10 per cent gain in its share price, taking the total gain to 40 per cent since mid-May. Analysts are bullish on the counter, given the strong outlook and reasonable valuations (compared to peers). An analyst with a foreign research house says, “A healthier order book, better product and market mix and lowering of debt will help company outperform peers in the medium term.” In the near term, analysts expect the company to announce a major order in the ultra high voltage segment, which should further rub off positively on sentiment. At Rs 196, the stock trades at 23 times its 2012-13 estimated earnings.
String of orders…
After announcement of the March quarter results on May 14, Alstom received orders worth Rs 1,068 crore. Of this, about half is from Bharat Heavy Electricals for supplying equipment to a bulk tender order (660 Mw) of NTPC, followed by Power Grid Corporation’s Rs 442-crore order in the high voltage segment (predominantly 765 Kv). Even in the March quarter, the performance in terms of order inflows (Rs 1,340 crore) was relatively better, with growth of seven per cent. Rahul Garg, analyst, HSBC Global Research, attributes the reason to Alstom’s better market mix.
Though a large number of power generation projects are held up due to land and fuel supply issues, the outlook for the T&D sector isn’t really bad. That’s because tendering by Power Grid, the country’s largest power transmission company, is likely to continue in the medium term. Says Garg, “Power Grid’s capex is likely to drive sector orders; expect ordering activity to be more linear in the 12th five-year Plan (FY13-17), compared to the backend loaded nature of ordering in previous Plans. Also, several state electricity boards (SEBs) are scaling up substation voltage levels. Further, Power Grid is likely to work along with SEBs (state electricity boards) to strengthen the sub-transmission network.” All these should ensure a steady flow of orders for companies like Alstom.
| ROBUST OUTLOOK | ||
| In Rs crore | FY12* | FY13E |
| Net sales | 4,151 | 4,206 |
| Operating profit | 432 | 454 |
| OPM (%) | 10.4 | 10.8 |
| Adjusted net profit | 148.0 | 203.0 |
| EPS (Rs) ** | 5.0 | 8.5 |
| PE (x) ** | 39.6 | 23.1 |
| * Figures for 15 months as the company extended the accounting year from December 11 to March 12 ** FY12 EPS & PE are on annualised basis E: Estimates Source: Company, Analyst reports | ||
...without margin pressure
Though not strictly comparable, as the year-ago quarter includes the distribution business, since transferred to Schneider Electric, the operating profit margin jumped 327 basis points sequentially in the March quarter. Notably, this margin is likely to remain stable (if not expand), as the company has been gaining orders mostly in the more profitable high voltage segment, where competition is lesser and Alstom enjoys a strong position.
Says Garg, “The March quarter saw the highest ever proportion of 765 Kv. Expect future orders to be increasingly skewed towards extra high voltage. Further, the outlook is improving and pricing seems to have bottomed out, as seen in recent bids.” Adds John Perinchery, analyst, Asian Markets Securities Institutional Research, in his post results note last month, “Easing of foreign competition, especially from Korean suppliers, in the last couple of quarters would enable maintaining of the operating profit margin.” Declining commodity prices should help.
The business outlook could improve further if hurdles in the power sector are removed, assuming the government is able to resolve the problems facing large projects, such as delay in procurement of land and coal linkages. This will add to the gains for T&D equipment producers such as Alstom.
Other catalysts
The company has emerged as the lowest bidder for the Champa Kurukshetra 800 Kv HVDC link, put to bid by Power Grid and funded by the Asian Development Bank. While the final decision is expected soon, if Alstom is awarded this order (estimated to be worth Rs 2,500 crore by analysts), it will be a major breakthrough, even after considering that it would be shared with Alstom’s parent. Meanwhile, the order book of Rs 4,700 crore provides decent revenue visibility of over a year.
Meanwhile, the company’s plan to sell land (in Bangalore, Chennai) will help reduce its debt of Rs 590 crore and improve the net profit margin. The interest cost of Rs 29 crore (three per cent of sales) in the March quarter was the highest in its history.
Notably, the stock valuation is attractive and well below the peer average of 33 times, capturing concerns on the macro front and competition.
