Areva T&D: Powering ahead

Rs 400 crore capex will enable the company to bid for local orders and supply more products to its global network.

Areva T&D bagged a Rs 115 crore order from Madhya Pradesh Power Transmission for setting up transformers. The order will be executed in CY08. The stock has gained nearly 7 per cent after the announcement of the contract.

Areva, a transmission and distribution solutions player, has benefited from the strong demand for its products, due to the government's thrust on the power sector.

The company has achieved a major improvement in its operating profit margins due to gains in operational efficiencies. Its margins, which were as low as 5.5 per cent in FY05, have improved to 15.8 per cent in the March 2007 quarter.

The y-o-y top line growth of 19.4 per cent and net sales of Rs 360.8 crore came on a higher base. The March 2006 quarter was exceptionally good, with gross sales growth of 80 per cent in the T&D business.

In the March 2007 quarter, Areva's raw material costs declined by 230 basis points. As a result, the operating profits grew 82 per cent y-o-y to Rs 56.9 crore, buoying the operating margins by 540 basis points.

Going forward, the Rs 400 crore capex programme will enable the company to bid for domestic orders as well as supply more products to its global network. But with the stock of Areva T&D trading at 41 times trailing earnings, it appears expensive in spite of future growth prospects.

Berger Paints: Bright colours

Berger Paints reported an improved performance in the March 2007 quarter, fuelled by the ongoing construction boom. The company's operating profits grew 30.7 per cent y-o-y to Rs 31.1 crore in the last quarter, on a 23.2 per cent growth in net sales to Rs 294.08 crore.

The operating profit margins also improved by 60 basis points y-o-y to 10.6 per cent in Q4 FY07. The operating profit margins of rival, Asian Paints, had also improved by 20 basis points y-o-y to 12.2 per cent in Q4 FY07.

Meanwhile, the adjusted raw material costs of Berger Paints as a percentage of net sales rose 30 basis points y-o-y to 66.3 per cent in Q4 FY07.

However, analysts point out that the company's price hikes earlier in FY07 helped in offsetting the higher costs of titanium dioxide and crude-oil based materials in Q4 FY07.

The consolidated operating profit margins declined 60 basis points to 10.5 per cent in FY07. Going forward, Berger is expected to see a rise in its raw material costs due to the jump in crude oil prices. However, the recently commissioned resin plant at Jammu is expected to provide a cushion to its margins.

With the stock trading at 16 times FY07 earnings, there is little room for further upside.

Arvind Mills: Going slow

The beleaguered denim division of Arvind Mills, the mainstay of the company, showed an improvement in realisations, which went up 6.4 per cent y-o-y and 7.5 per cent q-o-q. The volumes, however, remained low at 9.5 per cent y-o-y and 7.2 per cent sequentially.

This improvement may just be an aberration, as the glut situation in the domestic market persists. The realisation on shirting declined 2.5 per cent y-o-y and 4.1 per cent q-o-q and volumes dipped 10 per cent y-o-y and 15.6 q-o-q.

The company's financial performance in Q4 FY07 is not comparable with the previous year due to the merger of Arvind Brands with effect from April 2006.

However, the operating profit margins have declined by over 1100 basis points y-o-y to 13.9 per cent in Q4 FY07. The margins were also impacted due to rising cotton costs (up 5 per cent q-o-q and about 11 per cent up y-o-y) and higher expenses for the new plant.

The revenues are yet to accrue. The higher interest outgo and rupee appreciation also kept the profitability subdued at the net level.

The company is now reducing its focus on the domestic denim mass market and is targeting mid and premium brands in the US and EU for its denim division. Its branded apparel retail business, which includes Arvind Brands, now accounts for 18 per cent of the FY07 turnover.

Garments constitute about 15 per cent of sales, compared with 12 per cent a year ago. Both these businesses have the potential of earning good margins over the long term.

But there are plenty of uncertainties for this year as the rupee appreciation will weigh down earnings, while higher cotton prices will start affecting profits in the second half.

The stock is trading at 6 times estimated FY08 earnings and should underperform unless its profitability improves, which seems unlikely.

With contribution from Amriteshwar Mathur and Priya Kansara