Citigroup puts 'sell' on Areva T&D India

Research: Citigroup
Rating: Sell
CMP: Rs 288

The company ended the quarter with a backlog of Rs 5,110 crore, up 21% y-o-y. It has maintained its leadership position in Q2CY10. The backlog would have been higher if prices had stayed flat. Several EPC (engineering, procurement and construction) contractors have entered the T&D (transmission and distribution) space, and they are pulling down prices.

The management had earlier expected prices to stabilise by July ‘10 but now believe this might happen only in December ‘10. Chinese competition is continuing. Since September ‘08 transmission prices are down 25% and distribution prices are down 32%. The move to encourage domestic manufacturing in extra high voltage is positive.

Planning Commission’s study suggests that Chinese and Korean companies enjoy a 15-20% cost advantage due to incentives in their countries. Royalty as a percentage of sales is 1.5% currently and the company is not clear if this will go up as the new parent will have to take a call, especially now that the government has removed the royalty payment limit.

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