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[Sumans_Fan]

Areva T&D is among the top transmission and distribution players in India. The company is a leader in high-end technology products including 765kV substation- and gas-insulated-switch gears. Areva will expand aggressively over the next two years and, as a result, its asset base will increase threefold from CY07 levels.

We expect a sharp increase in CY09 revenue after new facilities are commissioned. The stock offers a 31% earnings Cagr over CY07-10CL. At 19.2x 09CL and 13.9x 10CL earnings, Areva is trading at a substantial discount to its closest peer, ABB. BUY.

Aggressive capacity expansion

India’s 11th plan, which calls for 45-55GW of generation capacity addition, will fuel domestic transmission and distribution (T&D) infrastructure growth and Areva T&D will be a key beneficiary. Management plans to aggressively expand capacity over the next two years to take advantage of this huge opportunity, as most of it current capacities are running at high utilisation rates.

The company is setting up a large facility to manufacture power transformers of up to 1,200kV and other medium-voltage and distribution transformers at Baroda, with an investment of Rs5bn. Areva T&D will invest Rs2bn in Hosur and Chennai to set up capacities for instrument transformers and circuit breakers.

At existing facilities, debottlenecking initiatives are currently underway in order to enhance production. The company’s fixed asset base will climb four fold from CY07 once these facilities are built.

Healthy domestic and overseas growth

The company is a technology leader in terms of introducing new products to India. The country’s first 765kV sub-station project was completed by Areva T&D for the National Thermal Power Corporation’s (NTPC’s) Sipat project.

Expansion plans are also aimed at high-end products like extra high-voltage transformers and gas-insulated switchgears (GIS), allowing the company to gain share given rising project sizes. New production facilities will also help boost export sales. Areva T&D just finalised a €500m order from the Middle East, and components worth €86m will be supplied by Areva T&D India.

Premium for strong earnings growth

Areva is currently trading at 19.2x 09CL and 13.9x 10CL earnings, a significant discount to ABB. With the company investing about Rs7bn to enhance its product portfolio and capacity, we expect a 30% revenue and Ebidta Cagr over CY07-10 with average ROE of 40%.

Given strong earnings growth and high return ratios, we expect the valuation gap vis-à-vis ABB to narrow.