Alstom Projects

Investors can consider taking profits off the stock of Alstom Projects India (Alstom Projects). Even as the stock has rallied 42 per cent over the last one year — way ahead of the 23 per cent climb of the broader market index CNX 500, its valuations have become stiff compared with peers, as earnings growth has failed to keep pace in the last few quarters.



At the current market price of Rs 824, the stock trades at 35 times its trailing per share earnings; higher than valuations of power equipment player BHEL and engineering conglomerate, Larsen & Toubro (on a consolidated basis).

Alstom Projects' long-term prospects remain intact, what with the company's well-entrenched position in the metro rail segment in India, besides its stronghold in the hydro power space.

Alstom Projects provides power equipment for utilities besides a range of services related to power generation to other industrial users. The company is also a dominant player in railway signalling system and metro cars.



The effect of the slowdown was visible on Alstom's numbers only in FY-10. Revenues for FY-10 fell 11 per cent to Rs 2043 crore. Net profits nevertheless managed a robust 24 per cent growth to Rs 167 crore, thanks to lower operating costs and higher proportion of revenue from power segment.

For FY-10, the company's sales were entirely tilted in favour of the power business, with the segment accounting for 96 per cent of revenues. After pricing and margin pressures witnessed in FY-09, the company managed to improve on this front.

Operating profit margins therefore, closed at a healthy 13 per cent in FY-10, 4 percentage points higher than the previous year. The company ended FY-10 with Rs 3,407 crore of orders in hand, a 24 per cent jump as a result of a six-fold increase in the transport sector, specifically from metro rail projects. Since March, orders continue to flow; the Rs 1,470-crore Chennai Metro Rail, being notable among them.

Sluggish topline

Despite a stream of positive events the previous year, Alstom moved into the first quarter of FY-11 rather sluggishly. The June quarter saw a 30 per cent decline in sales over a year ago numbers with net profits contracting by 14 per cent.

While the June quarter's decline alone may not spell much concern, this also happens to be the fourth consecutive quarter of decline in sales starting September 2009 (compared with the respective year ago numbers).

While hydro power projects, which account for a chunk of the company's orders, are themselves prone to slow revenue flow , the recent spate of metro rail projects are only likely to prolong the order book-to-revenue conversion period.

Group companies

In addition to these near-term draggers for earnings prospects, there are a couple of other revenue streams of the parent company that the markets appear to be factoring into the price of the Indian listed entity. One is the Bharat Forge-Alstom tie-up for power turbine, generators and auxillaries. This joint venture company, Alstom Bharat Forge Power, is between a (Alstom) group company and Bharat Forge.

The company has been termed a ‘group' company in Alstom Projects' annual report. In effect, the benefits from this venture would flow into the parent company in France and not to the Indian listed entity. Two, the stock of Alstom Projects has been reacting positively to news of the French parent Alstom's nuclear agreements in the country. At present, the negotiations and deals, whether for uranium or reactors, have been done at the parent level and there is no mention of the Indian listed entity involving itself in the same.

While it is possible that as a fall-out of such deals, the Indian unit may bag some contracts arising in the process, we believe that the parent company, which is a leader in the nuclear space, would deal directly. The Indian entity's revenue from parent and group companies though, may continue; exports now account for close to 20 per cent of the total revenues for the Indian unit.

In this regard, it is also not uncommon for MNCs to route certain business transactions in such a way that the benefits/cash go directly to the parent. Investors may therefore have to take note that there appear no triggers for the company to be re-rated higher than peers at this juncture.

Long-term prospects arising from its business in the thermal and hydro power segments, besides rail projects though, remain good.

via BL