Update/Earnings Guide

SECTOR: ENGINEERING-ELECTRICALEQUIPMENT

Alstom Power India

ST O C KINF O.

B LO O M B E RG

BSE SENSEX: 3,373 NA

S&P CNX:

RE U T E RS C O D E

1,088 NA

Equity Shares (m)

52-Week Range
1/6/12 Rel. Perf. (%)

Buy

Previous Recommendation: Buy (28 February 2001)

41.4

Year

Net Sales

PAT

EPS*

45/15

End

(Rs m)

(Rs m)

(Rs)

EPS
Growth (%)

Rs36
P/E

PEG

RoE

RoCE

EV/

EV/

Ratio

(x)

(%)

(%)

Sales

EBDIT

12/00A

2,739

113

2.7

13.5

0.2

12.7

13.7

0.6

10.7

1.7

12/01E

4,700

214

5.2

89.1

7.2

19.4

22.8

0.3

6.3

1,490

12/02E

6,658

263

6.3

22.7

5.8

20.7

33.2

0.2

3.9

23/50/59

Price/BV (12/00)
M.Cap. (Rs m)

15 June 2001

* Adjusted for extra-ordinary items

Investment argument
With an order backlog of Rs99b, Alstom Power is comfortably placed
Operating margins are likely to improve in the medium term as existing projects near completion
n Concerns about the possible consolidation of the Alstom group companies in India have been suitably addressed
n A forthright and transparent management is a major positive
n
n

Recommendation
Based on the size of the order backlog and the execution cycle, the business outlook appears very promising. Alstom
Power has cash and cash equivalents worth Rs700m. The EV of this zero debt company net of cash equivalents will
be around Rs800m. At the current market price of Rs36, the stock is trading at 7x FY01E and 6x FY02E earnings. We
recommend a BUY.

Quarterly Performance
YEAR ENDING DECEMBER

Sales
Change (%)
Total Expenses
EBITDA
Change (%)
As % of Sales
Interest
Depreciation
Other Income
PBT
Tax
PAT
As % of Sales

(Rs Million)
1Q FY00

2Q FY00

3Q FY00

4Q FY00

1Q FY01

2Q FY01E

FY00

FY01E

367

450

517

1,404

1,315

1,122

2,739

4,700

258.3

149.1

124.4

71.6

396

466

512

1,288

1,308

1,114

2,662

4,537

(29)

(16)

116

76

163

(51.0)

(100.3)

(159.5)

112.9
3.5

(3.5)

1.0

8.2

0.5

0.6

2.8

(23)

15

15

15

19

17

17

63

67

16

29

22

40

37

40

106

151

(33)

(11)

160

27

30

119

245

31

(33)

(11)

154

24

27

113

214

(9.1)

(2.4)

0.5

11.0

1.9

2.4

4.1

4.6

Abhay Kantak +91 22 207 1379; abhay@motilaloswal.com

Motilal Oswal Securities Ltd., 81-82, Bajaj Bhawan, Nariman Point,

Mumbai 400 021. Tel: +91 22 281 2500 Fax: 281 6161

ABB Alstom Power India

Comfortable order book position

The order intake in 1QFY01 was Rs2.4b comprising two
key projects.
1. Ash handling equipment for NTPC
s Talcher project. This
project would be executed over a three-year period.
However, not much revenue would be booked in FY01.
2. NHPC's Dhauliganga hydel power project. The parent
and Alstom Power India would jointly execute the contract.
The entire contract size for the project is Rs1.81b in which
Alstom Power India
s scope of work is worth Rs700 m.
This order will be executed over a period of four years.
As a result a the order backlog as of March 2001 has
increased by 12% compared to the level as of Dec.2000.
Some of the major orders that constitute part of the order
backlog as of January 1, 2001:
ORDER
PROJECT

Base Turnover

ORDER

ORDER

BACKLOG

SALES

INTAKE

BACKLOG

1/1/01

1QFY01A

1QFY01

1/4/01

1,626

232

290

1,689

EPC Projects

Some of the contracts that form part of the base turnover

as of January 1, 2001:
CLIENT

ORDER FOR

Tata Sponge

Industrial Turbine

NTPC, Talcher

Electrostatic Precipitators

134

Hindalco

Electrostatic Precipitators

218

Operating margins to improve

The base turnover comprises of short cycle contracts (3-12
months). These orders not only impart stability to the overall
revenues but also are inherently low-risk as far as cost
escalation is concerned. Thus, they increase overall
profitability. In contrast, the larger projects are bagged at
no-profit-no-loss basis.

3,658

700

2,958

2,063

83

1,980

PROJECT-WISE REVENUE MIX

- Hazira

1,523

300

1,223

Y/E DECEMBER

1,410

1,410

Base Turnover

Total

700

700

8,870

1,315

2,400

9,960

There are two to three project orders for gas turbines that
the management is aggressively pursuing.
n EPC contract for the second phase of IPP promoted
by GVK Power in Andhra Pradesh. This projected is
expected to achieve financial closure by September 2001.
The order size will be at least Rs. 2bn to executed over
a period of 24 months from the date of award of the
contract.
n Supply of gas turbines in Bangladesh. The order size
will be in the range Rs. 1.5bn to Rs. 1.75bn
n The other mega project that will be up for bidding in
October 2001 is NTPC
s coal-based 660 MWx3 project
at Sipat, Madhya Pradesh. Alstom Power will face stiff
competition from BHEL for this project.
n The company management also revealed that an order
worth Rs160m is expected shortly for a cogeneration
project. This order will part of the order intake in the
base turnover.

90

442

- Neyveli

Dhauliganga HEP

ORDER SIZE (RS M)

Total

- Korba
Talcher Ash Handling

The management is aware that the bigger projects have lot

of uncertainty surrounding them. The company has been
constantly trying to increase order intake from short-cycle
contracts to help free resources quickly and to impart
stability to the overall turnover. The order backlog as of
date from short-cycle contracts is around Rs1.69 or 17%
of the total order backlog.

(Rs Million)

Projects

1Q FY01

232

17.7

1,083

82.3

- Neyveli

700

53.2

- Hazira

300

22.8

- Korba

83

6.3

1,315

100.0

Total

Due to its superior project management and execution skills,

the company is able to ultimately record a reasonable margin
on the completion of the contract. All the bigger and longcycle projects are at the initial phase of execution. Margins
will therefore be low and it is only towards completion that
overall profitability of the project can be calculated.
REVENUE MODEL
Y/E DECEMBER

Base Turnover
% of Sales
EPC
- Neyveli
- Korba R&M
- Dhauliganga
- Hazira
- Talcher
- Others
Total

(Rs Million)
ORDER SIZE

FY00

FY01E

FY02E

1,340
49

1,650
35

1,750
26

4,800
2,210
700
1,638
1,600

1,142
142
115

1,800
350
50
750
100
4,700

1,858
1,250
200
800
300
500
6,658

2,739

15 June 2001

ABB Alstom Power India

EXPENDITURE BREAK UP
Y/E DECEMBER

1Q FY00

2Q FY00

3Q FY00

4Q FY00

1Q FY01

2Q FY01E

FY00

FY01E

270

308

372

1,138

1,151

970

2,088

3,826

As % of Sales

73.5

68.4

71.9

81.1

87.5

86.5

76.2

81.4

Personnel Exp.

44

57

61

57

57

58

219

265

As % of Sales

11.9

12.6

11.8

4.1

4.3

5.2

8.0

5.6

83

102

79

92

100

86

356

447

22.5

22.6

15.3

6.6

7.6

7.7

13.0

9.5

Consumption of RM

Other Expenditure
As % of Sales

In 1Q FY01, 83% of the sales booked comprised of bigger

and long-cycle projects. As a result margins were under
pressure. Going forward as the projects near completion
and contribution of base turnover as percentage of
sales increases, EBITDA margins will improve.

the next couple of months due to which it will receive

advances from customers. Typically 15% of the order size
is received upfront as advance money. We estimate that the
other income from such investments will be around Rs71m.

As the larger projects contributed to 83% of sales in 1Q

FY01, the raw material cost as percentage of sales
constituted 86.5% of sales. Going forward, this ratio will
come down to 81.4% because of two reasons:
n Increased contribution from the base turnover in which
raw material cost as percentage of sales will be lower.
n Secondly as the EPC contracts near completion profits
from these projects will be increasingly realised.

Loans and advances in the form of ICDs to group

companies as of March 31, 2001 stood at Rs520m. The
management is able to realize interest income at 250 to 300
basis points higher than the prevailing rates in commercial
banks. Since these monies are parked in the group companies,
the management has greater control over the funds deployed.

Tax rate to slacken PAT growth in FY02

The carry forward losses as at December 31, 2000 stood
at Rs155m. This has reduced the effective tax rate for
Alstom Power. The company has been paying minimum
alternative tax (MAT). As, it is very likely to wipe out its
losses in FY01, the effective tax rate will be 10% in FY01.
However, in FY02, though the growth in PBT will be 65%
PAT growth will only be 23%, as the company will be
paying tax at 35%.
Y/E DECEMBER

Profit before Tax

Change (%)
Tax
Effective Rate (%)
Profit after Tax
Change (%)

FY00

FY01

FY02

119

245

404
64.6

106.6

31

141

4.8

12.8

35.0

113

214

263

89.1

22.7

Non-business other income to increase in FY01

In FY00 interest income stood at Rs39m. As of March
2001, ICDs worth Rs520m were deployed with group
companies. At the AGM it was resolved that up to Rs900m
of surplus funds can be placed with group companies. The
management expects a couple of orders to be bagged over
15 June 2001

Loans to group companies

Consolidation blues?
Though the valuations are not demanding at all and
business holds a lot of promise in the Indian context,
there have been concerns about the possible consolidation
of the Alstom group companies in India for quite some
time now. At the annual general meeting of Alstom Power
India, Country President Dr. Krishna Pillai brushed aside
such concerns saying, There are no plans to consolidate
as of date.
n

An internal study group set up to examine the

fallouts

He admitted, however, that an internal study group has been

set up to look into the feasibility and viability of the
consolidation of 16 legal entities that the Alstom group runs
in India.
n

It is premature to make any comments on the

issue

At this juncture, we can only say that it is too premature to

make any comments on the issue. All that the management
is doing is taking an inventory of the activities of the various
group entities operating in India and examining whether it
makes sense to consolidate.

ABB Alstom Power India

We believe that the management will act in

the shareholders interest

Even if the consolidation were to happen, it would all done

to improve the business prospects of the Alstom group
and to increase shareholder value. The final decision of
consolidation will hinge on the following factors:
n Whether the combined entity will emerge stronger
n Whether the benefits would outweigh the costs of
consolidation
n

The management has clearly stated that it will

keep shareholders informed

The key thing to be observed at the AGM was the efforts

that the management took to explain the nitty-gritty of their
business to the all the shareholders present. We would also
to like to state that the management was extremely
transparent in its dealings with all the shareholders.
There are about 50,000 shareholders of Alstom Power and
45,000 shareholders of Alstom. The management clearly
stated that shareholder approval is most crucial before
any move for consolidation is taken. The management
s
transparent dealing with the ordinary shareholders present
at the AGM indicates that they are not just offering lip service
while talking of protecting shareholder interests.

Management initiatives
To mitigate imbalances developing between orders in hand
and resources, Alstom Power is establishing strong links with
other group companies abroad to allow effective utilization
of resources and to avoid break-up of core competencies.
In FY01, the company earned an income of Rs4.2m by
providing such global sourcing services.
Also, the designated project manager for the Videocon
Power Project has been deputed to a group company
abroad as the project has failed to close. This not only keeps
the key officials occupied but also gives them greater
exposure thus helping them to sharpen their project
management and execution skills.
Valuation and view
Based on the size of the order backlog and the execution
cycle, the business outlook appears very promising. Alstom
Power has cash and cash equivalents worth Rs700m. The
EV of this zero debt company will be around Rs600m. At
the current market price of Rs36, the stock is trading at 7x
FY01E and 6x FY02E earnings. We recommend a BUY.

15 June 2001

ABB Alstom Power India

INCOME STATEMENT
Period Ending December

(Rs Million)
1999

2000

2001E

2002E

963

2,739

4,700

6,658

(6.8)

184.4

71.6

41.7

24

67

80

125

Total Income

987

2,805

4,780

6,783

Raw Material

670

2,111

3,826

5,480

Employee Cost

184

219

265

322

SG&A Expenses

283

299

394

499

21

33

53

87

(171)

143

243

395

34.3

69.7

63.0

Net Sales
Change (%)
Operating Other Income

Other Operating Expenses

Stock Adjustment
EBITDA
Change (%)

(17.7)

5.2

5.2

5.9

Depreciation

% of Net Sales

43

63

67

75

Interest & Finance Charges

15

39

71

84

(224)

119

245

404

31

141

4.8

12.8

35.0

Profit after Tax

(224)

113

214

263

Change (%)

23.5

89.1

22.7

(23.2)

4.1

4.6

3.9

1999

2000

2001E

2002E

414
364
778
6
784

414
477
891
1
892

414
691
1,105
1,105

414
854
1,268
1
1,270

1,036
212
824
41

1,113
274
839
19

1,117
341
776
25

1,107
416
927
50

1,643
107
761
456
319
1,724
557
1,166
(81)

2,647
211
1,243
155
1,038
2,613
1,343
1,270
35

3,395
416
1,500
129
1,350
3,090
1,850
1,240
305

4,143
730
1,713
250
1,450
3,850
2,150
1,550
150
293

784

892

1,106

1,269

Other Income
Profit before Tax
Tax
Effective Rate (%)

% of Net Sales

BALANCE SHEET

(Rs Million)

Period Ending December

Share Capital
Reserves
Networth
Loans
Capital Employed (CE)
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Investments
Curr. Assets, L & Adv.
Inventory
Debtors
Cash & Bank Balance
Loans & Advances
Current Liab. & Prov.
Creditors
Advances from Customers
Other Liabilities
Net Current Assets

RATIOS
Period Ending December

1999

2000

2001E

2002E

(6.5)
(5.4)
18.8
-

2.7
4.2
21.5
-

5.2
6.8
26.7
-

6.3
8.1
30.6
2.4
37.9

13.5
8.7
10.7
0.6
1.7
-

7.2
5.5
6.3
0.3
1.4
-

5.8
4.5
3.9
0.2
1.2
6.5

(28.7)
(28.1)

12.7
13.7

19.4
22.8

20.7
33.2

289
58
304
1.2

166
36
232
3.1

116
40
176
4.3

94
49
143
5.2

Period Ending December

1999

2000

2001E

2002E

Op. Profit/(Loss) before Tax

Interest/Dividends Received

(214)
6

80
39

176
71

320
84

Depreciation & Amortisation

43

63

67

75

Interest Paid

15

(6)

(31)

(141)

(Inc)/Dec in Working Capital

856

303

296

(134)

Cash Flow from Op. Activity

706

480

579

205
-

Basic (Rs)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation
PE
Cash PE
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios
Debtors (Days)
Inventory (Days)
Creditors. (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)

CASH FLOW STATEMENT

Direct Taxes Paid

Extra-ordinary Items

Other Items

1,039

(783)

CF after Exceptional Items

1,745

(309)

579

205

(Inc)/Dec in FA + CWIP

(865)

(10)

(15)

CF from Investing Activity

(865)

(10)

(15)

Issue of Shares

(414)

(5)

(1)

(15)

(1)

(1)

(1)

(99)

(423)

(5)

(2)

(99)

456

(307)

567

91

456

155

129

456

155

129

250

(Pur)/Sale of Investments

Inc/(Dec) in Debt
Interest Paid
Dividends Paid
CF from Financing Activity
Inc/(Dec) in Cash

Misc. Expenses
Application of Funds

(Rs Million)

Add: Beginning Balance

Closing Balance

E: Inquire Estimates

For more copies or other information, contact

Motilal Oswal - Inquire Phone: (91-22) 207 3809/1379 Fax: (91-22) 207 6686. E-mail: inquire@motilaloswal.com
Sales: (91-22) 281 2500 (Institutional: Navin Agarwal, Retail: Nischal Maheshwari)
This document is for information purposes only. In no circumstances should it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the securities or commodities mentioned in it. The
information in this document has been obtained from sources believed reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.

15 June 2001