Wednesday, March 26, 2014

Alstom T&D - bogged down by low capex and very expensive

BSE: 522275 | NSE: ALSTOMT&D | ISIN: INE200A01026

Alstom global provides capital equipment for thermal power, renewable power, transmission and transport. This particular subsidiary designs and manufactures a range of electrical equipment for the high voltage and ultra-high voltage electricity transmission industry, provides substation automation solutions, network management services, and services & maintains capital assets sold earlier. Given the massive shortfall of electricity in India - at first glance this is an infrastructure play and should be hitting it out of the ballpark - and it was for many years but off late has lost the financial edge.

A capital equipment business is very scary from an operating leverage perspective. You have your team and assets lying waiting for the next order. If the order book dries up or execution is slow or the customers start delaying payments life becomes very challenging.

Domestic T&D market is around 80K Crores. 43% of it in 2012 was serviced by imports despite overcapacity in the Indian producers. Exports from India stand at around 18K Crores for T&D and have been growing slowly at 9.7%.

1. How good is the moat?

Grade B moat
  • Brand: Alstom is a massive global player and so the technology front is taken care of. That comes at the price of being exposed to foreign exchange risk. It has about 19% of the market and is the market leader in India. They also export over 10% of the revenue.
  • Sales & Distribution - All customer are industrial customers and seems like lots of government customers. Replication for a large corporation should not be such a big deal.
  • Pricing power - very low. Most of the products being won on pricing will be proprietary technology else might be hard to price. Company claims they lost lots of orders due to low prices.
  • Performance during recessions - very poor. Overcapacity in the sector in 2012 capacity utilization in the sector was 70% and capacity was expected to increase by more than 50% up to 2014-2015. Since then the economy has taken a nose dive and capital investments are slow.
  • Employees - 3597 employees. Seem to be stable. No competitive advantage seems to be here. Same with Vendors - not much covered here.

2. Risks

  • Technology license fee is rising - it has become 30.9 Crores in FY 2013 from 18.7 Crores in FY 2012. This may be a source of related party transactions where the pricing may not be in the interest of all shareholders
  • FX risk: Exports have become higher than imports in FY 2013 but still due to services and fees expenditure the company is still a net importer.
  • Debt - Debt to EBITD is at 1.48 times - which is a bit high. Not too much risk but I am worried about this due to the operating leverage situation described above.
  • Transparency risk - I don't understand why listed overseas companies want to maintain listed subsidiaries in India. The royalties, trademark fees, and buying prices of imports from parent companies or their vendors/affiliates is something which is a bit of a black box.
  • Customer creditworthiness - should be good as typically large state owned companies. Sometimes might have issues with large levered private companies.

3. Financials

  • CFO is actually leading net income which is great.
  • Stock options - Company claims parent company is providing stock options in the parent and not charging the subsidiary. Again this sounds slightly weird. Why would the subsidiary not be charged?
  • Exceptional items are small - profits on sale of land
  • Inventories in FY2013 have ballooned to 20% of sales from 10.7% a few years earlier. This again points to the slowdown in the customer pipeline.
  • ROE < 10% - has been going down since December 2008
  • Debtors % of sales stands at 50%+ - which is a very bad situation. Means average payment terms are 6 months. This drives up capital intensity and massively brings down ROE/ROCE.
  • Needless to say working capital consumption is much higher than where I would be comfortable
  • Dividend % of earnings is erratic - currently is 59% - the company is trying to keep up the dividend while the profits are falling.
  • No goodwill to talk about.

4. Soft factors

  • Shareholding - promoter shareholding is how 80% which needs to be 75% or below by SEBI guidelines and the promoters are wanting to keep the company listed.
  • Director shareholding - is not disclosed. Which is not a good sign
  • Growth - so far the company size has been contracting. Its multiple is probably high because the market expects that electricity transmission and distribution equipment market will pickup

5. Pricing

  • I really don't understand why project companies like Alstom are trading at such high multiples. Maybe the market is expecting them to hit it out of the ballpark once a new government is in place.
  • Overall the stability of earnings of this company is a big concern along with ballooning pending payments from customers. Pricing is also very expensive at 5000 Crores+ of market cap for just 107 Crores of TTM earnings. No value here.


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