Investors can consider adding the stock of Alstom Projects India (Alstom) to their portfolio with a 2-3 year perspective. A sizeable order book, dominant position in the manufacture and servicing of hydro power plants and rising prominence in the railway transport segment suggest strong earnings prospects for the company. Investors can consider buying the stock in lots to take advantage of any further declines linked to broad markets. At the current market price, the stock trades at 22 times its expected earnings for FY 2009. This valuation is within the band at which large power equipment companies trade.
Alstom makes power generation equipment and rail transport infrastructure and receives technology support from its French parent. The company's strength in hydropower equipment is a key revenue driver, given the huge potential for hydel power projects in India and the fact that Alstom has expanded capacities in order to capitalise on the impending order flow. The company has already bagged a series of orders from National Hydroelectric Power Corporation as well as private players. Alstom's order book is tilted to the extent of 95 per cent in favour of the power segment with the transport segment accounting for the rest. Its order book of Rs 2,470 crore (as of March 2007) witnessed a surge, with the company recently bagging a Rs 1,000-crore order for building a combined cycle power plant using technology that has procured repeat orders for its parent globally. This technology, which is to be used by Alstom for the first time locally, may prove to be a reference point for future orders in India.
Alstom has been gaining prominence in transport infrastructure in India, bagging orders from state-run railways. Going forward, with the company accessing expertise from its parent in areas such as signalling, safety and rail traction equipments, orders from various metro rail projects may flow in. Orders received in this segment have seen a five-fold increase over the past fiscal.
A tie-up with BHEL for transferring super critical boilers technology and NTPC's contract for renovation and modernisation of power plants bode well for revenue flows from these large companies. Alstom's operating profit margins rose to over 10 per cent in the June quarter. Competition from other global players with a local presence and any slowdown in power sector reforms are primary risks to earnings.
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