BuyPrevious Recommendation: Buy (28 February 2001) Rs36

Equity Shares (m) 41.4

52-Week Range 45/15

1/6/12 Rel. Perf. (%) 23/50/59

Price/BV (12/00) 1.7

M.Cap. (Rs m) 1,490

Update/Earnings GuideSECTOR: ENGINEERING - ELECTRICAL EQUIPMENT

ST OCK INF O.BSE SENSEX: 3,373

S&P CNX: 1,088

B LOOMB E RGNARE U T E RS C O D ENA

Alstom Power India

15 June 2001

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

Year Net Sales PAT EPS* EPS P/E PEG RoE RoCE EV/ EV/

End (Rs m) (Rs m) (Rs) Growth (%) Ratio (x) (%) (%) Sales EBDIT

12/00A 2,739 113 2.7 - 13.5 0.2 12.7 13.7 0.6 10.7

12/01E 4,700 214 5.2 89.1 7.2 - 19.4 22.8 0.3 6.3

12/02E 6,658 263 6.3 22.7 5.8 - 20.7 33.2 0.2 3.9

Quarterly Performance (Rs Million)YEAR ENDING DECEMBER 1Q FY00 2Q FY00 3Q FY00 4Q FY00 1Q FY01 2Q FY01E FY00 FY01E

Sales 367 450 517 1,404 1,315 1,122 2,739 4,700Change (%) - - - - 258.3 149.1 124.4 71.6

Total Expenses 396 466 512 1,288 1,308 1,114 2,662 4,537EBITDA (29) (16) 5 116 7 7 76 163

Change (%) (51.0) - (100.3) (159.5) - - - 112.9As % of Sales - (3.5) 1.0 8.2 0.5 0.6 2.8 3.5

Interest 5 9 9 (23) - - 1 1Depreciation 15 15 15 19 17 17 63 67Other Income 16 29 22 40 37 40 106 151PBT (33) (11) 3 160 27 30 119 245Tax - - - 6 2 3 6 31PAT (33) (11) 3 154 24 27 113 214

As % of Sales (9.1) (2.4) 0.5 11.0 1.9 2.4 4.1 4.6

Motilal Oswal Securities Ltd., 81-82, Bajaj Bhawan, Nariman Point, Mumbai 400 021. Tel: +91 22 281 2500 Fax: 281 6161

* Adjusted for extra-ordinary items

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

RecommendationBased on the size of the order backlog and the execution cycle, the business outlook appears very promising. AlstomPower has cash and cash equivalents worth Rs700m. The EV of this zero debt company net of cash equivalents willbe around Rs800m. At the current market price of Rs36, the stock is trading at 7x FY01E and 6x FY02E earnings. Werecommend a BUY.

2 15 June 2001

ABB Alstom Power India

Comfortable order book positionThe order intake in 1QFY01 was Rs2.4b comprising twokey projects.1. Ash handling equipment for NTPCs Talcher project. Thisproject 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 parentand Alstom Power India would jointly execute the contract.The entire contract size for the project is Rs1.81b in whichAlstom Power Indias 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 hasincreased by 12% compared to the level as of Dec.2000.

Some of the major orders that constitute part of the orderbacklog as of January 1, 2001:

ORDER ORDER ORDERPROJECT BACKLOG SALES INTAKE BACKLOG

1/1/01 1QFY01A 1QFY01 1/4/01Base Turnover 1,626 232 290 1,689EPC Projects

- Neyveli 3,658 700 - 2,958- Korba 2,063 83 - 1,980- Hazira 1,523 300 - 1,223

Talcher Ash Handling - - 1,410 1,410Dhauliganga HEP - - 700 700Total 8,870 1,315 2,400 9,960

There are two to three project orders for gas turbines thatthe management is aggressively pursuing.n EPC contract for the second phase of IPP promoted

by GVK Power in Andhra Pradesh. This projected isexpected to achieve financial closure by September 2001.The order size will be at least Rs. 2bn to executed overa period of 24 months from the date of award of thecontract.

n Supply of gas turbines in Bangladesh. The order sizewill be in the range Rs. 1.5bn to Rs. 1.75bn

n The other mega project that will be up for bidding inOctober 2001 is NTPCs coal-based 660 MWx3 projectat Sipat, Madhya Pradesh. Alstom Power will face stiffcompetition from BHEL for this project.

n The company management also revealed that an orderworth Rs160m is expected shortly for a cogenerationproject. This order will part of the order intake in thebase turnover.

The management is aware that the bigger projects have lotof uncertainty surrounding them. The company has beenconstantly trying to increase order intake from short-cyclecontracts to help free resources quickly and to impartstability to the overall turnover. The order backlog as ofdate from short-cycle contracts is around Rs1.69 or 17%of the total order backlog.

Some of the contracts that form part of the base turnoveras of January 1, 2001:CLIENT ORDER FOR ORDER SIZE (RS M)Tata Sponge Industrial Turbine 90NTPC, Talcher Electrostatic Precipitators 134Hindalco Electrostatic Precipitators 218Total 442

Operating margins to improveThe base turnover comprises of short cycle contracts (3-12months). These orders not only impart stability to the overallrevenues but also are inherently low-risk as far as costescalation is concerned. Thus, they increase overallprofitability. In contrast, the larger projects are bagged atno-profit-no-loss basis.PROJECT-WISE REVENUE MIX (Rs Million)Y/E DECEMBER 1Q FY01 %Base Turnover 232 17.7Projects 1,083 82.3

- Neyveli 700 53.2- Hazira 300 22.8- Korba 83 6.3

Total 1,315 100.0

Due to its superior project management and execution skills,the company is able to ultimately record a reasonable marginon the completion of the contract. All the bigger and long-cycle projects are at the initial phase of execution. Marginswill therefore be low and it is only towards completion thatoverall profitability of the project can be calculated.REVENUE MODEL (Rs Million)Y/E DECEMBER ORDER SIZE FY00 FY01E FY02EBase Turnover - 1,340 1,650 1,750

% of Sales 49 35 26EPC

- Neyveli 4,800 1,142 1,800 1,858- Korba R&M 2,210 142 350 1,250- Dhauliganga 700 - 50 200- Hazira 1,638 115 750 800- Talcher 1,600 100 300- Others - - 500

Total 2,739 4,700 6,658

315 June 2001

ABB Alstom Power India

In 1Q FY01, 83% of the sales booked comprised of biggerand long-cycle projects. As a result margins were underpressure. Going forward as the projects near completionand contribution of base turnover as percentage ofsales increases, EBITDA margins will improve.

As the larger projects contributed to 83% of sales in 1QFY01, the raw material cost as percentage of salesconstituted 86.5% of sales. Going forward, this ratio willcome 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.

Tax rate to slacken PAT growth in FY02The carry forward losses as at December 31, 2000 stoodat Rs155m. This has reduced the effective tax rate forAlstom Power. The company has been paying minimumalternative tax (MAT). As, it is very likely to wipe out itslosses 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 bepaying tax at 35%.

Y/E DECEMBER FY00 FY01 FY02Profit before Tax 119 245 404

Change (%) - 106.6 64.6Tax 6 31 141

Effective Rate (%) 4.8 12.8 35.0Profit after Tax 113 214 263

Change (%) - 89.1 22.7

Non-business other income to increase in FY01In FY00 interest income stood at Rs39m. As of March2001, ICDs worth Rs520m were deployed with groupcompanies. At the AGM it was resolved that up to Rs900mof surplus funds can be placed with group companies. Themanagement expects a couple of orders to be bagged over

the next couple of months due to which it will receiveadvances from customers. Typically 15% of the order sizeis received upfront as advance money. We estimate that theother income from such investments will be around Rs71m.

n Loans to group companiesLoans and advances in the form of ICDs to groupcompanies as of March 31, 2001 stood at Rs520m. Themanagement is able to realize interest income at 250 to 300basis points higher than the prevailing rates in commercialbanks. Since these monies are parked in the group companies,the management has greater control over the funds deployed.

Consolidation blues?Though the valuations are not demanding at all andbusiness holds a lot of promise in the Indian context,there have been concerns about the possible consolidationof the Alstom group companies in India for quite sometime now. At the annual general meeting of Alstom PowerIndia, Country President Dr. Krishna Pillai brushed asidesuch concerns saying, There are no plans to consolidateas of date.

n An internal study group set up to examine thefallouts

He admitted, however, that an internal study group has beenset up to look into the feasibility and viability of theconsolidation of 16 legal entities that the Alstom group runsin India.

n It is premature to make any comments on theissue

At this juncture, we can only say that it is too premature tomake any comments on the issue. All that the managementis doing is taking an inventory of the activities of the variousgroup entities operating in India and examining whether itmakes sense to consolidate.

EXPENDITURE BREAK UPY/E DECEMBER 1Q FY00 2Q FY00 3Q FY00 4Q FY00 1Q FY01 2Q FY01E FY00 FY01EConsumption of RM 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 81.4Personnel 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 5.6Other Expenditure 83 102 79 92 100 86 356 447

As % of Sales 22.5 22.6 15.3 6.6 7.6 7.7 13.0 9.5

4 15 June 2001

ABB Alstom Power India

n We believe that the management will act inthe shareholders interest

Even if the consolidation were to happen, it would all doneto improve the business prospects of the Alstom groupand to increase shareholder value. The final decision ofconsolidation will hinge on the following factors:n Whether the combined entity will emerge strongern Whether the benefits would outweigh the costs of

consolidation

n The management has clearly stated that it willkeep shareholders informed

The key thing to be observed at the AGM was the effortsthat the management took to explain the nitty-gritty of theirbusiness to the all the shareholders present. We would alsoto like to state that the management was extremelytransparent in its dealings with all the shareholders.

There are about 50,000 shareholders of Alstom Power and45,000 shareholders of Alstom. The management clearlystated that shareholder approval is most crucial beforeany move for consolidation is taken. The managementstransparent dealing with the ordinary shareholders presentat the AGM indicates that they are not just offering lip servicewhile talking of protecting shareholder interests.

Management initiativesTo mitigate imbalances developing between orders in handand resources, Alstom Power is establishing strong links withother group companies abroad to allow effective utilizationof resources and to avoid break-up of core competencies.In FY01, the company earned an income of Rs4.2m byproviding such global sourcing services.

Also, the designated project manager for the VideoconPower Project has been deputed to a group companyabroad as the project has failed to close. This not only keepsthe key officials occupied but also gives them greaterexposure thus helping them to sharpen their projectmanagement and execution skills.

Valuation and viewBased on the size of the order backlog and the executioncycle, the business outlook appears very promising. AlstomPower has cash and cash equivalents worth Rs700m. TheEV of this zero debt company will be around Rs600m. Atthe current market price of Rs36, the stock is trading at 7xFY01E and 6x FY02E earnings. We recommend a BUY.

515 June 2001

ABB Alstom Power India

INCOME STATEMENT (Rs Million)

Period Ending December 1999 2000 2001E 2002E

Net Sales 963 2,739 4,700 6,658Change (%) (6.8) 184.4 71.6 41.7

Operating Other Income 24 67 80 125

Total Income 987 2,805 4,780 6,783

Raw Material 670 2,111 3,826 5,480Employee Cost 184 219 265 322SG&A Expenses 283 299 394 499Other Operating Expenses 21 33 53 87

Stock Adjustment - - - -

EBITDA (171) 143 243 395Change (%) 34.3 - 69.7 63.0% of Net Sales (17.7) 5.2 5.2 5.9

Depreciation 43 63 67 75Interest & Finance Charges 15 1 1 1Other Income 6 39 71 84

Profit before Tax (224) 119 245 404Tax - 6 31 141

Effective Rate (%) - 4.8 12.8 35.0

Profit after Tax (224) 113 214 263Change (%) 23.5 - 89.1 22.7% of Net Sales (23.2) 4.1 4.6 3.9

BALANCE SHEET (Rs Million)

Period Ending December 1999 2000 2001E 2002E

Share Capital 414 414 414 414Reserves 364 477 691 854Networth 778 891 1,105 1,268Loans 6 1 - 1Capital Employed (CE) 784 892 1,105 1,270

Gross Fixed Assets 1,036 1,113 1,117 1,107Less: Depreciation 212 274 341 416Net Fixed Assets 824 839 776 927Capital WIP 41 19 25 50

Investments - - - -

Curr. Assets, L & Adv. 1,643 2,647 3,395 4,143Inventory 107 211 416 730Debtors 761 1,243 1,500 1,713Cash & Bank Balance 456 155 129 250Loans & Advances 319 1,038 1,350 1,450Current Liab. & Prov. 1,724 2,613 3,090 3,850Creditors 557 1,343 1,850 2,150Advances from Customers 1,166 1,270 1,240 1,550Other Liabilities - - - 150Net Current Assets (81) 35 305 293

Misc. Expenses - - - -Application of Funds 784 892 1,106 1,269

RATIOSPeriod Ending December 1999 2000 2001E 2002E

Basic (Rs)

EPS (6.5) 2.7 5.2 6.3Cash EPS (5.4) 4.2 6.8 8.1Book Value 18.8 21.5 26.7 30.6DPS - - - 2.4Payout (incl. Div. Tax.) - - - 37.9

ValuationPE 13.5 7.2 5.8Cash PE 8.7 5.5 4.5EV/EBITDA 10.7 6.3 3.9EV/Sales 0.6 0.3 0.2Price/Book Value 1.7 1.4 1.2Dividend Yield (%) - - 6.5

Profitability Ratios (%)RoE (28.7) 12.7 19.4 20.7RoCE (28.1) 13.7 22.8 33.2

Turnover RatiosDebtors (Days) 289 166 116 94Inventory (Days) 58 36 40 49Creditors. (Days) 304 232 176 143Asset Turnover (x) 1.2 3.1 4.3 5.2

Leverage RatioDebt/Equity (x) - - - -

CASH FLOW STATEMENT (Rs Million)Period Ending December 1999 2000 2001E 2002E

Op. Profit/(Loss) before Tax (214) 80 176 320Interest/Dividends Received 6 39 71 84Depreciation & Amortisation 43 63 67 75Interest Paid 15 1 1 1Direct Taxes Paid - (6) (31) (141)(Inc)/Dec in Working Capital 856 303 296 (134)Cash Flow from Op. Activity 706 480 579 205

Extra-ordinary Items - - - -Other Items 1,039 (783) - -CF after Exceptional Items 1,745 (309) 579 205

(Inc)/Dec in FA + CWIP (865) 7 (10) (15)(Pur)/Sale of Investments - - - -CF from Investing Activity (865) 7 (10) (15)

Issue of Shares (414) - - -Inc/(Dec) in Debt 6 (5) (1) 1Interest Paid (15) (1) (1) (1)Dividends Paid - - - (99)CF from Financing Activity (423) (5) (2) (99)

Inc/(Dec) in Cash 456 (307) 567 91Add: Beginning Balance - 456 155 129Closing Balance 456 155 129 250

E: Inquire Estimates

For more copies or other information, contactMotilal 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.