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ABB: India delivering!
Jan 24, 2006

Performance Summary
Engineering major, ABB India, has reported a strong performance for the fourth quarter and year ended December 2005 (January-December fiscal). Continuation of strong growth in the company’s power technologies and automation technologies divisions has aided the performance in the period under consideration. Also, on the back of an expansion in operating margins, bottomline growth has outpaced the growth in topline for both the periods.

Financial performance: A snapshot…
(Rs m) 4QCY04 4QCY05 Change CY04 CY05 Change
Sales 7,456 9,857 32.2% 22,602 29,631 31.1%
Expenditure 6,449 8,466 31.3% 20,473 26,449 29.2%
Operating profit (EBDITA) 1,006 1,392 38.3% 2,129 3,182 49.5%
Operating profit margin (%) 13.5% 14.1%   9.4% 10.7%  
Other income 166 159 -4.4% 453 511 12.7%
Interest 1 26 2902.3% 13 66 392.6%
Depreciation 54 62 13.9% 204 231 13.7%
Profit before tax 1,117 1,462 30.9% 2,365 3,395 43.5%
Extraordinary income/(expense) - -   38 -  
Tax 409 516 26.2% 860 1,208 40.5%
Profit after tax/(loss) 708 946 33.6% 1,543 2,187 41.7%
Net profit margin (%) 9.5% 9.6%   6.8% 7.4%  
No. of shares 42.4 42.4   42.4 42.4  
Diluted earnings per share* (Rs)         51.6  
P/E ratio* (x)         48.0  
* On a 12-month trailing basis            

What is the company’s business?
ABB India (ABB) is a 52% subsidiary of ABB, Zurich, which is a global leader in power and automation technologies. Besides catering to the Indian markets, ABB has also been playing an increasing role in the parent’s regional and global operations. The company serves utility and industry customers through its vast range of offerings, which form part of its segments – Power Technologies (PT) and Automation Technologies (AT). The former, at around 62% of CY05 revenues, caters chiefly to electric, gas and water utilities through its range of products and services for the power transmission and distribution business. The AT business serves customers across industries like metals, paper, automotive, chemicals and petrochemicals. During the period CY00 to CY05, ABB’s net sales and profits have grown at compounded rates of 30% and 32% respectively. The company has over 3,500 employees, 8 manufacturing units and 26 marketing offices.

What has driven performance in CY05?
Growth’s everywhere: ABB has witnessed an all-round growth during CY05, which encompasses robust performances from both its PT and AT divisions. While revenues from the former grew by 34% YoY, those of the latter recorded a 27% YoY growth during the fiscal. Consequently, while the PT division marginally over-performed our estimates of 30% YoY growth in revenues during CY05, the AT division underperformed our estimates of 40% YoY growth during the fiscal. During the period between CY05 and CY07, we expect revenues from these divisions to grow at compounded rates of 28% and 30% respectively.

A strong accretion to the order book has aided these robust performances of both the divisions during CY05. ABB booked orders worth Rs 37.6 bn during CY05, recording a 46% YoY over the order book of CY04. Around 27% of CY05 orders were booked in the fourth quarter of the fiscal (compared to 26% in CY04). At the end of CY05, the company’s order backlog stood at Rs 21 bn, representing 71% of CY05 revenues.

Continued strength in the capex cycle, whereby the Indian power transmission and distribution (T&D) and industrial sectors are witnessing increased investments, has helped this strong growth in orders for ABB. Further, healthy macro economic fundamentals, power sector opportunities and industrial growth momentum continue to offer encouraging signs for ABB’s future growth.

Segment-wise performance…
  4QCY04 4QCY05 Change CY04 CY05 Change
Power Technologies (PT)  
Revenue 4,860 6,559 35.0% 14,008 18,762 33.9%
% share 62.8% 63.9%   60.3% 61.7%  
PBIT margin 14.2% 13.6%   9.8% 10.4%  
Automation Technologies (AT)  
Revenue 2,878 3,701 28.6% 9,205 11,655 26.6%
% share 37.2% 36.1%   39.7% 38.3%  
PBIT margin 16.2% 15.1%   10.4% 11.9%  
Total*  
Revenue 7,738 10,260 32.6% 23,213 30,416 31.0%
PBIT margin 15.0% 14.1%   10.1% 10.9%  
* Excluding inter-segment adjustments

Lower input costs aid margins: Softening of the commodity (read, steel) cycle, which has helped other engineering players, has also aided ABB’s margin expansion during CY05. As a matter of fact, raw material costs declined as a percentage of revenues, from 74% of CY04 sales to just over 72% of sales in CY05. Based on segments, while PBIT margins for PT division expanded by around 60 basis points, those for AT improved by 150 basis points. ABB has slightly out-performed our operating margin estimates (actual of 10.7% vis-à-vis our estimates of 9.5% for CY05).

It boils down to the bottomline: The strong growth in revenues combined with the expansion in operating margins has helped ABB post a superlative growth on the net profit front. The actual net profit growth of 42% YoY during CY05 is marginally higher than our estimates of 38% YoY.

What to expect?
At the current price of Rs 2,475, the stock is trading at a price to earnings multiple of 31.3 times and 2.3 times our estimated CY08 earnings and sales respectively. These valuations are at the higher end of the valuation spectrum and thus, call for caution. The board has recommended a dividend of Rs 8 per share for CY05 (dividend yield of 0.3%).

We had recommended a ‘Sell’ on the stock in September 2005 at Rs 1,713. We shall reiterate here that while we do not doubt the strong growth prospects of the company on the back of improved investment scenario in the power T&D and automation segments, we believe that the same has already been captured in the stock price.

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