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ABB India: Powering its way ahead - Views on News from Equitymaster

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ABB India: Powering its way ahead
Feb 19, 2007

Performance summary
Power T&D equipment and services major, ABB India has announced strong results for the fourth quarter and full year ended December 2006. For CY06, the company has reported a topline growth of 44% YoY. Also, operating margins have expanded by 50 basis points due to stock related adjustments and lower staff and other costs. Due to this, as also on the back of lower interest charges, the bottomline growth at 56% YoY has outperformed the growth in topline. The performance has been almost in line with what we had estimated for ABB for CY06, with actual revenues and net profits being 2% and 3% higher respectively.

Financial performance: A snapshot…
(Rs m) 4QCY05 4QCY06 Change CY05 CY06 Change
Sales 9,857 14,263 44.7% 29,631 42,740 44.2%
Expenditure 8,466 12,316 45.5% 26,449 37,973 43.6%
Operating profit (EBDITA) 1,392 1,947 39.9% 3,182 4,767 49.8%
Operating profit margin (%) 14.1% 13.6%   10.7% 11.2%  
Other income 159 174 9.4% 511 737 44.3%
Interest 26 1 -95.9% 66 7 -89.1%
Depreciation 62 71 14.8% 231 265 14.4%
Profit before tax 1,462 2,049 40.1% 3,395 5,232 54.1%
Extraordinary income/(expense) - -   - -  
Tax 516 699 35.5% 1,208 1,829 51.4%
Profit after tax/(loss) 946 1,350 42.6% 2,187 3,403 55.6%
Net profit margin (%) 9.6% 9.5%   7.4% 8.0%  
No. of shares         42.4  
Diluted earnings per share* (Rs)         80.3  
P/E ratio* (x)         48.4  
* On a trailing 12-month 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 power and automation segments. The former caters chiefly to electric, gas and water utilities through its range of products and services for the power transmission and distribution business. The automation business serves customers across industries like metals, paper, automotive, chemicals and petrochemicals. During the period CY01 to CY06, ABB’s net sales and profits have grown at compounded rates of 330j% and 39% respectively. The company has over 3,500 employees, 8 manufacturing units and 26 marketing offices across the country.

What has driven performance in CY06?
All-round show: ABB has recorded strong growth across all its business segments, thereby reporting a 44% YoY growth in topline during CY06. Especially the company’s Automation sub-divisions (automation products and process automation), have witnessed strong traction during the fiscal. This segment contributed to 40% of ABB’s total revenues in CY06, up from 38% in CY05. The power segment (consolidated for power products and power systems) grew sales by 41% YoY during CY06.

Strong growth from all segments was made possible by the company’s robust accretion to orders. During CY06, ABB’s cumulative order intake stood at Rs 56.2 bn, recording a growth of 50% YoY. At the end of December 2006, the company’s order backlog stood at Rs 33.7 bn, growth of 60% YoY and almost 80% of the company’s trotal sales in CY06. ABB’s management has indicated that the company has received big orders for sub-stations and rural and urban distribution systems, which have been driven by generation capacity additions, transmission network augmentation, grid reliability and efficiency improvements. On the automation front, capacity addition and productivity improvement initiatives from India Inc. helped the segment’s stellar performance during CY06.

Segment-wise performance…
(Rs m) 4QCY05 4QCY06 Change CY05 CY06 Change
Power products
Revenue 3,014 3,878 28.7% 8,748 12,130 38.7%
% share 28.7% 25.4%   27.9% 26.5%  
PBIT margin 20.3% 19.8%   12.7% 11.4%  
Power systems
Revenue 3,670 4,976 35.6% 10,633 15,096 42.0%
% share 34.9% 32.6%   33.9% 33.0%  
PBIT margin 20.0% 18.0%   7.8% 10.8%  
Automation products
Revenue 1,922 2,857 48.6% 6,354 9,179 44.5%
% share 18.3% 18.7%   20.2% 20.1%  
PBIT margin 22.2% 25.1%   12.5% 12.5%  
Process automation
Revenue 1,899 3,489 83.7% 5,549 9,140 64.7%
% share 18.1% 22.9%   17.7% 20.0%  
PBIT margin 19.5% 17.6%   10.5% 10.8%  
Others
Revenue 11 63 488.8% 100 147 46.5%
% share 0.1% 0.4%   0.3% 0.3%  
PBIT margin 60.6% 4.6%   13.7% 6.4%  
Total*
Revenue 10,516 15,263 45.1% 31,384 45,693 45.6%
PBIT margin 20.5% 19.6%   10.6% 11.3%  
* Excluding inter-segment adjustments

Considering that ABB India has been one of the strongest performers ABB Group’s portfolio and that the latter is increasingly leveraging India not just as a market but an important resource and R&D base shall stand the former in good stead in the long term.

Higher input costs dent margins: ABB’s operating margins of 11.2% in CY06 was the highest that the company has earned in the past eight years, and speaks volumes of the company’s strategy of focusing on the higher end of the markets in power and automation products. The uptick in margins was on the back of lower staff and other costs as also stock related adjustments. The company’s actual performance on the operating margins front is 30 basis points (0.3%) higher than our CY06 estimates (10.9%).

Lower interest costs aid bottomline: On the back of a robust growth in topline, expansion in operating margins and higher other income, ABB reported a strong 56% YoY growth in its bottomline during CY06. This growth was also aided by lower interest costs, which declined by 89% YoY.

What to expect?
At the current price of Rs 3,890, the stock trades at a price to earnings multiple of 48.4 times its CY06 earnings and 23.4 times our estimated CY08 earnings. The board has recommended a dividend of Rs 10 per share (0.3% dividend yield) and has also announced a stock split in the ratio of 5:1, i.e., every share of Rs 10 face value to be split into five shares of Rs 2 each).

ABB Group’s commitment to growing its operations in India, as outlined by the group’s CEO in his visit to India in March 2006 seems well on course, as seen from the Indian subsidiary’s strong performance in the recent past. The company (ABB India) continues to expand its capacity and range of products, to cater to ABB Group’s global requiremens, as also those from the Indian power and industrial automation sectors. While we remain positive on the company’s growth from a 2-3 years’ perspective, our caution witjh respect to the stock’s valuations persists. While we had turned negative on the stock pretty early in the cycle (needless to say that we were wrong!), our basis premise was stretched valuations for the stock despite the fact that we did not doubt the company’s growth prospects. In fact, the actual revenues and net profits in CY06 have outperformed our original estimates (outlined in the Stoskselect in September 2005) by 8% and 19% respectively, which could not be termed as any drastic outperformance! As such, at the current levels, we maintain our valuation concerns with respect to the stock.

We shall soon be updating our research report on the company with the unaudited CY06 numbers.

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