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ABB: Good finish to the year - Views on News from Equitymaster

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ABB: Good finish to the year

Feb 20, 2008

Performance summary
  • Sales grow 29% YoY during 4QCY07, 39% YoY during the full year (December ending fiscal); power systems and automation products lead growth drivers. CY07 sales 6% lower than our estimates.
  • Operating margins expand by 0.5% in 4QCY07, 1% during CY07 - improvement due to lower raw material and staff costs (both as percentage of sales).

  • Net profits grow 45% YoY in CY07, largely aided by expansion in operating margins as other income records a decline. Profits 3% lower than our estimates.

  • Board recommends a dividend of Rs 2.2 per share for CY07 (dividend yield of 0.2%)

Financial performance snapshot
(Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
Sales 14,263 18,394 29.0% 42,740 59,303 38.8%
Expenditure 12,316 15,792 28.2% 37,973 52,057 37.1%
Operating profit (EBDITA) 1,947 2,602 33.7% 4,767 7,246 52.0%
Operating profit margin (%) 13.6% 14.1%   11.2% 12.2%  
Other income 174 254 45.7% 737 710 -3.6%
Interest 1 20 1710.3% 7 68 839.2%
Depreciation 71 82 14.7% 265 324 22.4%
Profit before tax 2,049 2,755 34.5% 5,232 7,565 44.6%
Extraordinary income/(expense) - -   - -  
Tax 699 947 35.4% 1,829 2,648 44.8%
Profit after tax/(loss) 1,350 1,808 34.0% 3,403 4,917 44.5%
Net profit margin (%) 9.5% 9.8%   8.0% 8.3%  
No. of shares         211.9  
Diluted earnings per share (Rs)         23.2  
P/E ratio (x)         54.1  

What has driven performance in CY07?
  • Automation division led ABB’s topline performance during the full year ended December 2007. This business, which is further sub-divided into two segments (process and products), grew its sales by 45% YoY during the fiscal, thereby increasing its share in ABB’s total sales to 38% (36% in CY06). The company’s power division (systems and products) also recorded a strong growth of 34% YoY in sales during CY07.

    Segment-wise performance
    (Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
    Power systems            
    Revenue 5,453 7,402 35.7% 16,919 22,514 33.1%
    % share 35.7% 37.5%   37.0% 35.6%  
    PBIT margin 14.7% 13.0%   10.4% 10.3%  
    Power products            
    Revenue 3,878 4,874 25.7% 12,130 16,326 34.6%
    % share 25.4% 24.7%   26.5% 25.8%  
    PBIT margin 15.8% 17.0%   11.4% 13.0%  
    Process automation            
    Revenue 3,011 3,126 3.8% 7,317 10,666 45.8%
    % share 19.7% 15.9%   16.0% 16.9%  
    PBIT margin 10.2% 14.4%   11.6% 12.5%  
    Automation products            
    Revenue 2,857 4,159 45.6% 9,179 13,332 45.2%
    % share 18.7% 21.1%   20.1% 21.1%  
    PBIT margin 15.0% 14.9%   12.5% 13.4%  
    Revenue 63 158 149.4% 147 344 134.3%
    % share 0.4% 0.8%   0.3% 0.5%  
    PBIT margin 10.3% 6.3%   6.4% 3.6%  
    Revenue 15,263 19,720 29.2% 45,693 63,182 38.3%
    PBIT margin 14.1% 14.6%   11.3% 12.0%  
    * Excluding inter-segment adjustments

    Growth in both these segments was on the back of robust order booking and execution throughout the year. During the year, for instance, ABB recorded an order inflow of Rs 77 bn, which was 36% higher than the orders booked in CY06. At the end of December 2007, the company’s unexecuted orderbook stood at Rs 50 bn, which is around 85% of its full year sales in CY07. As indicated in the press release, ABB received several orders for rural and urban electrification driven by new power capacity additions as well as strengthening of transmission and distribution systems. On the automation front, the company received major orders from sectors like steel, non-ferrous metals, pulp & paper, cement, oil & gas and building applications.

  • ABB’s operating margins expanded by 0.5% in 4QCY07 and 1% in CY07. This improvement was entirely due to lower raw material and staff costs (both as percentage of sales) as other costs increased marginally. Based on segments, power products and power systems recorded the best and worst performance in terms of PBIT margins during the year.

  • On the back of improvement in operating margins, ABB recorded a 45% YoY growth in its bottomline during CY07, which was a tad better than its topline performance, which was largely a result of expansion in operating margins. The bottomline performance would have been even better but for a marginal decline in other income and higher interest outgo.

What to expect?
At the current price of Rs 1,255, the stock is trading at a multiple of 25.6 times our estimated CY09 earnings. ABB’s CY07 performance has been almost in line with our estimates (just a marginal underperformance as mentioned above). The company continues to book key orders in both the power and automation spaces (the latest being a Rs 3.3 bn substation order from Power Grid). What is also important to note is the fact that the company’s global parent has reiterated the importance that Indian operations play in its overall growth plan. In fact, the parent company expects the business volumes for ABB India to double by 2010 and plans to invest an additional US$ 100 m (after a recent investment of US$ 100 m) for capacity and range expansion over the next 2-3 years to support this growth. This we believe is a positive for the Indian entity. We shall soon update our research report on the company incorporating CY07 actual numbers and estimates for CY10.

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