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ABB: Slowdown in the offing - Views on News from Equitymaster
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ABB: Slowdown in the offing
Feb 20, 2009

Performance summary
  • Sales grow 18% YoY during 4QCY08, 15% YoY during the full year (December ending fiscal); power products and automation products lead growth drivers. CY08 sales 4.5% lower than our estimates.
  • Operating margins contract by 1.9% in 4QCY07, 1% during CY08 - contraction due to higher raw material and staff costs (both as percentage of sales).
  • Net profits grow 11% YoY in CY08, largely aided by a jump in other income. Profits 2% lower than our estimates.
  • Board recommends a dividend of Rs 2.2 per share for CY08 (dividend yield of 0.5%)


Financial performance snapshot
(Rs m) 4QCY07 4QCY08 Change CY07 CY08 Change
Sales 18,394 21,663 17.8% 59,303 68,370 15.3%
Expenditure 15,768 18,984 20.4% 52,008 60,650 16.6%
Operating profit (EBDITA) 2,626 2,680 2.0% 7,295 7,720 5.8%
Operating profit margin (%) 14.3% 12.4%   12.3% 11.3%  
Other income 254 507 99.8% 710 1,304 83.6%
Interest 44 159 264.3% 117 325 177.8%
Depreciation 82 103 26.3% 324 367 13.2%
Profit before tax 2,755 2,925 6.2% 7,565 8,332 10.1%
Extraordinary income/(expense) - -   - -  
Tax 947 993 4.9% 2,648 2,858 7.9%
Profit after tax/(loss) 1,808 1,931 6.8% 4,917 5,474 11.3%
Net profit margin (%) 9.8% 8.9%   8.3% 8.0%  
No. of shares         211.9  
Diluted earnings per share (Rs)         25.8  
P/E ratio (x)         15.6  

What has driven performance in CY08?
  • The power products and automation products divisions led ABB’s topline performance during the full year ended December 2008. These two businesses grew sales by 26% YoY and 30% YoY respectively during the fiscal. The company’s process automation division also recorded a strong growth of 25% YoY in sales during CY08.

    Segment-wise performance
    (Rs m) 4QCY07 4QCY08 Change CY07 CY08 Change
    Power systems            
    Revenue 7,403 7,502 1.3% 22,514 23,054 2.4%
    % share 37.5% 30.9%   35.6% 30.7%  
    PBIT margin 13.3% 8.8%   10.5% 8.8%  
    Power products            
    Revenue 4,876 6,181 26.8% 16,321 20,492 25.6%
    % share 24.7% 25.5%   25.8% 27.3%  
    PBIT margin 17.0% 15.6%   13.0% 12.7%  
    Process automation            
    Revenue 3,126 5,063 62.0% 10,665 13,334 25.0%
    % share 15.8% 20.9%   16.9% 17.8%  
    PBIT margin 14.4% 16.0%   12.5% 13.9%  
    Automation products            
    Revenue 4,160 5,303 27.5% 13,333 17,376 30.3%
    % share 21.1% 21.9%   21.1% 23.1%  
    PBIT margin 15.0% 18.5%   13.4% 13.2%  
    Others            
    Revenue 158 206 30.4% 344 810 135.4%
    % share 0.8% 0.8%   0.5% 1.1%  
    PBIT margin 6.3% 9.9%   3.6% 7.3%  
    Total*            
    Revenue 19,723 24,256 23.0% 63,177 75,065 18.8%
    PBIT margin 14.7% 14.2%   12.1% 11.7%  
    * Excluding inter-segment adjustments

    During the year, ABB recorded order inflows of Rs 80 bn, which was 5% higher than the orders booked in the previous year. At the end of December 2008, the company’s unexecuted orderbook stood at Rs 62 bn, which is around 91% of its full year sales in CY08. As indicated in the press release, ABB received several orders for transmission and distribution projects across the country. On the automation front, the company received major orders from sectors like steel, non-ferrous metals, pulp & paper, cement, oil & gas and infrastructure.

  • ABB’s operating margins contracted by 1.9% in 4QCY07, 1% during CY08. The contraction was mainly due to higher raw material and staff costs (both as percentage of sales).

  • On the back of contraction in operating margins, ABB recorded just around 11% YoY growth in its net profits. This growth was largely on account of a jump in other income which grew by 84% YoY. The bottomline performance would have been worse if not for this other income.

What to expect?
At the current price of Rs 403, the stock is trading at a multiple of 8.5 times our estimated CY10 earnings. ABB’s CY08 performance has been almost in line with our estimates (just a marginal underperformance as mentioned above). As per the management, the company has not yet felt the complete effects of the global slowdown due to the fact that it is largely reliant on domestic consumption for growth. But it does expect to see some slowdown in demand in the short term. We shall soon update our research report on the company incorporating CY08 actual numbers and estimates for CY11.

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