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ABB Ltd: Performance continues to improve
Feb 25, 2014

ABB Ltd has announced fourth quarter results of financial year 2013 (It is a December ending company). The company has reported 5.8% YoY growth in sales and 249% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Sales increased by 5.8% YoY during 4QCY13. Strong performance from the power systems (+12.9% YoY) and power products (+10.2% YoY) segments boosted the top line growth during the quarter.
  • Operating profits increased 124.4% YoY during the quarter due to strong performance at the topline level. Operating margins increased by 3.6% YoY.
  • Net profits increased 249% YoY during the quarter. Net profit margins increased from 0.8% YoY in 4QCY12 to 2.7% YoY in 4QCY13.
  • The company has recommended a dividend of Rs 3 per share for the year ended December, 2013.

Standalone performance snapshot
(Rs m) 4QCY12 4QCY13 Change CY12 CY13 Change
Total operating income  20,823 22,039 5.8% 75,650 77,220 2.1%
Expenditure 20,157 20,544 1.6% 72,284 72,521 0.3%
Operating profit (EBDITA) 666 1,495 124.4% 3,366 4,699 39.6%
Operating profit margin (%) 3.2% 6.8% 112.0% 4.4% 6.1%  
Other income 28 7 -75.5% 71 70 -0.9%
Interest 185 288 55.9% 432 1,011 133.9%
Depreciation 246 270 9.8% 941 1,033 9.8%
Profit before tax 264 944 257.8% 2,063 2,725 32.1%
Tax 96 358 273.4% 688 956 38.9%
Profit after tax/(loss) 168 586 249.0% 1,375 1,769 28.6%
Net profit margin (%) 0.8% 2.7%   1.8% 2.3%  
No. of shares         211.9  
Basic & diluted earnings per share (Rs)         8.35  
P/E ratio (x)*         81.2  
* On a trailing 12 month basis.

What has driven performance in 4QCY13?
  • ABB's net sales increased by 5.8% YoY during 4QCY13. This was mainly due to 12.9% YoY and 10.2% YoY growth in the power systems and power products business segments respectively. However, revenues from the process automation segment declined by 15.6% YoY.

  • ABB's operating margins increased by 3.6% during the quarter. Margins from power systems and process automation systems showed considerable improvement during the quarter. Better cost management like localization initiative taken earlier and focus on supply chain management has started showing results.

    Segment-wise performance
    (Rs m) 4QCY12 4QCY13 Change CY12 CY13 Change
    Power systems
    Revenue 5,990 6,763 12.9% 22,422 23,851 6.4%
    % share  27% 29%   28% 29%  
    PBIT margin -10.5% 1.6%   -0.6% 3.5%  
    Power products
    Revenue 5,844 6,439 10.2% 20,853 21,304 2.2%
    % share  26% 27%   26% 26%  
    PBIT margin 9.4% 9.4%   6.6% 8.0%  
    Process automation
    Revenue 4,098 3,458 -15.6% 13,566 12,480 -8.0%
    % share  18% 15%   17% 15%  
    PBIT margin -0.2% 10.3%   -1.1% 5.7%  
    Discrete Automation and Motion
    Revenue 4,934 4,973 0.8% 17,753 18,237 2.7%
    % share  22% 21%   22% 22%  
    PBIT margin 13.1% 7.8%   11.0% 6.9%  
    Low Voltage Products
    Revenue 1,683 2,058 22.3%   6,174 6,769 9.6%
    % share  7% 9%   8% 8%  
    PBIT margin 6.8% 4.3%   6.2% 3.7%  
    Total*
    Revenue 22,549 23,691 5.1% 80,767 82,640 2.3%
    PBIT margin 4.4% 4.6%   1.2% 1.3%  
    * Excluding inter-segment adjustments & unallocated revenues

  • Net profits increased by 249% YoY during the quarter. We believe that a part of the profitability improvement is a reflection of the strategy reorientation and is thus sustainable. Higher share of manufactured products, preference for cash over revenues (and focus on projects where clearances are in-place, dispatch of materials post visibility of cash flows, etc) and better risk return profiling (including for instance compensation for project delays for factors beyond control, etc) helped in improving net profit for the firm.

  • The order inflow in 4QCY13 was weak at Rs 16.6 bn, leading to total order inflow of Rs 67 bn in CY13, down 4% YoY. As large projects remain elusive owing to lack of corporate capex activity in the economy, the management's focus has shifted to short-cycle products. Among the various industries, new growth areas like renewable energy (solar and wind), food and beverages, data centres, railways and mining are expected to provide base orders in CY14, while core industries like metals, cement, infrastructure and power generation are likely to remain weak.
What to expect?

ABB has been investing in capacities in India as it remains optimistic on the long-term outlook for Indian markets. We believe ABB should benefit from the capacities created and cost rationalization measures as demand environment improves over the next few years.

At the current price of Rs 620, the stock is trading at 58.4 times our estimated CY16 earnings. We believe expensive valuation and uncertain outlook in the near term will restrict any meaningful upside on the stock. Hence, we maintain our SELL view on the stock.

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