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ABB: Execution issues continue to haunt - Views on News from Equitymaster

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ABB: Execution issues continue to haunt

Mar 2, 2010

Performance summary
  • Sales fall by 13% YoY during 4QCY09 (December ending fiscal), 9% YoY in CY09.
  • Performance during the quarter impacted by a substantial fall in the power systems revenues.
  • Operating margins contract sharply by 4.4% YoY during the quarter on the back of higher cost of traded goods and higher other expenditure (both as percentage of sales).
  • Net profits decline by 43% YoY during the quarter, decline 35% YoY during for the full year.
  • Apart from contraction in operating margins, higher depreciation charges and lower other income also impacted the bottomline performance.
  • Recommends a dividend of Rs 2 per share for CY09 (dividend yield of 0.3%)


Financial performance snapshot
(Rs m) 4QCY08 4QCY09 Change CY08 CY09 Change
Sales 21,663 18,852 -13.0% 68,370 62,372 -8.8%
Expenditure 18,984 17,341 -8.7% 60,650 57,085 -5.9%
Operating profit (EBDITA) 2,680 1,512 -43.6% 7,720 5,287 -31.5%
Operating profit margin (%) 12.4% 8.0%   11.3% 8.5%  
Other income 507 215 -57.5% 1,304 726 -44.4%
Interest 159 26 -83.5% 325 254 -22.0%
Depreciation 103 125 21.3% 367 485 32.2%
Profit before tax 2,925 1,576 -46.1% 8,332 5,274 -36.7%
Tax 993 480 -51.7% 2,858 1,728 -39.6%
Profit after tax/(loss) 1,931 1,096 -43.2% 5,474 3,546 -35.2%
Net profit margin (%) 8.9% 5.8%   8.0% 5.7%  
No. of shares       211.9 211.9  
Diluted earnings per share (Rs)*         16.7  
P/E ratio (x)*         47  
* On a trailing 12 months basis

What has driven performance in 4QCY09?
  • ABB saw its net sales fall sales by 13% YoY during 4QCY09. This was led by the company’s power systems business, which reported a decline of 43% YoY during the quarter. On the other hand, the power products and process automation segments too saw a fall, albeit to a lesser extent (see table below). During the quarter, ABB recorded a surge in order inflows. Orders booked during the quarter stood at Rs 23.7 bn, which was a growth of 88% over 4QCY08. The cumulative order inflow for the CY09 was Rs 86.8 bn, a growth of 8% YoY. The company’s order backlog at the end of the quarter stood at Rs 84.8 bn which was higher by about 38% YoY.
    Segment-wise performance
    (Rs m) 4QCY08 4QCY09 Change CY08 CY09 Change
    Power systems            
    Revenue 7,502 4,265 -43.2% 23,054 17,192 -25.4%
    % share 30.9% 20.9%   30.7% 25.3%  
    PBIT margin 8.8% -9.2%   8.8% 0.4%  
    Power products            
    Revenue 6,181 5,927 -4.1% 20,492 19,936 -2.7%
    % share 25.5% 29.1%   27.3% 29.4%  
    PBIT margin 15.6% 6.5%   12.7% 10.9%  
    Process automation            
    Revenue 5,063 4,421 -12.7% 13,334 12,100 -9.3%
    % share 20.9% 21.7%   17.8% 17.8%  
    PBIT margin 16.0% 16.1%   13.9% 12.3%  
    Automation products            
    Revenue 5,303 5,657 6.7% 17,376 18,022 3.7%
    % share 21.9% 27.7%   23.1% 26.6%  
    PBIT margin 18.5% 16.6%   13.1% 11.4%  
    Others            
    Revenue 206 127 -38.5% 810 569 -29.8%
    % share 0.8% 0.6%   1.1% 0.8%  
    PBIT margin 9.9% 10.8%   7.3% 5.4%  
    Total*            
    Revenue 24,256 20,396 -15.9% 75,065 67,819 -9.7%
    PBIT margin 14.2% 8.1%   11.7% 8.6%  
    * Excluding inter-segment adjustments

  • ABB’s operating margins contracted drastically during 4QCY09. This decline was due to higher costs for goods purchased for trading as also higher other expenditure (both as percentage of sales). Based on segments, the power systems segment got battered; it slipped into a loss during the quarter. The process automation segment was the only major segment that held up its margins. The other two segments of power products and automation products saw their EBIT margins fall.

  • The company’s bottomline witnessed a decline of 43% YoY during the quarter, while it fell a lesser 35% YoY for the full year period. Apart from contraction in operating margins, higher depreciation expenses and lower other income compared to the same period last year also added to the bottomline woes.

What to expect?
At the current price of Rs 779, the stock is trading at a multiple of 23.8 times our estimated CY11 earnings. Based on the company’s dismal fourth quarter performance which has further weighed down on the full year’s performance, we will have to revise our numbers downwards.

The adverse economic environment, especially for project oriented business, and related project delays were some of the causes for the company’s poor show on the topline front during the period under consideration. Also, there was a larger share of orders with a longer gestation period in the backlog, leading to a slower booking of revenues.

The management expects the company to see growth going forward, especially on the back improved liquidity in the market, increased growth in the manufacturing sector and continued investments in the power and infrastructure sectors in India. Further, the company received significant orders for automation and power products including from new revenue streams like water, renewable energy and railways. The year gone by also saw ABB book several orders for electrical balance of plants for power generation plants as also orders for 765 KV substations and transformers.

The company’s lacklustre performance in combination with its high valuations make us cautious about the stock.

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