ABB: Order strength continues… - Views on News from Equitymaster

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ABB: Order strength continues…

Apr 10, 2003

T&D equipment major, ABB Ltd.'s growth story continues. The company has reported a 41% growth in March quarter (1QFY04) net profits, backed by an encouraging 18% growth in topline. However, at the operating level, margins dipped to 3.9% indicating competitive environment.

(Rs m)1QFY031QFY04ChangeFY02FY03Change
Net Sales2,4112,83717.6%10,41611,75812.9%
Other Income2566157.8%14224875.3%
Total expenditure2,3012,72518.4%9,45210,58712.0%
Operating Profit (EBDIT)1101121.4%9641,17121.4%
Operating Profit Margin (%)4.6%3.9% 9.3%10.0% 
Interest31-42.6%736-91.8%
Depreciation44441.0%1821830.4%
Profit before Tax8913147.7%8511,23044.5%
Extraordinary items00-0158-
Tax274463.0%198416110.7%
Profit after Tax/(Loss)628741.0%65397248.8%
Effective tax rate (%)30.3%33.5% 23.2%33.8% 
Net profit margin (%)2.6%3.1% 6.3%8.3% 
No. of Shares (eoy) (m)42.442.4 42.442.4 
Earnings per share*5.98.3 15.422.9 
*(annualised)      
Current P/e ratio 38.4  13.8 

The company further strengthened its order backlog to Rs 9,694 m, as compared to Rs 8,794 m at the beginning of the year. On a YoY basis, order backlog saw over 19% growth. The continuation of strong order growth indicates that ABB is likely to continue the strong growth it displayed in FY03 to continue in FY04 as well.

However, pressure on margins is a sign of the competitive market conditions. Had the company not reported strong growth in other income, it would have reported a 25% dip at the net profit level. The higher other income has been possible as a result of freeing of cash due to working capital efficiencies, as well as selling of some non-core businesses its air handling equipment business. In April 2003, it has also sold off its metering business to Elster Metering Private Ltd.

Cost as % to sales1QFY031QFY04
Raw material66.8%71.9%
Staff cost12.9%10.2%
Other expenditure15.7%13.9%
Total expenditure95.4%96.1%

At the current price of Rs 317, the stock trades at around 12x our FY04 earnings estimates. Though we are encouraged by the company's continuous improvement in efficiencies, its focus on services and end-to-end solutions, as also its outsourcing business initiatives, a 3.9% operating margin and dependence on other income for bottomline growth is a cause for worry.

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