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ABB India Vs ABB Group: Review 2
Apr 13, 2006

Almost three years since we had last analysed the performances of ABB India and its parent ABB Group (52% stake in the former), we believe that the performances need a review considering the changed business environments for both the companies. As such, here is our comparative analysis of the two entities, who are leaders in their respective segments and geographies.

About ABB Group
Based in Zurich, Switzerland, ABB Ltd. (ABB Group) is a leading provider of power and automation technologies to utility and industry customers worldwide. The company operates through Power Technologies and Automation Technologies divisions. The Power Technologies division (45% of CY05 revenues) offers various products, systems, and services for power transmission, distribution, and power plant automation to electric, gas, and water utilities, as well as industrial and commercial customers. The Automation Technologies division (55% of CY05 revenues) provides products, systems, software, and services for the automation of industrial and commercial processes. The Groupís power and automation revenues have grown at compounded rates of 12% and 13% respectively during the period CY02 to CY05.

ABB Group
(US$ m) CY02 CY03 CY04 CY05
Orders
Power 6,753 7,682 9,304 10,714
Automation 8,680 9,691 11,301 12,675
Revenue
Power 6,963 7,598 8,675 9,784
Automation 8,464 9,628 11,000 12,161
PBIT
Power 433 595 608 789
Automation 517 738 1,023 1,312
PBIT margins
Power 6.2% 7.8% 7.0% 8.1%
Automation 6.1% 7.7% 9.3% 10.8%
Others
Backlog 10,464 11,196 12,296 12,050
Times Sales 0.68 0.65 0.62 0.55
ABB India
(US$ m) CY02 CY03 CY04 CY05
Orders
Power 166 219 394 506
Automation 123 152 205 273
Revenue
Power 147 203 322 440
Automation 108 134 212 273
PBIT
Power 13 17 32 46
Automation 12 14 22 33
PBIT margins
Power 8.7% 8.4% 9.8% 10.4%
Automation 11.3% 10.2% 10.4% 11.9%
Others
Backlog 182 234 307 493
Times Sales 0.71 0.70 0.58 0.69

About ABB India
ABB India (ABB) is a 52% subsidiary of the ABB Group, and is a leader in the Indian power and automation technology industries. Besides catering to the Indian markets, ABB has also been playing an increasing role in the parent's regional and global operations. Like the parent, ABB also serves utility and industry customers through its vast range of offerings, which form part of its segments - Power Technologies (PT) and Automation Technologies (AT). The former, at 62% of revenues, caters chiefly to electric, gas, and water utilities through its range of products and services for the power transmission and distribution business. The AT business, at 38% of revenues, serves customers across industries like metals, paper, automotive, chemicals and petrochemicals. During the period CY02 and CY05, the PT and AT segment sales have grown at compounded rates of 44% and 36% respectively. Strong growth of the Indian subsidiary has seen its contribution to the Group increasing by the years (see adjacent chart).

Performance analysis

Power segment: For ABB, India has been the chief growth territory with low contribution coming from exports and outsourcing for the parent. However, for the Group as a whole, in the power sector, high levels of economic expansion with investments in power transmission and distribution (T&D) infrastructure in Asia and the Middle East has been the growth driver. In the European and the American regions, the Group has gained from investments in replacement of the ageing T&D infrastructure and improving the performance and reliability of existing grids. On the other hand, most of ABBís (the Indian subsidiary) revenues have been from new T&D establishments considering that India still has to go a long way in setting up a world-class and reliable T&D infrastructure.

As a matter if fact, against a global ratio of 1:1 for investments in T&D vis-ŗ-vis those in generation, the same for India stands at a low 0.3:1. Simply, this is to say that India invests just 30% of the amount spent in power generation as towards building up the T&D infrastructure. And this is the reason the country faces high levels of T&D losses and consequently supply deficits. Also, a poor T&D infrastructure deters greater private sector investments into the power generation sector in the country.

Automation segment: As far as growth of this segment is concerned, the story has been similar for both the Group and ABB India with respect to the kind of investments taking place in their respective territories of operations. For the Group, growth has been mainly driven by replacement spending in North America and Western Europe, which has been aimed at improving the performance of existing assets. On the other hand, as seen for the Group in the Asian and the Middle East regions, demand for ABB Indiaís products and services has emanated from investments in new production capacities. Going forward, for ABB India, a deeper market penetration, growth in channel partners, increased focused on manufacturing efficiency and productivity supported by industrial revival is likely to play a key role in growth for the automation technology segment. We believe that growth in several industrial sectors, like steel and cement, and pharma and biotechnology is likely to help in a faster growth for the segment going forward.

Financial analysis
There is no doubt that ABB India has outperformed the parent as far as growth rates are concerned. While the former has grown its revenues at a CAGR of 41% during CY02 to CY05, the growth for the latter has been lower at 12%. This strong growth for ABB India has been mainly a result of faster accretion to orders considering the governmentís increased focus towards improving the overall T&D infrastructure in the country in line with the generation capacity enhancement plans. As a matter of fact, power segment orders for the parent and ABB India have grown at compounded rates of 17% and 45% respectively during the said period.

As far as profitability is concerned, while both the entities have been able to record improvements, this time the Group has outperformed ABB India. Against the Groupís 1.8% and 4.7% increase in PBIT margins for PT and AT during CY02 to CY05, ABB Indiaís margins have improved by just 1.7% and 0.6% respectively. As seen, the difference in margin improvement is much pronounced in the automation segment, and this has mainly been the result of higher input prices that ABB India has to do with without being able to pass on the entire effect to customers. Going forward, while we expect margins for the company to improve from the current levels on assumption of softening of the commodity cycle, the volume based growth strategy shall be at the fore considering the kind of competition we are witnessing in the segment.

What to expect?
At the respective current prices of Rs 3,116 and US$ 13, the stocks of ABB India and ABB Group are trading at price to earnings multiples of 29.4 times and 18.3 times respectively. Considering the relatively stronger growth prospects of the Indian arm, while there is no denying the fact that the company should command a premium valuations to its parent, investors still need to be cautious regarding the same. Engineering sector is supposed to move in line with business cycles and, as such, accretion to order books in some of the years should not form the sole criteria of investing in stocks. Execution is the key. While we do not deny that ABB India possesses strong execution skills considering its past track record and also the parentís technological support, valuations remain concern.

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