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ABB: On a growth march!

Apr 16, 2005

Performance summary
Engineering major, ABB, has reported yet another quarter of strong performance. For the first quarter ended March 2005 (ABB's financial year is December ending), while revenues have grown YoY by 38%, an 80 basis points expansion in operating margins has led to an even stellar profits grow performance (63% YoY).

Financial performance: A snapshot…
(Rs m) 1QCY04 1QCY05 Change
Sales 4,414 6,077 37.7%
Expenditure 4,178 5,705 36.6%
Operating profit (EBDITA) 236 371 57.2%
Operating profit margin (%) 5.3% 6.1%  
Other income 76 119 57.5%
Interest 5 3 -40.0%
Depreciation 48 55 14.0%
Profit before tax 259 433 67.1%
Extraordinary income/(expense) - -  
Tax 90 158 75.6%
Profit after tax/(loss) 169 275 62.7%
Net profit margin (%) 3.8% 4.5%  
No. of shares 42.4 42.4  
Diluted earnings per share* (Rs) 16.0 26.0  
P/E ratio (x)   49.9  
(* annualised)      

What is the company's business?
ABB India is a 52% subsidiary of ABB, Switzerland. The company has divided its operations into two focus areas - power technology and automation technology. Under power technologies, the company supplies transmission and distribution (T&D) equipments to the power sector. ABB India is also the outsourcing agent of the parent company in the T&D segment. This segment contributes around 60% of the company's total revenues. In automation technologies, the company is into providing analytical solutions, industry solutions, robotics and control systems, and the segment contributes to the remaining 40% of revenues.

What has driven performance in 1QCY05?
PT lead topline growth:  Growth in both the segments of the company - power technologies (PT) and automation technologies (AT) - has helped the topline growth in 1QCY04. However, of the 38% YoY growth in the topline, a larger proportion (almost 22%) was contributed by PT, which expectedly saw a strong order inflow during the quarter. On the other hand, the AT business also witnessed significant traction and revenues from the same contributed around 16% to the overall topline growth.

ABB's order intake has also recorded a strong growth of 51% YoY during the quarter and this seems a result of increased investments in the country's infrastructure development, especially in the power transmission and distribution (T&D) segment. At the end of the quarter, the outstanding order book of the company stands at Rs 15.8 bn, almost 70% of CY04 revenues and 19% higher than the CY04 end order backlog of Rs 13.4 bn.

Segment-wise performance…
  1QCY04 % of total 1QCY05 % of total Change
Power Technologies (PT)
Revenue 2,768 61.8% 3,800 61.1% 37.3%
PBIT 143 55.7% 245 58.2%  
PBIT margin 5.2%   6.5%    
Automation Technologies (AT)
Revenue 1,708 38.2% 2,416 38.9% 41.5%
PBIT 114 44.3% 177 41.8% 54.7%
PBIT margin 6.7%   7.3%    
Total*
Revenue 4,476   6,216   38.9%
PBIT 257   422   63.9%
PBIT margin 5.8%   6.8%    
* Excluding inter-segment adjustments

Efficiencies help margin expansion:  ABB has managed to expand its operating margins by 80 basis points in 1QCY05. If one were to consider different heads of expenditure as percentage of revenues, while raw material costs have declined by 20 basis points (from 77.1% in 1QCY04), other expenditure is down 180 basis points (from 13.8%). Based on segments, while profit margins for PT expanded by 130 basis points, those for AT improved by 60 basis points.

Higher other income propels net profits:  Apart from the expansion on the operating margin front, a higher other income has aided a greater then proportionate growth in net profits relative to the growth in topline.

What to expect?
At the current price of Rs 1,295, the stock is trading at a price to earnings multiple of 49.9 times annualised 1QCY05 earnings and 26.0 times our expected CY05 earnings. Based on the price to sales valuation parameter, the stock is trading at around 1.8 times expected CY05 sales. While valuations based on 1QCY05 numbers look pretty expensive, investors should note that revenues and profits for engineering companies are generally skewed towards the latter quarters of the year. As such, valuations seem to correct to lower levels during the third and fourth quarter of a fiscal.

We had recently upgraded our recommendation on the stock from a 'Sell' to a 'Hold' with the target price being Rs 1,610 for the long-term. This was based on our opinion that investments in T&D infrastructure are likely to materialise much faster, as compared to the overall power infrastructure and that this promises strong growth prospects for the company going forward. The strong performance in the first quarter of the current fiscal only vindicates our view.

However, investors should note that the order book position cannot rise at a much faster rate than what is executable and therefore, they have to be realistic with respect to the order book growth. Unlike the past, most of the global engineering majors (upon reading their annual reports) are looking at India and China for growth opportunities, and competition, in this sense, is only going to increase for ABB.

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