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ABB India: Well begun is half done!
Apr 25, 2006

Performance Summary
Robust order bookings have helped ABB India report a strong performance for the first quarter of 2005 (January-December fiscal). Adjustments in stock in trade have helped the company record a 2.6% expansion in operating margins during the quarter.

Financial performance: A snapshot…
(Rs m) 1QCY05 1QCY06 Change
Sales 6,077 8,029 32.1%
Expenditure 5,705 7,335 28.6%
Operating profit (EBDITA) 371 695 87.1%
Operating profit margin (%) 6.1% 8.7%  
Other income 119 180 50.5%
Interest 3 2 -33.8%
Depreciation 55 62 13.8%
Profit before tax 433 810 87.0%
Extraordinary income/(expense) - -  
Tax 158 297 88.0%
Profit after tax/(loss) 275 513 86.5%
Net profit margin (%) 4.5% 6.4%  
No. of shares 42.4 42.4  
Diluted earnings per share* (Rs)   57.2  
P/E ratio* (x)   53.2  
* On a 12-month trailing basis      

What is the company’s business?
ABB India (ABB) is a 52% subsidiary of ABB, Zurich, which is a global leader in power and automation technologies. Besides catering to the Indian markets, ABB has also been playing an increasing role in the parent’s regional and global operations. The company serves utility and industry customers through its vast range of offerings, which form part of its power and automation segments. The former caters chiefly to electric, gas and water utilities through its range of products and services for the power transmission and distribution business. The automation business serves customers across industries like metals, paper, automotive, chemicals and petrochemicals. During the period CY00 to CY05, ABB’s net sales and profits have grown at compounded rates of 30% and 32% respectively. The company has over 3,500 employees, 8 manufacturing units and 26 marketing offices across the country.

What has driven performance in 1QCY06?
Growth’s everywhere: ABB has reclassified its segments into four broad categories (as indicated in the table below) from the earlier broader categorise of Power Technologies and Automation Technologies. As per the new classification, the company’s power systems and automation products divisions have been the key drivers of topline growth during the quarter.

Government’s thrust on rural electrification and improvement in the country’s power transmission and distribution (T&D) has helped ABB rake in a strong growth in order bookings during the quarter. This, combined with a large order backlog at the end of the previous quarter, has consequently aided the topline growth during 1QCY06. As a matter of fact, ABB booked orders worth Rs 14 bn during 1QFY06, which is a growth of 57% YoY over the Rs 9 bn of orders that were booked in 1QCY05. Consequently, at the end of the quarter, the company’s order backlog stood at nearly Rs 27 bn (69% YoY growth), which is around 90% of total sales in CY05. Order booking in 1QCY06 represents around 25% of our CY06 estimates for the company.

Segment-wise performance…
  1QCY05 % of total 1QCY06 % of total Change
Power products
Revenue 1,756 27.3% 2,072 24.0% 18.0%
PBIT margin 8.7%   8.8%    
Power systems
Revenue 2,184 34.0% 3,008 34.9% 37.8%
PBIT margin 4.3%   8.2%    
Automation products
Revenue 1,334 20.7% 1,912 22.2% 43.4%
PBIT margin 8.2%   11.3%    
Process automation
Revenue 1,126 17.5% 1,620 18.8% 44.0%
PBIT margin 5.7%   8.4%    
Others
Revenue 30 0.5% 19 0.2% -38.0%
PBIT margin 12.6%   11.4%    

In terms of the topline, 1QCY06 performance represents around 20% of our estimated CY06 topline for the company, which is in line with what has been achieved by ABB in first quarter of every fiscal. Our past five years’ analysis indicates that ABB earns around 20%, 22%, 24% and 34% of its revenues in 1Q, 2Q, 3Q and 4Q respectively. Such is the nature of an engineering business. However, this should not be construed as a projection for the future considering the changing dynamics of the business.

Stock adjustments aid margins: Despite increase in input costs (from 77% of 1QCY05 sales to 79% of 1QFY06 sales), adjustments in stock in trade have helped ABB post an 87% YoY growth in operating profits during the quarter. Operating margins improved from 6.1% in 1QFY05 to 8.7% in 1QFY06. An important point is to note that ABB has managed to consistently improve its first quarter margins over the past four years (from 3.9% in 1QCY03 to 8.7% in 1QCY06). The skewed nature of the business (where lowest and highest revenues are recorded in the first and fourth quarter respectively) is well established from the chart shown alongside, wherein margins have moved in a similar fashion (1Q and 4Q earning the least and highest margins).

In 1QCY06, if one were to consider a segmental analysis (second table above), the power systems segment has yet again emerged as the key driver with a 3.9% expansion in PBIT margins (automation products follow with 3.2% expansion). We expect ABB to earn 11.1% operating margins during CY06, an improvement of 40 basis points over CY05 margins.

It boils down to the bottomline: Strong growth in topline, expansion in operating margins, increase in other income and lower interest costs have all combined to lead to a strong bottomline growth for ABB in 1QCY06.

What to expect?
At the current price of Rs 3,020, the stock trades at a price to earnings multiple of 20.1 times our estimated CY08 earnings, which we believe is stretched. We are enthused by the strong performances reported by the company in the past few quarters and also by the vibrations emanating from the parent regarding its increasing commitment towards growing operations in India. As a matter of fact, ABB India is already a global sourcing base for several products and components used by the ABB Group. We believe that strong growth in the domestic market combined with increased global presence shall be of immense benefit to the company over the long term.

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