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ABB: Automation leads the way
Apr 25, 2008

Performance summary
  • Sales grow 17% YoY during 1QCY08, led by automation business that has grown sales by 34% YoY. Power systems manage a growth of 8% YoY.

  • Operating margins expand by 1.5% YoY on account of lower raw material costs (as percentage of sales).

  • Net profits grow 36% YoY during the quarter, largely aided by expansion in operating margins.

Financial performance snapshot
(Rs m) 1QCY07 1QCY08 Change
Sales 13,124 15,353 17.0%
Expenditure 11,843 13,626 15.1%
Operating profit (EBDITA) 1,282 1,727 34.8%
Operating profit margin (%) 9.8% 11.3%  
Other income 152 185 22.0%
Interest 10 28 181.5%
Depreciation 86 83 -3.3%
Profit before tax 1,337 1,801 34.7%
Extraordinary income/(expense) - -  
Tax 471 624 32.5%
Profit after tax/(loss) 866 1,177 35.9%
Net profit margin (%) 6.6% 7.7%  
No. of shares# 42.4 211.9  
Diluted earnings per share (Rs)*   24.7  
P/E ratio (x)*   47.5  
* On a trailing 12 months basis
# Increase in number of shares on account of 5:1 stock split

What has driven performance in 1QCY08?
  • ABB’s automation division led the company’s topline performance during 1QCY00. This business, which is further sub-divided into two segments (process and products), grew its sales by 34% YoY during the fiscal, thereby increasing its share in ABB’s total sales to 42% (37% in 1QCY07). On the other hand, the company’s power division (systems and products) could manage a growth of merely 8% YoY during the quarter.

    Segment-wise performance
    (Rs m) 1QCY07 1QCY08 Change
    Power systems      
    Revenue 4,867 5,122 5.2%
    % share 35.0% 31.2%  
    PBIT margin 8.8% 8.9%  
    Power products      
    Revenue 3,803 4,263 12.1%
    % share 27.4% 26.0%  
    PBIT margin 9.0% 12.9%  
    Process automation      
    Revenue 2,285 2,953 29.3%
    % share 16.4% 18.0%  
    PBIT margin 8.6% 14.3%  
    Automation products      
    Revenue 2,880 3,951 37.2%
    % share 20.7% 24.1%  
    PBIT margin 11.3% 10.0%  
    Others      
    Revenue 54 111 104.7%
    % share 0.4% 0.7%  
    PBIT margin -2.4% 8.2%  
    Total*      
    Revenue 13,889 16,399 18.1%
    PBIT margin 9.3% 11.2%  
    * Excluding inter-segment adjustments

    During the quarter, ABB recorded an order inflow of Rs 27 bn, which was 35% higher than the orders booked during 1QCY07. At the end of March 2008, the company’s unexecuted orderbook stood at nearly Rs 62 bn, which is almost equal to its full year sales in CY07. ABB received several orders for rural and urban electrification driven by new power capacity additions as well as strengthening of transmission and distribution systems. On the automation front, the company received major orders from sectors like steel, non-ferrous metals, pulp & paper, cement, oil & gas and building applications.

    The quarter also saw ABB upgrading its production and testing facilities to manufacture 765 kV power transformers locally. The company also commissioned its new small power transformer facility to manufacture power transformers up to 170 kV.

  • ABB’s operating margins expanded by 1.5% in 1QCY08. This improvement was entirely due to lower raw material costs, which declined from 75% of sales in 1QCY07 to 65.8% in 1QCY08. Based on segments, process automation and automation products recorded the best and worst performance in terms of PBIT margins during the year. While margins for the former expanded by 5.7% YoY, those for the latter declined by 1.3% YoY.

  • On the back of improvement in operating margins, ABB recorded a 36% YoY growth in its bottomline during 1QCY08, which was almost double its topline growth.

What to expect?
At the current price of Rs 1,173, the stock is trading at a multiple of 18.7 times our estimated CY10 earnings, which we believe makes it fairly valued. The company continues to invest in ramping up capacity and expanding its range of offerings to cater to growing requirements from the power transmission and distribution sector. And the benefits shall flow into its numbers in the medium to long term. However, at the current stock price, we believe that new or additional investments into the same must be practiced with caution.

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