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ABB India: Rock solid performance - Views on News from Equitymaster
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ABB India: Rock solid performance
Apr 26, 2007

Performance summary
Power equipment and services major, ABB India has announced strong results for the first quarter of 2007 (January to December fiscal). For 1QCY07, the company has reported a topline growth of 64% YoY. Also, operating margins have expanded by 110 basis points (1.1%) due to lower raw material and staff and costs (as percentage of sales). Due to this, and despite lower other income, the bottomline growth at 69% YoY has outperformed the growth in topline.

Financial performance: A snapshot…
(Rs m) 1QCY06 1QCY07 Change
Sales 8,029 13,124 63.5%
Expenditure 7,335 11,843 61.5%
Operating profit (EBDITA) 695 1,282 84.6%
Operating profit margin (%) 8.7% 9.8%  
Other income 180 152 -15.5%
Interest 2 10 416.3%
Depreciation 62 86 38.9%
Profit before tax 810 1,337 65.1%
Extraordinary income/(expense) - -  
Tax 297 471 58.6%
Profit after tax/(loss) 513 866 68.9%
Net profit margin (%) 6.4% 6.6%  
No. of shares   42.4  
Diluted earnings per share* (Rs)   88.6  
P/E ratio* (x)   46.2  
* On a trailing 12-month 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 CY01 to CY06, ABB’s net sales and profits have grown at compounded rates of 33% and 39% respectively.

What has driven performance in 1QCY07?
Segment-wise performance...
(Rs m) 1QCY06 1QCY07 Change
Power systems
Revenue 3,008 4,480 48.9%
% share 34.9% 32.3%  
PBIT margin 8.2% 9.5%  
Power products
Revenue 2,072 3,803 83.6%
% share 24.0% 27.4%  
PBIT margin 8.8% 9.0%  
Process automation
Revenue 1,620 2,671 64.9%
% share 18.8% 19.2%  
PBIT margin 8.4% 7.5%  
Automation products
Revenue 1,912 2,880 50.6%
% share 22.2% 20.7%  
PBIT margin 11.3% 11.3%  
Others
Revenue 19 54 191.0%
% share 0.2% 0.4%  
PBIT margin 11.4% -2.4%  
Total*
Revenue 8,631 13,889 60.9%
PBIT margin 9.1% 9.3%  
Power division leads the way: ABB’s strong 64% YoY growth in topline during 1QCY07 has been a result of robust performance from its power division. Within this business, while power systems has grown its sales by 49% YoY, power products’ sales have recorded an 84% YoY growth during the quarter. Further, the company’s automation sub-divisions of automation products and process automation have also witnessed strong traction during the quarter, recording sales growth of 51% YoY and 65% YoY respectively.

Record order intake and execution of the already huge backlog aided ABB’s topline growth across all segments during the quarter. The company recorded an order intake of Rs 20 bn during 1QCY07, growth of 43% YoY. At the end of the quarter, the company’s order backlog stood at near Rs 43 bn, almost equal to the company’s CY06 revenues. During the quarter, the company received large orders from power utilities and core industries like cement, steel, pulp and paper.

Lower input, staff costs aid margin expansion: ABB’s operating margins of 9.8% in 1QCY07 was the highest first quarter margins that the company has earned in the past eight years, and speaks volumes of its strategy of focusing on the higher end of the markets in power and automation products. The expansion in margins during this quarter was on the back of lower input and staff costs (as percentage of sales). As a matter of fact, input costs declined from 79% of sales in 1QCY06 to 75% in 1QCY07.

Margin expansion aids bottomline: ABB’s strong bottomline performance was aided by the improvement in operating profitability (as explained above) as also lower effective tax rate. However, this growth would have been higher but for a reduction in other income.

What to expect?
At the current price of Rs 4,096, the stock trades at a multiple of 46.2 times its trailing 12 months earnings and 24.7 times our estimated CY08 earnings. The company continues to turn out strong performance in line with the robust demand environment in the power transmission and distribution equipment segment. Capacity expansion in core sectors is also expected to aid the company’s growth in the future. What is, however, more heartening is the fact that the company continues to benefit from a move up the value chain, as seen from the improvement in operating margins on a consistent basis. We also see stability in input costs as a key factor driving profitability improvement in the future.

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