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ABB: Profits down, but orders up - Views on News from Equitymaster

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ABB: Profits down, but orders up

Apr 30, 2009

Performance summary
  • Sales decline 9% YoY during 1QCY09 (December ending fiscal) owing to weak performance of both power systems and process automation businesses that saw sales fall by 13% YoY and 20% Y0Y respectively.
  • Operating margins contract by 2.3% YoY on account of lower raw material costs and higher other expenditure (as percentage of sales).
  • Net profits decline by 33% YoY during the quarter, largely due to a contraction in operating margins and a higher interest expense.

Financial performance snapshot
(Rs m) 1QCY08 1QCY09 Change
Sales 15,353 13,931 -9.3%
Expenditure 13,599 12,660 -6.9%
Operating profit (EBDITA) 1,754 1,271 -27.5%
Operating profit margin (%) 11.4% 9.1%  
Other income 185 143 -22.8%
Interest 55 103 89.0%
Depreciation 83 109 30.5%
Profit before tax 1,801 1,203 -33.2%
Extraordinary income/(expense) - -  
Tax 624 419 -32.9%
Profit after tax/(loss) 1,177 784 -33.4%
Net profit margin (%) 7.7% 5.6%  
No. of shares# 211.9 211.9  
Diluted earnings per share (Rs)*   23.97  
P/E ratio (x)*   20.3  
* On a trailing 12 months basis

What has driven performance in 1QCY09?
  • ABB’s process automation division led the decline in topline during 1QCY09. This business saw sales fall by 20% YoY during the quarter. The company power systems business too saw a big fall in sales (13% Y0Y). On the other hand, the power products and automation products divisions recorded relatively lesser declines, with power products’ sales remaining almost flat.

    Segment-wise performance
    (Rs m) 1QCY08 1QCY09 Change
    Power systems      
    Revenue 5,121 4,472 -12.7%
    % share 31.2% 29.7%  
    PBIT margin 9.3% 6.3%  
    Power products      
    Revenue 4,262 4,259 -0.1%
    % share 26.0% 28.2%  
    PBIT margin 13.0% 12.7%  
    Process automation      
    Revenue 2,953 2,355 -20.2%
    % share 18.0% 15.6%  
    PBIT margin 14.3% 13.0%  
    Automation products      
    Revenue 3,951 3,844 -2.7%
    % share 24.1% 25.5%  
    PBIT margin 10.0% 7.3%  
    Revenue 111 147 33.0%
    % share 0.7% 1.0%  
    PBIT margin 8.2% -7.3%  
    Revenue 16,398 15,077 -8.1%
    PBIT margin 11.3% 9.3%  
    * Excluding inter-segment adjustments

    During the quarter, ABB recorded an order inflow of Rs 23 bn, which was 83% higher than the orders booked during 4QCY08. At the end of March 2009, the company’s unexecuted orderbook stood at nearly Rs 70 bn, which is almost equal to its full year sales in CY08. With the 83% increase in orders received during 4QCY08, the company is of the belief that the sentiment in the market has considerably improved compared to what it was a couple of months back.

  • ABB’s operating margins contracted by 2.3% YoY in 1QCY09. This was due to higher raw material costs, which increased from 65% of sales in 1QCY08 to 65.6% in 1QCY09. Based on segments, all the company’s segments recorded decline in margins with the power systems and automation products segments seeing the biggest fall in PBIT margins. While margins for the former contracted by 3% YoY, those for the latter declined by 2.7% YoY.

  • On the back of poor show in terms of operating margins and higher interest costs, ABB recorded a 33% YoY fall in its bottomline during 1QCY09, which was much higher than the 9% fall in its topline.

What to expect?
At the current price of Rs 487, the stock is trading at a multiple of 11.5 times our estimated CY11 earnings, which we believe makes it attractively valued. ABB’s management has expressed its optimism about the power sector with utilities investing in new capacity and augmentation across generation, transmission, distribution and improvements in grid reliability and efficiency. It expects that despite the slowdown, focus on improving operational optimisation and improving energy efficiency in industries will continue to drive demand for automation solutions. Also, the company inaugurated a new manufacturing facility for automation products near Bangalore and commissioned a new service center for high voltage machines at Taloja, near Mumbai. Short term concerns notwithstanding, we believe that the stock presents an attractive investment opportunity to investors from a 2-3 year perspective.

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