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ABB Ltd: Cost rationalization helps profits

May 9, 2014

ABB Ltd has announced first quarter results of CY14. (It is a December ending company). The company has reported 7.7% YoY de-growth in sales and 20% YoY increase in profits. Here is our analysis of the results.

Performance summary
  • Sales for the quarter decreased by 7.7% YoY during 1QCY14. There was YoY de-growth in two of its business segments i.e Power Systems and Discrete Automation and Motion. Strong performance from the Power products (+29.8% YoY) and Low Voltage products (+28.4% YoY) restricted the sales decline.
  • Operating profits increased 17.3% YoY during the quarter due to sharp decrease in raw material cost as a proportion of sales. Operating margins increased by 1.5% YoY to 6.9%.
  • Net profits increased 20% YoY during the quarter as a result of good operating level performance.
  • The company managed an order inflow of Rs 19.8 bn this quarter as compared to Rs 15.4 bn in the corresponding quarter of last year.
  • Order backlog at the end of the quarter stands at Rs 78.8 bn (drop of 4.6% YoY).

Standalone performance snapshot
(Rs m) 1QCY13 1QCY14 Change
Total operating income  19,811 18,277 -7.7%
Expenditure  18,739 17,020 -9.2%
Operating profit (EBDITA) 1,072 1,257 17.3%
Operating profit margin (%) 5.4% 6.9% 27.2%
Other income 15 11 -26.6%
Interest 198 221 11.7%
Depreciation 246 274 11.3%
Profit before tax 643 774 20.3%
Tax 213 257 20.8%
Profit after tax/(loss) 431 517 20.0%
Net profit margin (%) 2.2% 2.8%  
No. of shares   211.9  
Basic & diluted earnings per share (Rs)   2.4  
P/E ratio (x)*   100.3  
* On a trailing 12 months basis

What has driven performance in 1QCY14?
  • ABB's net sales decreased by 7.7% YoY during 1QCY14. The decline in revenue was in line with ABB's policy of cash over profits as the company deferred execution of certain projects where the payments were still not done.

  • Its Products business reported strong revenue growth YoY with Power products growing by 29.8%; while Low Voltage products grew by 28.4%.

  • Power Systems revenue de-grew by 36.6% YoY.

  • ABB's operating margins increased by 1.5% during the quarter. Decline in the material cost was the key reason for improvement in margins. ABB's efforts towards cost rationalization through localization and high manufactured content vs procured content in products have started to give results. Except Discrete Automation and Motion, EBIT margins have improved in all the other segments.

  • The company had an impressive order inflow growth this quarter. Few of the large orders include around Rs 800m order from Indian Railways and an order from a cement manufacturer in India.

    Segment-wise performance
    (Rs m) 1QCY13 1QCY14 Change
    Power systems
    Revenue 7,519 4,766 -36.6%
    % share 36% 24%  
    PBIT margin 4.0% 4.9%  
    Power products
    Revenue 4,421 5,739 29.8%
    % share 21% 29%  
    PBIT margin 5.0% 10.1%  
    Process automation
    Revenue 2,803 2,891 3.1%
    % share 14% 15%  
    PBIT margin 6.4% 7.1%  
    Discrete Automation and Motion
    Revenue 4,531 4,353 -3.9%
    % share 22% 22%  
    PBIT margin 7.5% 4.4%  
    Low Voltage Products
    Revenue 1,414 1,815 28.4%
    % share 7% 9%  
    PBIT margin 3.8% 4.3%  
    Total*
    Revenue 20,687 19,563 -5.4%
    PBIT margin 4.8% 5.0%  
    * Excluding inter-segment adjustments & unallocated revenues
What to expect?
ABB's localization efforts have resulted in a consistent improvement in margin quarter over quarter. The company has been expanding its manufacturing capacity in India as it wants to follow 'in country, by country and for country' strategy. While the management is optimistic about long term prospects; short hiccups are expected as investment climate is yet subdued especially for its projects business.

At the current price of Rs 817, the stock is trading at 77 times our estimated CY15 earnings. Margin improvement and strengthening of order book give us comfort that ABB India will be one of the prime beneficiaries of an economic turnaround. However, expensive valuation does not justify any further upside in the stock. However, we shall soon roll over our estimates to CY16 earnings; which may lead to change in our view. Till then, we recommend investors to avoid the stock.

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