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ABB Ltd: Forex loss mars profits - Views on News from Equitymaster

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ABB Ltd: Forex loss mars profits
May 19, 2012

ABB has announced first quarter results of financial year 2011-2012 (It is a December ending company). The company has reported 0.3% YoY and 20.0% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales decline by 0.3% YoY during 1QCY12 (December ending fiscal). Decline in sales from process automation, discrete automation and motion products and power systems impacted sales. However, sales from power products and low voltage products increased 4.1% YoY and 11.5% YoY respectively.
  • Operating margins fall to 5.4% during the quarter due to rise in other expenses as a percentage of sales. Other expenses increased due to an exchange loss (clubbed with other expenses) of Rs 327.6 m compared to a gain of Rs 29.1 m in 1QCY11.
  • Net profits decline 20.0% YoY during the quarter, due to poor performance at the operating level. Further, fall in other income and rise in interest and depreciation expenses also impacted profitability.
  • Order inflow during the quarter stood at Rs 16.3 bn, compared to an inflow of Rs 16.9 bn in 1QCY11. The order backlog at the end of the quarter stood at Rs 90.2 bn

Financial performance snapshot
(Rs m) 1QCY11 1QCY12 Change
Total operating income 17,960 17,903 -0.3%
Expenditure 16,943 16,928 -0.1%
Operating profit (EBDITA) 1,016 975 -4.0%
Operating profit margin (%) 5.7% 5.4%  
Other income 45 19 -59.0%
Interest 40 54 35.0%
Depreciation 144 223 55.0%
Profit before tax 877 716 -18.4%
Tax 282 240 -14.9%
Profit after tax/(loss) 595 476 -20.0%
Net profit margin (%) 3.3% 2.7%  
No. of shares   211.9  
Basic & diluted earnings per share (Rs)   2.25  
P/E ratio (x)*   86.6  
* On a trailing 12 month basis.

What has driven performance in 1QCY12?
  • ABB's net sales declined by 0.3% YoY during 1QCY12. This was led by the company's process automation business which reported a decline of 7.9% YoY. The power systems and discrete automation & motion businesses too recorded weak performance with revenue decline of 0.6% YoY and 0.8% YoY respectively. However, revenues from the power products segment increased 4.1% YoY.

    Segment-wise performance
    (Rs m) 1QCY11 1QCY12 Change
    Power systems      
    Revenue 5,723 5,689 -0.6%
    % share 30% 30%  
    PBIT margin 0.3% 5.0%  
    Power products      
    Revenue 4,400 4,580 4.1%
    % share 23% 24%  
    PBIT margin 4.9% 2.3%  
    Process automation      
    Revenue 3,298 3,039 -7.9%
    % share 17% 16%  
    PBIT margin 6.6% 2.7%  
    Discrete Automation and Motion      
    Revenue 4,174 4,141 -0.8%
    % share 22% 22%  
    PBIT margin 12.2% 10.4%  
    Low Voltage Products      
    Revenue 1,297 1,447 11.5%
    % share 7% 8%  
    PBIT margin 8.0% 5.7%  
    Total*      
    Revenue 18,892 18,895 0.0%
    PBIT margin 5.6% 5.2%  
    * Excluding inter-segment revenues

  • ABB's operating margins declined to 5.4% during 1QCY12 due to increase in staff cost and other expenses as a percentage of sales. Other expenses increased due to an exchange loss of Rs 327.6 m incurred during the quarter which was clubbed with other expenses. Staff cost increased due to consolidation of acquired businesses.

  • Net profits declined 20.0% YoY during the quarter. Weak performance at the operating level, fall in other income and increase in interest and depreciation expenses impacted profitability. Depreciation expenses increased due to increase in asset base from the acquired businesses. Interest cost increased due to higher cost of borrowing.

What to expect?
Revenue growth in the quarter was affected by slowdown in investments from the industrial side. Consequently, the lifting in company's product deliveries was impacted. However, the power systems segment showed strong resilience taking into consideration the current market conditions. Both discrete automation and low voltage products have also done well after excluding the forex impact during the quarter. Also, the pricing environment in the power side has stabilized. Further, the cost optimization benefits have also started yielding benefits for the company as reflected by the reduction in material cost. Nonetheless, considering the expensive valuations and competitive scenario in the power sector, we maintain our negative view on the stock.

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