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To be in ABB’s shoes

Jul 7, 2000

The title may leave you wondering what this is all about. Well, in our earlier stories on the engineering sector we have long talked about Asea Brown Boveri’s (ABB) overvaluation vis-à-vis its PSU counterpart Bharat Heavy Electricals Limited (BHEL). May be it’s a good time to check out why it is advantageous to be in ABB’s shoes than in BHEL’s. It is a known fact that BHEL is outclassed on basically three counts – its a government owned entity, its overstaffed and it is doing too many things at the same time putting pressure on its margins. But this does mean that ABB is bereft of any problems.

ABB’s power division was a drag on its profitability due to the slow pace of power sector reforms in India. But ABB’s management realised this and recently hived it off its power generation business as a separate company with Alstom (now known as ABB Alstom Limited) in 1999. As a result the company’s future earnings prospects and profit making abilities have improved dramatically. The company is focusing on industrial automation segment, which will earn it better margins.

It is aiming to provide complete software services/solutions to integrate management functions and shop floor activities. Its other focus area - transmission and distribution (T&D) equipment, is also set to grow in light of the mammoth latent demand in the segment. India’s T&D to power generation ratio is 0.3:1 as compared to international standard of 1:1.

On the operations front it is looking to become more cost efficient. The company has trimmed its workforce by almost 28% in the last 3 years to 3,606 employees currently. As a result of this ABB’s turnover is expected to grow at a CAGR (compounded annual growth rate) of atleast 12.1% by FY2002 and its profits are expected to surge at a CAGR of 29% over the same period.

But all this was not an exercise to bring out the attributes of ABB, but rather to highlight the inadequacies and helplessness of BHEL which come with being a PSU. For the record we would like to add that BHEL has cut its employee size by over 8,000 to 54,000 employees currently. It only goes on to show that the government should stop dithering on PSU divestments and/or restructuring and unlock the hidden wealth of its public sector giants.

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