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ABB: Reality check

Jul 14, 2003

ABB India is a 52% subsidiary of ABB, Switzerland. The key focus areas of the company are the traditional T&D equipment segment and services (focused on catering to day-to-day running and maintenance of plants). Recently it has spelled out the retail sector (i.e. branded products for retail consumers) too as a key focus area. The retail market for products like transformers and other smaller equipment is largely unorganised at the current juncture.

Segment Business area Major competitors
Utilities Produces power transformers, provides solutions for high voltage
and medium voltage substations, power line carrier communication
equipments, relay control panels, networking mgmt and services to utilities.
BHEL and Siemens
Automation Technology
Products
Provides products, systems, software and services for the automation
and key technologies including measurement control, instrumentation,
process analysis, power, automation and unique process industry technology products
Siemens and Crompton Greaves
Others Switchgears, breakers, capacitors as well
as other products and technologies for high and
medium voltage applications.
BHEL, siemens and Crompton Greaves

The companyís orderbook grew 19% YoY to Rs 9.7 bn in FY03 (82% of revenues). The robustness in order book position continued in 1QFY04 as well (35% growth YoY to Rs 3.8 bn). Now letís have a look at the segmental break-up of the revenues.

Power technology segment contributed to 53% of ABBís total revenues and accounted for 38% to the PBIT in 1QFY03. As compared to the same quarter last year, revenues for this segment increased by 16% and PBIT by 9%.

Power Tech. (Rs m)
Revenue 1QFY03 1,618
PBIT for segment 1QFY03 488
Revenue 1QFY02 1,398
PBIT for segment 1QFY02 447
% increase in revenue 16%
% increase in PBIT 9%

ABB will be a significant beneficiary of the recently passed Electricity Bill. The focus is on the transmission and distribution segment, particularly on reducing T&D losses. So, rising investments here will directly improve business opportunities for ABB. The investment ratio of T&D to generation has been abysmally low as compared to world standards because T&D companies were not able to realise the money for electricity they supplied. But the scenario is expected to improve now because the sector will increasingly be unbundled. The companies involved in generation will be allowed to take up distribution also, so investing in T&D will make sense for these companies. The government has plans to put additional 100,000 MW to generation capacity till 2012. It takes approximately Rs 35 m to set up 1 MW capacity, and going by the world standards the investment ratio of T&D to generation should be 1:1. So great opportunity lies ahead for ABB.

The automation technology segment has shown significant improvements in 1QFY03 as compared to same quarter last year. The revenue went up by 6% and PBIT of the segment increased by 34%. The index of industrial production (IIP) registered a growth of 5.8% for FY03. This could be an indication of a long-term cyclical upturn.

Automation Tech. (Rs m)
Revenue 1QFY03 1,156
PBIT for segment 1QFY03 783
Revenue 1QFY02 1,090
PBIT for segment 1QFY02 583
% increase in revenue 6%
% increase in PBIT 34%

The other segment contributed 9% to the total revenues for first quarter FY03 and showed an improvement of 18% as compared to same quarter last year but the PBIT improved considerably.

Others (Rs m)
Revenue 1QFY03 2,527
PBIT for segment 1QFY03 242
Revenue 1QFY02 2,137
PBIT for segment 1QFY02 -55
% increase in revenue 18%
% increase in PBIT NA

The stock is currently valued at 370, and trading at P/E of 16.3x FY03 earnings. Historically, ABB has traded in a price band of 14-20x earnings, at a premium to its peers in the power equipment business. Given ABBís strong focus, order book strength coupled with sector positives, we are optimistic on the companyís long term fortunes. But for the valuations to sustain, the company has to continually log in good numbers. And this in turn, is dependent on the execution of power sector reforms on the ground.

Valuation Snapshot
Sales (Rs m) 11,724
PAT (Rs m) 97
EPS (Rs) 22.8
P/E (x) 16.3
Price/Book value (x) 3.2
Order book (Rs m) 9,694
Order book/Sales (x) 0.8
Market Cap/Sales (x) 1.3
* FY03 numbers


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