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ABB: Improving but still not there

Jul 20, 2000

On first glance ABB's second quarter performance will seem poor as compared to the corresponding quarter in 1999. But if we compare its half yearly figures in FY2000 to 1HFY99 the performance seems creditable.

(Rs m) 2QFY99 2QFY00 Change 1HFY99 1HFY00 Change
Sales 1,908 1,645 -13.8% 3,609 3,136 -13.1%
Other Income 29 50 74.3% 48 76 56.8%
Expenditure 1,676 1,526 -8.9% 3,423 2,983 -12.9%
Operating Profit (EBDIT) 232 119 -48.8% 186 153 -17.3%
Operating Profit Margin (%) 12.2% 7.2%   5.1% 4.9%  
Interest 13 11 -16.0% 31 23 -25.6%
Depreciation 37 42 13.4% 86 83 -3.6%
Profit before Tax 211 117 -44.9% 117 124 5.7%
Tax 28 8 -71.4% 28 8 -71.4%
Profit after Tax/(Loss) 183 109 -40.8% 89 116 30.0%
Net profit margin (%) 9.6% 6.6%   2.5% 3.7%  
No. of Shares (eoy) (m) 41.4 41.4   41.4 41.4  
Earnings per share* 17.7 10.5   4.3 5.6  

But both the comparisions do not present the real picture, simply because last year's figures include ABB's now demerged power business. It would seem strange that the company's 2QFY99 net profit is more than its 1HFY99 net profit. This is because the loss making power business was demerged only in the second quarter of FY99. So its second quarter profitability surged.

Coming to the half yearly figures, if we exclude the company's power business from the 1HFY99 figures, then the profit after tax is actually Rs 132 m. So in effect 1HFY2000 net profit actually fell by Rs 16 m compared to 1HFY99.

Added to this, ABB management has said that the 1HFY2000 figures contain VRS expenses to the tune of Rs 58 m. A large portion of this was a part of the 2QFY2000. So, the second quarter earnings have been adversely affected to that extent. If we take out the VRS of around Rs 50 m in 2QFY2000, then the net profit is actually Rs 159 m, which is not too bad.

But even if we add back the VRS expenses to its 1HFY2000 performance (i.e. 116+58= Rs 174 m) and annualise these earnings (it works out to be around Rs 350 m), still at the current price of around Rs 210, the price to earnings (P/E) multiple works out to be 25, which is a shade expensive at given the current state of the power sector and the industry in general. This P/E multiple may not be sustainable in the long run, unless in the coming quarters ABB records improved growth in turnover and margins.

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