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ABB: No tripping!
Jul 22, 2005

Performance Summary
Engineering major, ABB India (ABB), has reported strong performance for the second quarter ending June 2005 (January-December fiscal) with robust growth in the power technologies business aiding the overall topline growth. On the other hand, expansion in margins of the automation technologies business has aided the overall margin improvement during the quarter. Record order intake on the back of continued strength in the capex cycle has added muscle to the company’s business during the first half of CY05.

Financial performance: A snapshot…
(Rs m) 2QCY04 2QCY05 Change 1HCY04 1HCY05 Change
Sales 5,174 6,589 27.3% 9,588 12,666 32.1%
Expenditure 4,734 5,985 26.4% 8,912 11,690 31.2%
Operating profit (EBDITA) 440 604 37.3% 676 975 44.3%
Operating profit margin (%) 8.5% 9.2%   7.1% 7.7%  
Other income 98 141 44.4% 173 260 50.1%
Interest 4 17 315.1% 9 20 119.8%
Depreciation 50 56 12.0% 98 111 13.0%
Profit before tax 483 672 39.1% 742 1,105 48.9%
Extraordinary income/(expense) - -   - -  
Tax 177 236 33.3% 267 394 47.6%
Profit after tax/(loss) 306 436 42.4% 475 711 49.6%
Net profit margin (%) 5.9% 6.6%   5.0% 5.6%  
No. of shares 42.4 42.4   42.4 42.4  
Diluted earnings per share* (Rs) 28.9 41.2   22.4 33.6  
P/E ratio (x)         43.9  
(* annualised)            

What is the company’s business?
ABB India (ABB) is a 52% subsidiary of ABB, Zurich, which is a global leader in power and automation technologies. Besides catering to the Indian markets, ABB has also been playing an increasing role in the parent’s regional and global operations. The company serves utility and industry customers through its vast range of offerings, which form part of its segments – Power Technologies (PT) and Automation Technologies (AT). The former, at 61% of revenues, caters chiefly to electric, gas and water utilities through its range of products and services for the power transmission and distribution business. The AT business, at 39% of revenues, serves customers across industries like metals, paper, automotive, chemicals and petrochemicals. During the period CY99 and CY04, ABB’s net sales and profits have grown at compounded rates of 24% and 33% respectively. The company has 3,500 employees, 8 manufacturing units and 26 marketing offices.

What has driven performance in 2QCY05?
PT lead topline growth: The PT business of ABB has yet again led the growth in topline. The business has reported 37% YoY growth in revenues during 2QCY05. Revenues for the AT segment have grown by 14% YoY. Robust performance of both the segments, especially of PT, has been brought about by a strong growth in order intake during the quarter. ABB booked orders worth Rs 9.4 bn during 2QCY05, a growth of over 43% YoY. For the first half, which also takes into consideration bookings in the first quarter, orders received have grown by nearly 47%. Continued strength in the capex cycle, which is witnessing increased investments in the Indian power transmission and distribution segments (T&D) has helped this strong growth in orders for ABB. At the end of the first half, the company’s order backlog stood at Rs 18.6 bn, a growth of 39% over 1HCY04 and almost 80% of CY04 revenues. A large part of the orders in 2QCY05 were booked for turnkey substations, distribution automation and medium voltage equipment sub-segments of the T&D segment.

Segment-wise performance…
  2QCY04 % of total 2QCY05 % of total Change
Power Technologies (PT)
Revenue 2,992 56.3% 4,109 60.9% 37.4%
PBIT 278 61.0% 347 53.4% 24.7%
PBIT margin 9.3%   8.4%    
Automation Technologies (AT)
Revenue 2,321 43.7% 2,638 39.1% 13.7%
PBIT 178 39.0% 302 46.6% 69.9%
PBIT margin 7.7%   11.5%    
Total*
Revenue 5,312   6,747   27.0%
PBIT 456   649   42.3%
PBIT margin 8.6%   9.6%    
* Excluding inter-segment adjustments

Efficiencies help margin expansion: ABB has managed to expand its operating margins by 70 basis points during 2QCY05. If one were to consider different heads of expenditure as percentage of revenues, while raw material costs have declined by 200 basis points (from 74% in 2QCY04), other expenditure is down 120 basis points (from 13.2%). Based on segments, while PBIT margins for PT contracted by 90 basis points, those for AT improved strongly by 380 basis points.

It boils down to the bottomline: Expansion in operating margins and higher other income has aided ABB’s profits during the quarter, as the same have grown by 42% YoY. For 1HCY05, the profits have grown by nearly 50% YoY for reasons mentioned above.

What to expect?
At the current price of Rs 1,475, the stock is trading at a price to earnings multiple of 29.3 times our estimated CY05 earnings. Readers should note that business for engineering companies generally picks up momentum during the second half of the year and, as such, valuations based on first half earnings tend to be skewed, as can bee seen in the first table above. We had recommended a ‘Hold’ on the stock in April 2005 at Rs 1,215 with a target price being Rs 1,610 in the long-term. This was based on our opinion that investments in T&D infrastructure are likely to materialise much faster, as compared to the overall power infrastructure and that this promises strong growth prospects for the company going forward. While the strong performance in the second quarter only vindicates our view, we are of the opinion that much of the anticipated growth has already been factored in to the current price. As such, investors need to practice utmost caution.

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