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ABB India: On to the next level!

Jul 24, 2006

Performance summary
Power T&D equipment and services major, ABB India has yet again reported strong performance, with its 2QCY06 topline and bottomline growing by 48% YoY and 65% YoY respectively. Strong accretion to and execution of the order book has helped the company maintain its streak of robust performances. What is more important is that the company has also managed to improve upon its operating margins by 130 basis points for the second quarter.

Financial performance: A snapshot
(Rs m) 2QCY05 2QCY06 Change 1HCY05 1HCY06 Change
Sales 6,589 9,742 47.9% 12,666 17,771 40.3%
Expenditure 5,985 8,722 45.7% 11,690 16,057 37.3%
Operating profit (EBDITA) 604 1,020 68.8% 975 1,715 75.8%
Operating profit margin (%) 9.2% 10.5%   7.7% 9.6%  
Other income 141 153 8.7% 260 332 27.8%
Interest 17 2 -89.5% 20 4 -81.1%
Depreciation 56 65 16.0% 111 127 14.9%
Profit before tax 672 1,106 64.6% 1,105 1,916 73.4%
Extraordinary income/(expense) - -   - -  
Tax 236 387 64.0% 394 684 73.6%
Profit after tax/(loss) 436 719 64.9% 711 1,232 73.3%
Net profit margin (%) 6.6% 7.4%   5.6% 6.9%  
No. of shares 42.4 42.4   42.4 42.4  
Diluted earnings per share* (Rs)         63.9  
P/E ratio* (x)         36.5  
* On a trailing 12-month basis            

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 power and automation segments. The former caters chiefly to electric, gas and water utilities through its range of products and services for the power transmission and distribution business. The automation business serves customers across industries like metals, paper, automotive, chemicals and petrochemicals. During the period CY00 to CY05, ABB’s net sales and profits have grown at compounded rates of 30% and 32% respectively. The company has over 3,500 employees, 8 manufacturing units and 26 marketing offices across the country.

What has driven performance in 2QCY06?
Growth’s everywhere: ABB’s power division led the overall topline growth during 2QCY06, with its products and systems sub-divisions growing revenues at 35% YoY and 46% YoY respectively. These two sub-divisions together contributed to around 61% of the company total revenues and over 51% of the PBIT (profit before interest and tax). Strong order bookings and execution has aided this segment’s growth during 2QCY06, as has been seen in the previous quarters as well. While the company has not divulged details, considering the past five years’ track record, the power segment has probably contributed to around 60% of the total order bookings of Rs 14.5 bn during the second quarter (Rs 28.5 bn orders booked during 1HCY06).

ABB has indicated that, in the power division, it has received big orders for sub-stations and rural and urban distribution systems. Going forward, we believe that the government’s continued thrust on rural electrification and improvement in the country’s power transmission and distribution (T&D) shall help the company to continuously rake in strong growth in orders, thus providing the business with the much-needed visibility.

Segment-wise performance…
(Rs m) 2QCY05 2QCY06 Change 1HCY05 1HCY06 Change
Power products
Revenue 1,947 2,943 51.1% 3,703 5,014 35.4%
% share 28.0% 28.2%   27.7% 26.3%  
PBIT margin 9.3% 8.2%   9.0% 8.5%  
Power systems
Revenue 2,326 3,571 53.5% 4,510 6,580 45.9%
% share 33.4% 34.3%   33.7% 34.5%  
PBIT margin 7.1% 7.5%   5.7% 7.8%  
Automation products
Revenue 1,486 2,090 40.6% 2,820 4,002 41.9%
% share 21.4% 20.1%   21.1% 21.0%  
PBIT margin 11.2% 13.0%   9.8% 12.2%  
Process automation
Revenue 1,158 1,781 53.8% 2,284 3,402 48.9%
% share 16.6% 17.1%   17.1% 17.9%  
PBIT margin 11.3% 14.5%   8.5% 11.6%  
Revenue 39 31 -21.0% 69 50 -28.3%
% share 0.6% 0.3%   0.5% 0.3%  
PBIT margin 11.6% 7.8%   12.0% 9.1%  
Revenue 6,957 10,417 49.7% 13,387 19,048 42.3%
PBIT margin 9.3% 10.0%   8.0% 9.6%  
* Excluding inter-segment adjustments

As far as the automation business is concerned, the sub-divisions of automation products and process automation have grown revenues by 42% YoY and 49% YoY respectively. These sub-segments together contribute to around 39% of ABB’s total revenues and 48% of the total PBIT.

In terms of the topline, as our analysis shows, 1HCY06 performance represents around 40% of ABB’s total revenues during a fiscal. And considering that the company has already done 44% of our estimated CY06 revenues during the first half, it is well on course of meeting our full year target.

Lower staff and other costs aid margins: Despite higher raw material costs (from 72.1% of 2QCY05 sales to 73.8% of 2QCY06 sales), lower staff and other costs as a percentage of sales have helped ABB post a 130 basis points (1.3%) expansion in operating margins during 2QCY06. Importantly, the 10.5% operating margins posted by ABB during this quarter is the best that its has done in the same quarter of past seven fiscals (CY00 to CY06) and that is commendable. The skewed nature of the business (where lowest and highest revenues are recorded in the first and fourth quarter respectively) is well established from the chart shown alongside, wherein margins have moved in a similar fashion (1Q and 4Q earning the least and highest margins). We estimate ABB to earn 11.1% operating margins during CY06, an improvement of 40 basis points over CY05 margins.

Margin expansion aids bottomline: Strong growth in the topline combined with expansion in operating margins has helped ABB post a robust 65% YoY growth in bottomline during 2QCY06. The growth for the first half has been better at 73% YoY. The net profit performance is also in line with our estimates. ABB’s 1HCY06 net profit margin stands at 6.9% and we estimate the same to touch 7.8% for the full year CY06.

What to expect?
At the current price of Rs 2,333, the stock trades at a price to earnings multiple of 20.3 times our estimated CY07 earnings. We remain enthused by the strong performances reported by ABB and also by vibrations emanating from the parent regarding its increasing commitment towards taking the India operations to the next level (through increased role of ABB India in global outsourcing). Also, considering the decline in the stock price in line with the overall markets, valuations look decent from a long-term perspective, though they are still stretched from the medium term standpoint.

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