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ABB: Weakening momentum?
Jul 25, 2008

Performance summary
  • Sales grow by 15% YoY during 2QCY08, 16% YoY in 1HCY08 (December ending fiscal). Growth during the quarter led by the automation business.

  • Operating margins expand marginally during the quarter on the back of lower raw material and other costs (both as percentage of sales).

  • Net profits grow by 21% YoY during the quarter, 28% YoY during the half year period. Apart from expansion in operating margins, higher other income also aide bottomline growth.



Financial performance snapshot
(Rs m) 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
Sales 14,009 16,163 15.4% 27,133 31,516 16.2%
Expenditure 12,371 14,261 15.3% 24,213 27,887 15.2%
Operating profit (EBDITA) 1,638 1,902 16.1% 2,920 3,629 24.3%
Operating profit margin (%) 11.7% 11.8%   10.8% 11.5%  
Other income 147 213 44.6% 299 398 33.2%
Interest 23 8 -63.8% 33 36 11.0%
Depreciation 77 88 14.5% 163 171 5.1%
Profit before tax 1,686 2,019 19.7% 3,023 3,820 26.3%
Extraordinary income/(expense) - -   - -  
Tax 600 701 16.7% 1,071 1,325 23.7%
Profit after tax/(loss) 1,086 1,318 21.4% 1,952 2,495 27.8%
Net profit margin (%) 7.7% 8.2%   7.2% 7.9%  
No. of shares       211.9 211.9  
Diluted earnings per share (Rs)*         25.8  
P/E ratio (x)*         32.4  
* On a trailing 12 months basis

What has driven performance in 2QCY08?
  • ABB grew its net sales by 15% YoY during 2QCY08. This growth was led by the company’s automation business – process automation and automation products – which reported a growth of 18% YoY. On the other hand, the company’s power division (systems and products) grew by 14% YoY during the quarter. Continued investments by state and private sector utilities in the nation’s power transmission and distribution (T&D) setup has aided growth for ABB during the quarter.

    Segment-wise performance
    (Rs m) 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
    Power systems
    Revenue 5,110 5,321 4.1% 9,977 10,443 4.7%
    % share 34.1% 30.4%   34.6% 30.8%  
    PBIT margin 8.6% 6.4%   8.7% 7.6%  
    Power products
    Revenue 4,031 5,130 27.2% 7,835 9,392 19.9%
    % share 26.9% 29.3%   27.1% 27.7%  
    PBIT margin 13.4% 12.1%   11.3% 12.5%  
    Process automation
    Revenue 2,759 2,844 3.1% 5,044 5,797 14.9%
    % share 18.4% 16.2%   17.5% 17.1%  
    PBIT margin 12.8% 11.0%   10.9% 12.7%  
    Automation products            
    Revenue 3,010 3,953 31.3% 5,890 7,903 34.2%
    % share 20.1% 22.6%   20.4% 23.3%  
    PBIT margin 12.1% 14.8%   11.7% 12.4%  
    Others
    Revenue 73 275 276.6% 127 386 203.5%
    % share 0.5% 1.6%   0.4% 1.1%  
    PBIT margin 1.1% 6.8%   -0.4% 7.2%  
    Total*
    Revenue 14,984 17,523 16.9% 28,872 33,922 17.5%
    PBIT margin 11.3% 10.7%   10.4% 10.9%  
    * Excluding inter-segment adjustments

    During the quarter, ABB recorded an order inflow of Rs 22 bn, which was 11% higher than the orders booked during 2QCY07. At the end of June 2008, the company’s unexecuted orderbook stood at nearly Rs 67 bn, which is slightly higher than its full year sales in CY07. ABB continues to receive orders for rural and urban electrification driven by new power capacity additions as well as strengthening of transmission and distribution systems. On the automation front, the company has received major orders from sectors like steel, non-ferrous metals, pulp & paper, cement, oil & gas and building applications.

  • ABB’s operating margins marginally expanded during 2QCY08. This improvement was due to lower raw material and other costs. Based on segments, all except automation products recorded decline in PBIT margins. The power systems segment (30% of total sales) recorded the worst performance with its PBIT margins declining from 8.6% in 2QCY07 to 6.4% in 2QCY08. On a half yearly basis though, except power systems, the other three segments recorded expansion in PBIT margins.

  • On the back of stable operating margins and higher other income (up 45% YoY), ABB recorded a 21% YoY growth in bottomline during 2QCY08. A decline in interest cost also helped matters.

What to expect?
At the current price of Rs 838, the stock is trading at a multiple of 13.9 times our estimated CY10 earnings. As indicated in the results press release, ABB continues to invest in ramping up capacity and expanding its range of offerings to cater to growing requirements from the power transmission and distribution sector. And we believe that the benefits of these initiatives shall flow into its numbers over the next few years. While growth during the second quarter and half year period is much slower than what was recorded in the first half of 2007, the fact that ABB will be a key beneficiary of the T&D investments planned for the next few years cannot be denied. The company is also doing well to improve its profitability quarter by quarter. We maintain our positive view on the stock from a 2 to 3 years perspective.

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