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ABB India: Maintaining the momentum - Views on News from Equitymaster

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ABB India: Maintaining the momentum
Jul 26, 2007

Performance summary
  • Sales grow 53% YoY in 1HCY07 (December ending fiscal), 44% YoY in 2QCY07.

  • Operating margins expand by 120 basis points (1.2%) in 1HCY07, owing to lower raw material and staff costs (both as percentage of sales).

  • Net profits surge 58% YoY in 1HCY07, 51% YoY in 2QCY07.

  • First half order bookings at Rs 40 bn, up 40% YoY. Order backlog at the end of June 2007 stood at Rs 46 bn (1.1 times CY06 sales).

Financial performance: A snapshot
(Rs m) 2QCY06 2QCY07 Change 1HCY06 1HCY07 Change
Sales 9,742 14,009 43.8% 17,771 27,133 52.7%
Expenditure 8,722 12,371 41.8% 16,057 24,213 50.8%
Operating profit (EBDITA) 1,020 1,638 60.6% 1,715 2,920 70.3%
Operating profit margin (%) 10.5% 11.7%   9.6% 10.8%  
Other income 153 147 -3.6% 332 299 -10.0%
Interest 2 23 1203.0% 4 33 789.6%
Depreciation 65 77 18.0% 127 163 28.2%
Profit before tax 1,106 1,686 52.4% 1,916 3,023 57.8%
Extraordinary income/(expense) - -   - -  
Tax 387 600 55.1% 684 1,071 56.6%
Profit after tax/(loss) 719 1,086 51.0% 1,232 1,952 58.4%
Net profit margin (%) 7.4% 7.7%   6.9% 7.2%  
No. of shares         211.9  
Diluted earnings per share* (Rs)         19.5  
P/E ratio* (x)         58.3  
* 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 CY01 to CY06, ABB’s net sales and profits grew at compounded rates of 33% and 39% respectively.

What has driven performance in 1HCY07?
Power division leads the way: Strong performances from the process automation (PA) and power products (PP) businesses set up the growth for ABB’s topline during 1HCY07. These segments grew sales by 95% YoY and 56% YoY respectively, thereby increasing their share in the company’s total revenues to 18% and 27% respectively (14% and 26% respectively in 1HCY06). The other two segments of power systems (PS) and automation products (AP) also recorded strong growth in sales during the said period.

Segment-wise performance
(Rs m) 2QCY06 2QCY07 Change 1HCY06 1HCY07 Change
Power systems            
Revenue 3,985 5,110 28.2% 7,393 9,977 35.0%
% share 38.3% 34.1%   38.8% 34.6%  
PBIT margin 7.2% 8.6%   7.5% 8.7%  
Power products            
Revenue 2,943 4,031 37.0% 5,014 7,835 56.2%
% share 28.2% 26.9%   26.3% 27.1%  
PBIT margin 8.2% 13.4%   8.5% 11.3%  
Process automation            
Revenue 1,368 2,759 101.7% 2,589 5,044 94.8%
% share 13.1% 18.4%   13.6% 17.5%  
PBIT margin 17.4% 12.8%   13.8% 10.9%  
Automation products            
Revenue 2,090 3,010 44.0% 4,002 5,890 47.2%
% share 20.1% 20.1%   21.0% 20.4%  
PBIT margin 13.0% 12.1%   12.2% 11.7%  
Others            
Revenue 31 73 135.0% 50 127 155.9%
% share 0.3% 0.5%   0.3% 0.4%  
PBIT margin 7.8% 1.1%   9.1% -0.4%  
Total*            
Revenue 10,417 14,984 43.8% 19,048 28,872 51.6%
PBIT margin 10.0% 11.3%   9.6% 10.4%  
* Excluding inter-segment adjustments

Growth in sales of all these segments was on the back of robust order booking that ABB recorded during the second quarter and first half of the calender year. While 2QCY07 recorded order intake of Rs 20 bn, the total bookings for the first half stood at Rs 40 bn. At the end of the June 2007, ABB’s order backlog stood at nearly Rs 46 bn, which is slightly higher than the company’s full year sales in CY06. The company received significant orders for rural and urban electrification driven by new power capacity additions as well as strengthening of transmission and distribution systems to improve grid reliability and improve efficiency. Further, strong capex spending by large number of Indian corporates perked up growth in orders for the automation business.

Lower input, staff costs lead to operating margin expansion: ABB recorded a 120 basis points expansion in its operating margins for 1HCY07. This expansion was on the back of lower staff and raw material costs. While the former declined from 6.5% of 1HCY06 sales to 5.5% in 1HCY07, the latter reduced from 76.1% to 73.7% of sales in 1HCY07. Based on segments, while the power divisions (PS and PP) recorded improved profitability during the first half, that for the automation divisions (PA and AP) contracted marginally.

Margin expansion aids bottomline: ABB recorded a 58% YoY growth in its 1HCY07 bottomline, which was largely a result of expansion in operating margins. But for a lower other income and higher interest outgo, the net profit growth would have been better.

What to expect?
At the current price of Rs 1,135, the stock is trading at a multiple of 23.1 times our estimated CY09 earnings. While the company’s topline performance has been in line with our estimates for CY07, we shall take a re-look at our profitability estimates, considering that these have improved over the past two quarters of this fiscal. Overall, we believe that capacity expansion in core sectors will continue to aid ABB’s growth in the future. However, we maintain our cautious view with respect to the stock’s valuations, considering that it is almost nearing our CY09 estimated fair value.

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