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ABB Ltd: Margins continue expansion - Views on News from Equitymaster
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ABB Ltd: Margins continue expansion
Jul 29, 2015

ABB Ltd has announced second quarter results of financial year 2015 (It is a December ending company). The company has reported 6% YoY growth in sales. Profit after tax has increased by 20.5% YoY. Here is our analysis of the results.

Performance summary
  • Sales for the company increased by 6.2% YoY during 2QCY15. The discrete automation and motion segment, one of the largest contributors to sales saw a 21% YoY growth in sales. The power systems business performed the worst with sales decline of 15% YoY.
  • Operating profit increased 27.4% YoY during the quarter. Therefore, operating margins increased by 1% to 6.5% YoY.
  • The increase in operating margins along with a fall in interest expenses led to a 20.5% YoY increase in net profits during the quarter.

Standalone performance snapshot
(Rs m) 2QCY14 2QCY15 Change H1CY14 H1CY15 Change
Total operating income  17,944 19,065 6.2% 36,044 36,915 2.4%
Expenditure 16,964 17,816 5.0% 33,984 34,526 1.6%
Operating profit (EBDITA) 980 1,249 27.4% 2,060 2,389 16.0%
Operating profit margin (%) 5.5% 6.5%   5.7% 6.5%  
Other income 282 262 -7.2% 471 565 20.0%
Interest 254 246 -2.9% 474 454 -4.2%
Depreciation 279 375 34.5% 553 797 44.2%
Profit before tax 730 889 21.8% 1,504 1,702 13.2%
Tax 253 315 24.4% 510 585 14.7%
Profit after tax/(loss) 477 575 20.5% 994 1,117 12.4%
Net profit margin (%) 2.7% 3.0%   2.8% 3.0%  
No. of shares         211.9  
Basic & diluted earnings per share (Rs)*         11.4  
P/E ratio (x)*         115.9  
* On a trailing 12 month basis

What has driven performance in 2QCY15?
  • ABB's power products business along with the discrete automation and motion segment were the biggest drivers of the topline growth.

  • ABB's operating margins improved from 5.5% to 6.5% YoY. Improvement in margins was a result of a focus on more efficient execution along with a continued drive by ABB to localize its several products which has reduced material cost.

  • Decreased interest expenses during the quarter and expansion in operating margins helped the company post a 20.5% growth in profit after tax.

  • Order inflow during the quarter was Rs 19 bn, compared to an inflow of Rs 20.2 bn in 2QCY14 (down 6.1% YoY). The order backlog at the end of the quarter stood at Rs 79.6 bn (down 2% YoY).

    Segment-wise performance
    (Rs m) 2QCY14 2QCY15 Change H1CY14 H1CY15 Change
    Power systems
    Revenue 5,365 4,547 -15.2% 10,131 9,123 -9.9%
    % share  27% 22%   26% 23%  
    PBIT margin 5.9% 5.4%   5.4% 5.0%  
    Power products
    Revenue 5,536 6,238 12.7% 11,275 11,632 3.2%
    % share  28% 30%   29% 29%  
    PBIT margin 6.3% 8.1%   8.2% 6.2%  
    Process automation
    Revenue 3,017 3,123 3.5% 5,908 5,820 -1.5%
    % share  15% 15%   15% 15%  
    PBIT margin 9.4% 8.9%   8.3% 9.1%  
    Discrete Automation and Motion
    Revenue 3,955 4,788 21.1% 8,308 9,435 13.6%
    % share  20% 23%   21% 24%  
    PBIT margin 5.3% 8.4%   4.8% 8.2%  
    Low Voltage Products
    Revenue 1,932 1,920 -0.6% 3,746 3,690 -1.5%
    % share  10% 9%   10% 9%  
    PBIT margin 5.8% 7.9%   5.1% 8.6%  
    Total*
    Revenue 19,804 20,616 4.1% 39,367 39,700 0.8%
    PBIT margin 6.4% 7.6%   6.5% 7.1%  
    * Excluding inter-segment adjustments & unallocated revenues
What to expect?

Better performance on operational front has been a continuing trend for ABB for some time now. Emerging segments along with exports have driven new orders in the quarter gone by. A push towards technology upgrades and grid stability solutions also helped order booking amongst the current weak business environment. While utilities were seen making selective capital expenditure, demand from the industry side continues to remain dispersed.

At current price of Rs 1,320, the stock is trading at 116 times its trailing twelve month earnings.

The company's margin improvement efforts have been fructifying and this gives us comfort that ABB India will be one of the prime beneficiaries of an economic turnaround as an when it takes place. However, expensive valuations do not justify any further upside in the stock. However, we shall soon roll over our estimates to CY17 earnings; and will then be in a position to offer a defined view on the stock. Till then, we recommend investors to avoid the stock.

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