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ABB Ltd: Margin expansion drives performance
Aug 7, 2014

ABB Ltd has announced second quarter results of financial year 2014 (It is a December ending company). The company has reported 3.7% YoY growth in sales. Profit after tax has increased by 20.3% YoY. Here is our analysis of the results.

Performance summary
  • Sales for the company increased by 3.7% YoY during 2QCY14. Power Systems, one of the largest contributors to sales saw a 6.5% YoY growth in sales. Low voltage products segment performed the best with sales increase of 23.6% YoY.
  • Operating profit increased 13.1% YoY during the quarter. Therefore, operating margins increased by 0.5% to 5.5% YoY.
  • The increase in operating margins along with a 12.6% increase in other income led to a 20.3% YoY increase in net profits during the quarter.

Financial performance snapshot
(Rs m) 2QCY13 2QCY14 Change H1CY13 H1CY14 Change
Total operating income  17,300 17,944 3.7% 36,943 36,044 -2.4%
Expenditure 16,433 16,964 3.2% 35,172 33,984 -3.4%
Operating profit (EBDITA) 867 980 13.1% 1,771 2,060 16.3%
Operating profit margin (%) 5.0% 5.5% 4.8% 5.7%  
Other income 250 282 12.6% 433 471 8.7%
Interest 256 254 -0.9% 454 474 4.6%
Depreciation 260 279 7.4% 506 553 9.3%
Profit before tax 602 730 21.3% 1,245 1,504 20.8%
Tax 205 253 23.2% 418 510 22.0%
Profit after tax/(loss) 396 477 20.3% 827 994 20.2%
Net profit margin (%) 2.3% 2.7%   2.2% 2.8%  
No. of shares         211.9  
Basic diluted earnings per share (Rs)*         9.2  
P/E ratio (x)*         113.0  
* On a trailing 12 month basis.

What has driven performance in 2QCY14?
  • ABB's net sales increased by 3.7% YoY during 2QCY14. This was led by a 23.6% YoY sales growth in the Low Voltage Products business. Power Systems revenue grew by 6.5% during the quarter.

  • ABB's operating margins improved from 5.0% to 5.5% YoY. Improvement in margins was a result of drive of ABB to localize its several products which has reduced material cost.

  • EBIT margin has improved in all except power products segments. Process automation recorded highest jump in margin from 6.4% to 9.4% YoY.

  • Flat interest expenses during the quarter, a 12.6% YoY increase in other income and expansion in operating margins helped the company post a 20.3% growth in profit after tax.

  • Order inflow during the quarter was Rs 20.2 bn, compared to an inflow of Rs 17.5 bn in 2QCY13 (up 15.4% YoY). The order backlog at the end of the quarter stood at Rs 80.8 bn (up 21.7% YoY).

    Segment-wise performance
    (Rs m) 2QCY13 2QCY14 Change H1CY13 H1CY14 Change
    Power systems
    Revenue 5,035 5,365 6.5% 12,554 10,131 -19.3%
    % share 26% 27%   31% 26%  
    PBIT margin 4.6% 5.9%   4.6% 5.4%  
    Power products
    Revenue 5,250 5,536 5.5% 9,671 11,275 16.6%
    % share 27% 28%   24% 29%  
    PBIT margin 11.0% 6.3%   6.9% 8.2%  
    Process automation
    Revenue 3,211 3,017 -6.1% 6,014 5,908 -1.8%
    % share 17% 15%   15% 15%  
    PBIT margin 6.4% 9.4%   4.7% 8.3%  
    Discrete Automation and Motion
    Revenue 4,180 3,955 -5.4% 8,710 8,308 -4.6%
    % share 22% 20%   22% 21%  
    PBIT margin 4.6% 5.3%   6.7% 4.8%  
    Low Voltage Products
    Revenue 1,563 1,932 23.6% 2,979 3,746 25.8%
    % share 8% 10%   7% 10%  
    PBIT margin 4.9% 5.8%   2.8% 5.1%  
    Total*
    Revenue 19,239 19,804 2.9% 39,928 39,368 -1.4%
    PBIT margin 6.7% 6.4%   5.5% 6.5%  
    * Excluding inter-segment adjustments & unallocated revenues
What to expect?
Better performance on operational front was the key highlight of this quarter for ABB. We feel going forward the company shall be able to maintain or improve its operating performance following the localization drive the company has adopted.

At current price of Rs 1,045, the stock is trading at 113 times its trailing twelve month earnings.

Margin improvement and strengthening of order book gives us comfort that ABB India will be one of the prime beneficiaries of an economic turnaround. However, expensive valuations does not justify any further upside in the stock. However, we shall soon roll over our estimates to CY16 earnings; which may lead to change in our view. Till then, we recommend investors to avoid the stock.

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