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ABB India Vs ABB International - Views on News from Equitymaster
 
 
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  • Aug 11, 2003

    ABB India Vs ABB International

    ABB India has done fairly well in FY03 and has posted good numbers for 1HFY04. The company is a 52% subsidiary of the Swiss giant, ABB Ltd. In this article, we take a look into the business operations of ABB international and ABB India and compare the performance and financials of giant parent with Indian subsidiary.

    ABB Ltd., (formed with the merger of two companies, Asea of Sweden and BBC Brown Boveri Ltd. of Switzerland, in 1988) is among one of the largest electrical engineering companies in the world. Its operations are spread in more than 100 countries, with a significant employee size of 133,000. The company earned revenues of around US$ 18.2 bn in FY03. It came to India way back in 1949 as Hindustan Brown Boveri Ltd. but after the merger of the parent company, it emerged as ABB, in 1989 (earlier known as Asea Brown Boveri). ABB India, is one of the leading engineering company in the country. It has 8 manufacturing units, 25 marketing offices, 3,200 employees and earned revenues of around Rs 11.7 bn in FY03.

    Lets look at the business focus of ABB international and ABB India

    ABB International had four business divisions but recently the company has streamlined its divisional structure to focus on two core businesses namely, power technologies (comprising of power technology products and utilities) and automation technologies (comprising of automation technology products and industries). ABB International has divested a few of its businesses like nuclear power, power generation, financial services and rails recently. The company is also looking to divest its other non-core businesses like oil & gas, petrochemicals, insurance, equity venture, building systems in a bid to focus on its core business.

    In line with the parent companyís strategy ABB India too has decided to narrow down its business focus from four divisions to two key areas i.e. power technologies and automation technologies. The management has said that it will also target the retail segment going forward.

    Business profile of ABB India

    Power technologies contributed around 39% to FY03 revenues of the parent company. The order inflow for power technologies decreased by 8.4% due to not many large projects coming in the systems business and selective bidding. However, revenues were up 3.3% YoY on the back of strong order backlog and higher product sales in HV products and power transformers. Higher margins and improved operational performance lifted segment EBIT by 9.2%. Letís have a look at the geographical break-up of the order inflow. Europe accounted for 37% of orders followed by North America. Power sector is going through a sea change in Asia-pacific region. Lot of unbundling is being pursued and the sector is witnessing private investments. Going forward the order inflow percentage from this region can increase.

    Parent company
    ( US $ m) FY02 FY03 Change
    Order Inflow 7,474 6,843 -8.4%
    Revenues 6,873 7,103 3.3%
    EBIT 392 428 9.2%
    EBIT margins 5.7% 6.0%
    India subsidiary
    ( Rs m) FY02 FY03 Change
    Order Inflow 6,794 10,599 56.0%
    Revenues 5,984 8,229 37.5%
    EBIT 550 608 10.6%
    EBIT margins 8.1% 5.7%

    Power technologies accounted for 58% of FY03 revenues for the Indian subsidiary. It had a healthy increase of 56% in the order inflow from this segment. The revenues from this segment grew at a significant pace (up 37.5% YoY), thus giving credence to the Asia Pacific growth potential. But ABB Indiaís revenues are just 2.5% of the parent and it has still a long way to go. But what is interesting to note that the Indian subsidiaryís margins were largely in line with the parent.

    Automation technologies contributed around 47% to FY03 revenues of the parent company. The order inflow for the segment increased by 4.6% YoY, key reasons being 13% increase in the servicing contracts and double digit growth in India (21%) and China (32%). However, the revenues were up marginally because of low order intake in 2001 and manufacturing sector not doing well in the US. Europe accounted for more than 50% of the order inflows followed by America. Asian region contributed around 19%. But the significant growth shown by India and China can be taken as the indicator of the potential lying ahead in this region.

    Parent company
    ( US $ m) FY02 FY03 Change
    Order Inflow 8,319 8,699 4.6%
    Revenues 8,482 8,505 0.3%
    EBIT 515 518 0.6%
    EBIT margins 6.2% 6.0%
    India subsidiary
    ( Rs m) FY02 FY03 Change
    Order Inflow 4,244 5,742 35.3%
    Revenues 4,769 5,208 9.2%
    EBIT 485.9 573.29 10.6%
    EBIT margins 13.0% 10.6%

    Automation technologies accounted for 35% of ABB Indiaís FY03 revenues. The segment saw an increase of around 35% in order inflow. The revenues increased by around 9% as compared to a nominal growth of around 4% by the parent company. What is encouraging is that the Indian margins were much better than the parentís, but then India contributed only 1.3% to the parentís automation technology revenues.

    Non-core business contributed around 17% to revenues of the parent company. However, as mentioned earlier, it is looking to exit these areas as these businesses have become heavy loss makers. The loss figures arising from the non-core business is alarmingly high (over US$ 880 m).

    The Indian subsidiary has been quickly able to exit from non-core businesses like air handling and metering. As a result, the company has better profitability ratios. Let's have a look at the financial details of these two companies.

    ABB Ltd. ABB India
    (US $ m) (Rs m)
    Revenues 18,295 13,437
    YoY increase -5.6% 12.9%
    EBIT 394 1413
    EBIT Margin 2.2% 10.5%
    Net income/(loss) -783 918
    Net profit margin - 6.8%
    EPS -0.7 21.7
    P/E ratio - 18.7
    ROA -2.7% 8.6%
    RONW -7.7% 19%
    D/E ratio 9.7 0
    Market cap/Sales ratio 0.33 1.28

    The revenues of ABB India are less than 2% of ABB group, but the company accounts for the around 8% of the group EBIT and its margins are far better. The problem for ABB international is that their non-core businesses are incurring losses. The parent company has huge long-term borrowings of around US$ 5.4 bn, owing to which the interest costs are very high US$ 336 m. Total outside liabilities of the company are around US$ 28.2 bn, as a result the debt/equity ratio reaches 9.7, which is alarmingly high and remains a cause of great concern for all shareholders of parent as well as subsidiary companies. Though there are no doubts that Indian subsidiary is doing well, but we must remember cases like Daewoo Motors and its bearing on the Indian operations.

    At the current price of Rs 405 ABB India trades at the P/E multiple of 18.7x and market cap/sales of 1.28x. Where as, at the price level of US$ 4.8 the parent companyís stock trades at market cap/sales of 0.33x. The valuations of the parent company are reflecting its relative poor performance and the debt concerns.

     

     

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