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ABB to 'power' its presence through JV - Views on News from Equitymaster
 
 
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  • Aug 14, 1999

    ABB to 'power' its presence through JV

    Swiss-Swedish major ABB will consolidate its presence in the Indian power sector under one holding entity. After the consolidation, the interests will be transferred to a JV formed by the global merger of the power businesses of ABB and Alstom.

    Earlier in April 1999, ABB and the Anglo-French major, Alstom had announced a merger of their power generation businesses. The merged entity with sales of 7.2 bn euros (1 euro = approximately Rs 46) will be the largest company in terms of revenue in the power generation business, pushing General Electric to second place.

    In the previous month, ABB (India) de-merged its power generation business. After the de-merger, ABB (India)'s business now consists only of power distribution and will, in the future also include equity stakes in projects developed by its customers. The de-merger of its power generation business will enable the company to focus on growth opportunities in that area.

    However, analysts have frowned upon this move by ABB. In the past, ABB's revenues were largely driven by its power generation business. The company had bagged orders in several projects like Daewoo-Korba project (Madhya Pradesh), ST-CMS (Tamil Nadu) and Ispat's captive power project, among others. With the transfer of the power generation business, ABB (India) has surrendered its most important growth driver. Post-transfer, ABB (India)'s role will be reduced to that of a power distributor, which will reduce its growth by 50%.

    In 1QFY2000, ABB (India) posted a loss of Rs 94 m (Rs 264 m loss in 1QFY99). Cost cutting measures have enabled the company to reduce operating costs by 78%. But one cannot overlook the fact that power equipment manufacturers like ABB and BHEL follow the contract method of accounting, and their quarterly figures do not represent a full year's performance.

    Market View:
    ABB (India) has suffered due to delays in the financial closure of private power projects that it has bagged. This will further affect its growth prospects. For all these reasons, most analysts do not find ABB as profitable as it was before the de-merger. They have therefore flagged the company as a SELL.

     

     

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