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ABB Ltd: Operational performance improves - Views on News from Equitymaster

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ABB Ltd: Operational performance improves
Aug 16, 2013

ABB Ltd has announced second quarter results of financial year 2013 (It is a December ending company). The company has reported 7.5% YoY de-growth in sales. Profit after tax has declined by 21.9% YoY. Here is our analysis of the results.

Performance summary
  • Sales for the company decreased by 7.5% YoY during 2QCY13. Power Systems, the largest contributor to sales performed badly with 11.5% YoY drop in sales. Only Low voltage products segment performed well with sales increase of 3.9% YoY.
  • Operating profit increased 2.8% YoY during the quarter despite drop in sales. Raw material cost as a percentage of sales declined from 64.7% to 61.9% YoY. Also, sub contracting charges and staff costs declined on an absolute basis. Therefore, operating margins increased from 5.6% in 2QCY12 to 6.3% in 2QCY13.
  • Interest cost of the company increased by 235% YoY. This led to 21.9% YoY decline in net profits during the quarter.

Standalone financial performance
(Rs m) 2QCY12 2QCY13 Change H1CY12 H1CY13 Change
Total operating income 18,838 17,416 -7.5% 36,741 37,117 1.0%
Expenditure 17,778 16,327 -8.2% 34,706 34,961 0.7%
Operating profit (EBDITA) 1,060 1,090 2.8% 2,035 2,155 5.9%
Operating profit margin (%) 5.6% 6.3%   5.5% 5.8%  
Other income 14 38 166.2% 33 52 57.3%
Interest 77 256 234.6% 131 454 247.5%
Depreciation 231 259 12.1% 455 505 11.2%
Profit before tax 766 612 -20.1% 1,483 1,248 -15.8%
Tax 250 209 -16.4% 490 419 -14.5%
Profit after tax/(loss) 516 403 -21.9% 993 829 -16.5%
Net profit margin (%) 2.7% 2.3%   2.7% 2.2%  
No. of shares         211.9  
Basic & diluted earnings per share (Rs)         3.9  
P/E ratio (x)*         85.4  
* On a trailing 12 months basis

What has driven performance in 2QCY13?
  • ABB's net sales declined by 7.5% YoY during 2QCY13. This was mainly due to de growth of 11.5% YoY and 9.4% YoY in Power systems and Discrete Automation & Motion business segments respectively. Sales of Low voltage products grew by 3.9% YoY.

  • The company's short cycle products business has also suffered during the quarter; which has led to decline in sales.

  • ABB's operating margins improved from 5.6% to 6.3% YoY. Improvement in margins was a result of a drive from ABB to localize its several products which reduced material cost.

  • EBIT margin has improved in all except Discrete Automation and Motion and low voltage products segments. Power products recorded highest jump in margin from 5.5% to 8.6% YoY.

  • Increase in interest expenses (+235% YoY) also impacted profitability. Net profit dropped by 21.9% YoY.

  • Order inflow during the quarter was Rs 17.3 bn, compared to an inflow of Rs 20.5 bn in 2QCY12 (down 15.4% YoY). The order backlog at the end of the quarter stood at Rs 82.4 bn (down 10% YoY). The company has maintained that it has consciously kept away from turnkey orders where terms and conditions are not very fair i.e. price levels are low.

    Segment-wise performance
    (Rs m) 2QCY12 2QCY13 Change H1CY12 H1CY13 Change
    Power systems
    Revenue 5,688 5,035 -11.5% 11,377 12,554 10.4%
    % share  28% 26%   29% 32%  
    PBIT margin 5.0% 5.6%   5.0% 4.6%  
    Power products
    Revenue 5,278 5,250 -0.5% 9,858 9,671 -1.9%
    % share  26% 27%   25% 24%  
    PBIT margin 5.5% 8.6%   4.1% 6.9%  
    Process automation
    Revenue 3,294 3,211 -2.5% 6,332 6,014 -5.0%
    % share  16% 17%   16% 15%  
    PBIT margin -2.5% 3.2%   0.0% 4.7%  
    Discrete Automation and Motion
    Revenue 4,506 4,084 -9.4% 8,647 8,505 -1.6%
    % share  22% 21%   22% 21%  
    PBIT margin 12.8% 6.2%   11.7% 6.9%  
    Low Voltage Products
    Revenue 1,505 1,563 3.9% 2,952 2,977 0.8%
    % share  7% 8%   8% 7%  
    PBIT margin 4.9% 2.0%   5.3% 2.9%  
    Total*
    Revenue 20,272 19,144 -5.6% 39,166 39,720 1.4%
    PBIT margin 5.6% 5.8%   5.4% 5.5%  
    * 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 487, the stock is trading at 23.3 times our estimated CY14 earnings; which seems expensive given the gloomy investment scenario. We maintain our SELL view on the stock. We shall soon update investors with our CY15 estimates and revised valuation.

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