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Down but not out… - Views on News from Equitymaster
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  • Aug 26, 2000

    Down but not out…

    General Electric, Asea Brown Boveri (ABB) and Siemens dominate the power transmission and distribution (T&D) equipment markets worldwide. While globally, there is oversupply in the power equipment sector, India is a study in contrast. A power deficient country, India has to generate an incremental 10,000 MW of electricity every year for the next 10 years to plug the existing demand-supply gap. More importantly it has to bring transmission and distribution (T&D) at par with power generation. India’s T&D to generation ratio stands at a dismal 0.3:1, as compared to an international benchmark of 1:1. This represents a huge opportunity for power equipment suppliers such as ABB.

    The company like its parent is one of the foremost suppliers of high-end power T&D equipment in India. The Rs 7.8 billion (US$ 170 million) ABB India manufactures motors, generators and alternators upto 200 megawatt (MW). It commands a 19 percent share of the Rs 14 billion (US$ 305 million) high tension (HT) switchgear segment. It also manufactures control systems and mini/micro processor-based systems.

    When the power sector reforms were initiated in India during 1991, ABB India set the pace to gain the maximum advantage of the situation. The game plan was that ABB’s international parent will bag power generation contracts and will source the T&D equipment from ABB India. This was a plausible idea, but the company’s calculation went haywire when the government first set the privatisation ball rolling for power generation instead of distribution. Added to that, the snail’s pace of power sector reforms upset ABB India’s calculations. Despite its power division bagging orders for setting up almost 3,000 MW of capacity, the lack of financial closure adversely affected the company’s growth.

    This took a toll on its turnover and profitability growth. Meanwhile, its parent and France’s Alstom decided to amalgamate operations worldwide. Thus ABB Alstom Power India Limited was formed in 1999, which led to the spin off of ABB India’s power division.

    (Rs m) 2QFY99 2QFY00 Change 1HFY99 1HFY00 Change
    Sales 1,908 1,645 -13.8% 3,609 3,136 -13.1%
    Other Income 29 50 74.3% 48 76 56.8%
    Expenditure 1,676 1,526 -8.9% 3,423 2,983 -12.9%
    Operating Profit (EBDIT) 232 119 -48.8% 186 153 -17.3%
    Operating Profit Margin (%) 12.2% 7.2%   5.1% 4.9%  
    Interest 13 11 -16.0% 31 23 -25.6%
    Depreciation 37 42 13.4% 86 83 -3.6%
    Profit before Tax 211 117 -44.9% 117 124 5.7%
    Tax 28 8 -71.4% 28 8 -71.4%
    Profit after Tax/(Loss) 183 109 -40.8% 89 116 30.0%
    Net profit margin (%) 9.6% 6.6%   2.5% 3.7%  
    No. of Shares (eoy) (m) 41.4 41.4   41.4 41.4  
    Earnings per share* 17.7 10.5   4.3 5.6  

    Having done this ABB India set in motion a process of reinventing itself. In line with its parent’s move, it is slowly transforming itself from an equipment seller to become more of a value added services and solutions provider. As a result, it identified three core divisions, which will chug its future growth. These were namely: its traditional T&D equipment business, industrial automation and building technologies. Post hive off of its power division, both T&D and industrial automation contribute 45 percent each to the company’s turnover, the building technologies division contributes the remaining 10 percent.

    The company has set its sights to improve realisations and contribution from industrial automation segment. It is aiming to provide complete software services/solutions to integrate management functions and shop floor activities. Automation involves both hardware (meaning the product) as well as value added software services. The margins are higher in the services segment. India’s current hardware to services ratio has been 60/40 as compared to a 30/70 ratio in the west. As hardware takes a backseat, niche services segment are likely to spring up. ABB is gearing itself for such a scenario and is aiming to capture a lion’s share in this segment. This development is a way by which the company hopes to fight the adverse conditions it faces in its T&D segment.

    India International
    At present Next 3 years
    Hardware 60 50 30
    Software/Services 40 50 70

    Though the bureaucratic hurdles in the power sector reforms have taken the wind out of ABB’s T&D equipment plans, there is hope yet for this division. For one the mammoth latent demand still exists.

    Moreover, ABB will continue to get business from the power generation projects executed by ABB Alstom Power. The parent has also indicated interest in making ABB India its hub for Research & Development (R&D) activities. Currently, global majors like Enron who prefer sourcing equipment from their international suppliers, are setting up many independent power projects. In such cases, MNC affiliates in India like ABB are better placed to bag orders.

    On the operations front it is looking to become more cost efficient. The company has trimmed its workforce by almost 28% in the last 3 years to 3,606 employees currently. All this has improved the company’s future earnings prospects. As a result, industry watchers are expecting ABB’s turnover to grow at a CAGR (compounded annual growth rate) of atleast 12.1 percent by FY2002 and its profits are expected to surge at a CAGR of 29 percent over the same period.

    ABB India has the potential and the right ideas. The proper execution of its ideas coupled with some luck should set the pace for its growth.



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