The stock price of automation major, ABB has gained significantly in the last few months. The stock has moved up by around 60% in last 8 months. Lets have a look at the reasons for the run in stock price and find how much growth is fundamental.
ABB India is a 52% subsidiary of ABB, Switzerland. The key focus areas of the company are the traditional T&D equipment segment and services (focused on catering to day-to-day running and maintenance of plants). It is also focusing on the retail sector (i.e. branded products for retail consumers) for growth. The retail market for products like transformers and other smaller equipment is largely unorganised at the current juncture.
Operating Profit (EBDIT)
Profit after Tax/(Loss)
Consider 1HFY04 performance of the company first. ABB's topline grew by around 17% YoY and bottomline was up 39%. Revenues from power technologies in 1HFY04 increased by 8% and contributed around 55% to the net sales. Automation revenues were up 16% YoY and contributed around 40% to the total revenues. The PBIT margins from automation business were on a higher side i.e. 8% as compared to 3% from power technologies.
The company fared well in exports segment and further consolidated its strategic focus on value-based projects, standard products, service and exports. Export orders during the first half of 2003 amounted to Rs 2,101 m as compared with Rs 747 m in the same period last year. The order backlog further strengthened to Rs 10,732 m (0.9x FY03 revenues). It includes orders from both utility and industrial customers for power and automation technologies. The strong order book is a positive for the company.
The stock gained around 35% in last two months mainly due to heavy export orders bagged by the company. It has received international orders worth US$ 265 m post 1HFY04. This works out to around 1.1x FY03 revenues. It has also received assignments for moderanising and servicing power stations abroad.
Market cap/ Sales ratio
At the current price of Rs 475, the stock trades at P/E multiple of 24.5x, FY03 earnings. Though the company has been able to win orders, valuations at the current juncture seem to be stretched for an engineering company. While power sector liberalisation could increase order inflow, it is some time away. The market capitalisation to sales ratio of ABB at around 1.7x currently is high when compared with the parent company, ABB international. The parent major is trading at market cap/sales ratio of 0.3x.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407