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ABB: Will the price sustain?

Sep 17, 2003

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.

(Rs m) 1HFY03 1HFY04 Change
Net Sales 5,260 6,140 16.7%
Operating Profit (EBDIT) 370 408 10.3%
Extraordinary items 144 233 61.3%
Profit after Tax/(Loss) 388 540 39.3%

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.

(Rs m) ABB BHEL Thermax
Net Sales 11,758 69,782 5,386
PAT 814 5,171 482
P/E ratio 24.5 17.1 14.3
Market cap/ Sales ratio 1.7 1.3 1.3

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.

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