Asea Brown Boveri (ABB), the transmission and distribution equipment (T&D) major, has seen quite a correction (down 20%) in price since the company declared its first half results in July end. At that time, the company was trading at a P/E of 36x 1HFY02 annualised earnings.
The Rs 7.9 bn ABB India manufactures motors, generators and alternators upto 20 megawatt (MW). It commands a 19% share of the Rs 14 bn high tension (HT) switchgear segment. It also manufactures control systems and mini/micro processor-based systems. ABB has also merged ABB Instrumentation, ABB Analytical, ABB Lenzohm Service and Introl India with itself quite recently. The appointed date of amalgamation as per the scheme is April 1, 2001.
So far in FY02 the company has set a good growth momentum for itself. Till 1HFY02 ABB India has shown a 36% turnover growth and a 25% bottomline growth. On the surface the performance does look good. However, despite the surge in turnover ABB has not been able to contain its expenditure. Its expenditure during 1HFY02 surged 35% YoY. A huge increase in tax outgo also put the brakes on bottomline growth. In fact, in 2QFY02 though ABB’s turnover improved 37% YoY, it actually recorded a 11% decline in profits during the period.
Going forward the company is likely to continue showing encouraging growth in turnover YoY owing to a significant order backlog of Rs 6,900 m (based on July end data). Also, the merger move would add another Rs 700 m to its topline annually. However, despite this, its margins are likely to remain under pressure, due to a more or less similar increase in expenditure and higher tax outgo.
In the long run, ABB India’s future seems bright owing to the huge latent potential for power equipment. It would be one of the key players in India’s power infrastructure development. However, it is still to get it’s costing under control. Also, the power equipment business is a cycle of ups and downs. Some quarters there is exceptional business and some are lean quarters, depending on when the power plant gets completed. In the past, the performance of ABB has been quite erratic and one cannot draw solace from it.
At the current price of Rs 198 the stock trades at a P/E of 29x its 1HFY02 annualised earnings.
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: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407