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ABB: So near yet so far…

Oct 1, 2001

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.

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