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ABB India: Power led growth

Oct 1, 2002

There was news yesterday that ABB has bagged a contract from Powergrid Corporation of India to design, build and install a new power transmission system at Vishakapatnam. The total order is valued at Rs 2,350 m. Out of this, ABB India's work scope would amount to roughly Rs 1,300 m. This is good news for ABB India, which has been performing well in the last few quarters. The company ended FY02 with a 31% growth in topline and a 21% growth in profit. In the first half of FY03 too, ABB India reported nearly 19% topline growth and 24% bottomline growth (excluding extraordinary income). The company's cumulative order backlog stood at Rs 8,315 m at the beginning of July '02. The new Powergrid order would add to this burgeoning tally.

The year so far...
(Rs m) 1HFY02 1HFY03 Change
Orders Booked 4,309 5,912 37.2%
Net Sales 4,428 5,260 18.8%
Free cash flow -46 616 -
Profit after Tax* 196 388 97.8%
Operating Profit Margin (%) 5.9% 7.0%  
Net profit margin (%) 4.4% 7.4%  
No. of Shares (eoy) (m) 41.4 42.4  
Annualised EPS 9.5 18.3  
Current P/e ratio   15.4  
* includes extraordinary income

Besides the topline, the company is also performing better at the operating level. Its operating margins have shown signs of improvement. This is a result of improved sales-mix, wherein higher proportion of orders is coming from utilities and the automation and power technology segments. These segments earn higher margins for the company, as compared to the industry segment. Also, due to focus on working capital management, the company generated Rs 616 m as free cash flow in the first half of the year (Rs -46 m in 1HFY02).

PBIT margins (%) 2QFY03 1HFY03
Utilities 8.9% 7.2%
Industries 4.0% 1.7%
Power Technology Products 3.5% 2.8%
Automation Technology Products 5.4% 7.1%
Others 1.0% 1.4%

The company is also likely to benefit from the shift in focus of government's power policy from generation to transmission & distribution. The company is strong in the T&D area, and going forward should continue to see improved performance. Reflecting this, the company's stock price has appreciated nearly 45% in the last one year.

At the current price of Rs 282, the stock is trading at over 15x 1HFY03 annualised earnings, which is at the higher end of the spectrum. What's more, if we exclude the extraordinary income of Rs 144 m ABB earned in 1HFY03, as capital gains from sale of air handling equipment business, the P/E goes up to 25x annualised 1HFY03 earnings. Going by this, it seems that the bourses have already built in expectations of a good FY03 and even beyond. We reckon valuations are streched in the short to medium term.

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