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ABB: Continues to meet expectations

Oct 19, 2004

Performance Summary
Transmission and distribution (T&D) major, ABB, has continued its strong showing in the September quarter. The company has reported a strong 66% revenue growth during the quarter. Resultantly, ABB's revenue growth during the nine month period ended September quarter stands at nearly 60%, indicating the overall buoyancy in the power and engineering sector. The company has grown its profits by nearly 73% during the quarter, despite a dip in operating margins.

(Rs m)3QCY033QCY04Change9mCY039mCY04Change
Net sales3,3725,59565.9%9,51215,18359.6%
Expenditure3,1045,19467.3%8,83614,10659.6%
Operating profit (EBDITA)26840149.4%6761,07759.2%
EBDITA margin (%)8.0%7.2% 7.1%7.1% 
Other income8416090.3%22633447.7%
Interest 34-613114.9%
Depreciation465110.5%13514910.2%
Profit before Tax30350666.9%7611,24964.1%
Extraordinary income/(expense)038-23338-
Tax9518494.7%24645183.7%
Profit after Tax/(Loss)20836072.5%74883611.7%
Net profit margin (%)6.2%6.4% 7.9%5.5% 
No. of Shares (m)42.442.4 42.442.4 
Diluted Earnings per share (Rs)*19.733.9 23.526.3 
Price to earnings ratio (x)    28.3 
*(annualised), CY = Calendar Year      

What is the company’s business?
ABB India is a 52% subsidiary of ABB, Switzerland. The company has divided its operations into two focus areas: power technology and automation technology. Under power technologies, the company supplies transmission and distribution (T&D) equipments to the power sector. ABB India is also the outsourcing agent of the parent company in the T&D segment. This segment contributes around 60% of the company’s total revenues. In automation technologies, the company is into providing analytical solutions, industry solutions, robotics and control systems. The segment contributes to the remaining 40% of revenues.

What has driven performance in 3QCY04?
Sales: Though we have yet to receive the company's press release, past performance during CY04 suggests that both power as well as automation divisions contributed to this strong showing. In the first half of 2004 (June end), while ABB's power technology business grew by 54% YoY, automation technology clocked a strong 60% YoY growth.

Orderbook: ABB has received orders worth Rs 19 bn during 9mCY04, which are around 52% higher as compared to same period last year. With the strong order inflow, the outstanding order book at the end of 9mCY04 stood at Rs 13.9 bn, which is around 0.95 times CY03 revenues. The order book includes significant orders for power and automation projects from leading utility and industrial customers, as well as a strong growth in standard product volumes. Range expansion of products too contributed to this strength. Consequently, we believe that topline will continue to grow at a higher trajectory over the next one year.

Net Profit: ABB divested its Control valve business to Kent Introl Private Ltd. in July 2004. The gain on divestment (Rs 38 m) is shown as an exceptional item in 3QCY04. Excluding this one-off income, ABB still managed to grow in third quarter bottomline by nearly 55%. This buoyancy in bottomline was achieved largely due to the near doubling of other income. This strength stems from the continued working capital efficiencies, which have led to increased cash generation and therefore higher other income. On a nine month basis, though net profit has grown by only 12%, this is not a correct comparison. The reason being, in April 2003 last year, ABB had earned Rs 233 m as an extraordinary income due to gains from divestment of its Metering business to Elster Metering. If we consider profits before extraordinary items and tax, then ABB's profits have shot up by 64% YoY during 9mCY04.

What to expect?
At the current price level of Rs 744, the stock trades at a P/E multiple 28.3 times annualised 9mCY04 earnings. The market cap to sales ratio stands at 1.6x annualised 9mCY04 revenues. The government has approved an expenditure of Rs 400 bn during 10th five-year plan under APDRP scheme. Of this, Rs 200 bn has been provided to state governments for implementing the upgradation and modernisation of sub transmission and distribution component, which is likely to result in higher orders for the company going forward. Also, the company's strategy of divesting non-core divisions too, will strengthen its business focus. However, investors need to be aware that the current valuations have factored in some amount of this potential.

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