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ABB: It's the consistency question

Oct 24, 2001

In the September quarter, Asea Brown Boveri, continues its growth momentum. Its topline this quarter (3QFY02) has improved by 15% YoY. However, this growth is slower than what the company has displayed till the first half of the year (36% topline growth).

(Rs m) 3QFY01 3QFY02 Change 9m FY01 9m FY02 Change
Net Sales 1,936 2,232 15.3% 5,072 6,507 28.3%
Other Income 11 32 185.3% 87 97 11.9%
Expenditure 1,697 2,006 18.2% 4,680 6,025 28.8%
Operating Profit (EBDIT) 239 226 -5.5% 393 482 22.8%
Operating Profit Margin (%) 12.4% 10.1%   7.7% 7.4%  
Interest 9 17 103.6% 31 44 40.8%
Depreciation 46 41 -9.9% 129 126 -2.0%
Profit before Tax 196 199 1.8% 319 409 28.1%
Tax 62 59 -4.8% 70 125 78.6%
Deffered tax (write 0 -7   0 -7  
Profit after Tax/(Loss) 134 147 10.0% 249 291 16.8%
Net profit margin (%) 6.9% 6.6%   4.9% 4.5%  
No. of Shares (eoy) (m) 41.4 41.4   41.4 41.4  
Earnings per share* 12.9 14.2   8.0 9.4  
Current P/e ratio   13.9     21.1  

Despite the encouraging growth in topline, the T&D equipment major recorded only a 10% growth in 3QFY02 bottomline. This was because the company's expenses grew at a faster clip than sales. Consequently, its operating margins declined by 230 basis points to 10.1%. In the first half, the bottomline growth was 25% YoY despite higher tax burden. If we exclude the deffered tax write back, then profits have only grown by a marginal 4.8%.

While utilities contributed 29% to September quarter sales, power technology and automation technology (ABB's relatively new focus areas) contributed 27.4% and 22.5% respectively. A look at the table below reveals that utilities contributed a lion's share (49%) to profits before interest and tax, followed by automation technology (43%). Though power technology contributed 27% to sales, its contribution to the profits was an absymal 5%.

Contribution to PBIT 3QFY02 9m FY02
UT - Utilities 48.7% 39.4%
PI - Process Industries 6.5% 12.7%
MC - Manufacturing and Consumer Industries -2.8% -7.3%
PT - Power Technology Products 5.3% 21.0%
AT - Automation Technology Products 43.1% 35.0%
Others -0.9% -0.9%

The lower sales growth in third quarter as compared to the first half of the year may be a sign of declining order backlog. Though ABB has not given any figures of orders received during 3QFY02 in its press release, but in 1HFY02 ABB's order intake had declined by 37% to Rs 4,191 m as compared to 1HFY01. The shortfall in orders was mainly due to the lack of green field investments. In FY01, the company had received huge infrastructure orders from customers such as WBSEB, MSEB, APTRANSCO, NTPC Talcher and Delhi Metro Rail Corporation. This helped ABB register a significant 52% jump in order intake to Rs 11 bn during FY01. During the June ended quarter ABB's order backlog stood at Rs 6,900 m.

Though the ABB board has given consent to the amalgamation of ABB Instrumentation, ABB Analytical, ABB Lenzohm Service and Introl India with the company and the appointed date of amalgamation was fixed as April 1, 2001, the third quarter results do not include the merged figures. The above companies had a combined turnover of Rs 700 m in the year 2000. The merger will marginally increase ABB Group shareholding in ABB India from the current level of 51% to 52%.

The ABB stock has come off by over 20% since it declared its second quarter results in July 2001. At the current price of Rs 198 the stock is trading at a P/E of 21x its annualised nine month FY02 earnings. Though the stock has corrected quite a bit in the last four months, ABB's past inconsistency would come in the way of its recovery. Its inconsistent bottomline growth is a negative. ABB failure to keep a tab on its operational costs, which have increased at a faster clip than turnover is also worrying.

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