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ABB: An aberration?
Oct 24, 2008

Performance summary
  • Sales grow by 10% YoY during 3QCY08 (December ending fiscal), 14% YoY in 9mCY08. Growth during the quarter led by the power products business.
  • Operating margins contract sharply during the quarter on the back of higher raw material and staff costs (both as percentage of sales).
  • Net profits decline by 9% YoY during the quarter, increase 14% YoY during for the nine month period. Apart from contraction in operating margins, higher interest expense also pared the bottomline growth.
  • The other income includes a net gain of Rs 186 m during the quarter on mark to market valuation derivative contracts.


Financial performance snapshot
(Rs m) 3QCY07 3QCY08 Change 9mCY07 9mCY08 Change
Sales 13,775 15,191 10.3% 40,909 46,707 14.2%
Expenditure 12,035 13,843 15.0% 36,240 41,666 15.0%
Operating profit (EBDITA) 1,740 1,348 -22.5% 4,669 5,041 8.0%
Operating profit margin (%) 12.6% 8.9%   11.4% 10.8%  
Other income 158 399 153.1% 457 798 74.6%
Interest 32 67 111.1% 73 166 126.5%
Depreciation 79 92 16.4% 242 264 8.8%
Profit before tax 1,787 1,588 -11.1% 4,810 5,408 12.4%
Extraordinary income/(expense) - -   - -  
Tax 630 540 -14.2% 1,701 1,865 9.6%
Profit after tax/(loss) 1,157 1,048 -9.4% 3,109 3,543 14.0%
Net profit margin (%) 8.4% 6.9%   7.6% 7.6%  
No. of shares       211.9 211.9  
Diluted earnings per share (Rs)*         25.25  
P/E ratio (x)*         19  
* On a trailing 12 months basis

What has driven performance in 3QCY08?
  • ABB grew its net sales by 10% YoY during 3QCY08. This growth was led by the company’s power products business and automation products business– which reported growth of 36% YoY and 27% YoY respectively. On the other hand, the power systems and process automation segments saw marginal decline in sales (see table below). During the quarter, ABB recorded an order inflow of Rs 19 bn, which was 13% higher than the orders booked during 3QCY07.

    Segment-wise performance
    (Rs m) 3QCY07 3QCY08 Change 9mCY07 9mCY08 Change
    Power systems            
    Revenue 5,134 5,109 -0.5% 15,111 15,552 2.9%
    % share 35.2% 30.3%   34.8% 30.6%  
    PBIT margin 9.8% 10.1%   9.1% 8.8%  
    Power products            
    Revenue 3,616 4,920 36.1% 11,444 14,311 25.1%
    % share 24.8% 29.1%   26.3% 28.2%  
    PBIT margin 11.5% 9.2%   11.4% 11.4%  
    Process automation            
    Revenue 2,496 2,474 -0.9% 7,539 8,271 9.7%
    % share 17.1% 14.6%   17.3% 16.3%  
    PBIT margin 13.2% 12.2%   11.7% 12.6%  
    Automation products            
    Revenue 3,283 4,169 27.0% 9,173 12,072 31.6%
    % share 22.5% 24.7%   21.1% 23.8%  
    PBIT margin 14.4% 7.3%   12.7% 10.7%  
    Others            
    Revenue 59 218 269.8% 186 604 224.5%
    % share 0.4% 1.3%   0.4% 1.2%  
    PBIT margin 5.2% 5.1%   1.4% 6.5%  
    Total*            
    Revenue 14,588 16,890 15.8% 43,453 50,809 16.9%
    PBIT margin 11.8% 9.4%   10.9% 10.6%  
    * Excluding inter-segment adjustments

  • ABB’s operating margins contracted substantially during 3QCY08. This decline was due to higher raw material, staff and other costs (all as percentage of sales). Based on segments, all except power systems segment recorded decline in PBIT margins.

  • The company’s bottomline witnessed a decline of 9% YoY during the quarter, while it grew 14% YoY for the nine-month period. Apart from contraction in operating margins, higher interest expense also added to the bottomline woes.

What to expect?
At the current price of Rs 488, the stock is trading at a multiple of 8.1 times our estimated CY10 earnings. Based on the company’s nine-month performance, we might have to slightly revise our numbers downwards. The management has indicated that the decline in net profits during the quarter was due to revenue composition and nature of orders executed during the quarter.

As indicated in the results press release, ABB continues to invest in ramping up capacity and expanding its range of offerings to cater to growing requirements from the power transmission and distribution sector. The management also feels that a temporary slowdown maybe here for a while and that the industry and the government will work together to see it through.

We believe that the benefits of these initiatives shall flow into its numbers over the next few years. While growth during the third quarter and nine-month period is much slower than what was recorded in 2007, the fact that ABB will be a key beneficiary of the T&D investments planned for the next few years cannot be denied. We maintain our positive view on the stock from a 2 to 3 years perspective.

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