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ABB: Life as usual!
Oct 25, 2005

Performance Summary
Engineering major, ABB India (Research), has maintained its strong run, reporting robust growth in both topline and bottomline for the third quarter and nine-months ending September 2005 (January-December fiscal). Equally strong growth in power technologies and automation technologies divisions of the company has aided the performance in both the periods. Combined with this, an expansion in operating margins has led to the bottomline growth outpacing the growth in topline. Record order intake on the back of continued strength in the capex cycle has added muscle to the company’s business during the first nine-months of CY05.

Financial performance: A snapshot…
(Rs m) 3QCY04 3QCY05 Change 9mCY04 9mCY05 Change
Sales 5,595 7,107 27.0% 15,147 19,773 30.5%
Expenditure 5,194 6,293 21.1% 14,024 17,983 28.2%
Operating profit (EBDITA) 401 815 103.4% 1,123 1,790 59.5%
Operating profit margin (%) 7.2% 11.5%   7.4% 9.1%  
Other income 160 92 -42.6% 287 352 22.5%
Interest 4 20 449.7% 13 40 217.1%
Depreciation 51 59 14.7% 149 169 13.6%
Profit before tax 506 827 63.6% 1,248 1,933 54.9%
Extraordinary income/(expense) 38 -   38 -  
Tax 184 298 62.0% 451 692 53.4%
Profit after tax/(loss) 360 529 47.2% 835 1,241 48.6%
Net profit margin (%) 6.4% 7.4%   5.5% 6.3%  
No. of shares 42.4 42.4   42.4 42.4  
Diluted earnings per share* (Rs) 34.0 50.0   26.3 39.0  
P/E ratio (x)         43.2  
(* annualised)            

What is the company’s business?
ABB India (ABB) is a 52% subsidiary of ABB, Zurich, which is a global leader in power and automation technologies. Besides catering to the Indian markets, ABB has also been playing an increasing role in the parent’s regional and global operations. The company serves utility and industry customers through its vast range of offerings, which form part of its segments – Power Technologies (PT) and Automation Technologies (AT). The former, at 61% of 9mCY05 revenues, caters chiefly to electric, gas and water utilities through its range of products and services for the power transmission and distribution business. The AT business, at 39% of revenues, serves customers across industries like metals, paper, automotive, chemicals and petrochemicals. During the period CY99 and CY04, ABB’s net sales and profits have grown at compounded rates of 24% and 33% respectively. The company has over 3,500 employees, 8 manufacturing units and 26 marketing offices.

What has driven performance in 3QCY05?
All-round growth: Strong growth in ABB’s topline during 3QCY05 has been due to a combination of good performances from the company’s PT and AT business. Both the segments have recoded 25% YoY growth each during the quarter. Robust performance of both the segments has been brought about by a strong growth in order intake during the quarter. ABB booked orders worth Rs 9.2 bn during 3QCY05, a growth of over 39% YoY. For the nine-month period, orders received have grown by nearly 44%. Continued strength in the capex cycle, whereby the Indian power transmission and distribution (T&D) and industrial sectors are witnessing increased investments, has helped this strong growth in orders for ABB. At the end of 9mCY05, the company’s order backlog stands at Rs 20.8 bn, which is almost 90% of CY04 revenues. As per the management, strong macro economic fundamentals, power sector opportunities and industrial growth momentum continue to offer encouraging signs for ABB’s future growth.

Segment-wise performance…
  3QCY04 3QCY05 Change 9mCY04 9mCY05 Change
Power Technologies (PT)  
Revenue 3,424 4,294 25.4% 9,148 12,203 33.4%
% share 59.6% 59.7%   59.1% 60.5%  
PBIT margin 7.7% 10.7%   7.5% 8.6%  
Automation Technologies (AT)  
Revenue 2,321 2,900 24.9% 6,327 7,954 25.7%
% share 40.4% 40.3%   40.9% 39.5%  
PBIT margin 8.6% 12.0%   7.8% 10.4%  
Total*  
Revenue 5,746 7,194 25.2% 15,475 20,156 30.3%
PBIT margin 8.1% 11.2%   7.6% 9.3%  
* Excluding inter-segment adjustments

Lower input costs aid margin expansion: ABB has managed to expand its operating margins by 430 and 160 basis points during 3QCY05 and 9mCY05 respectively. This has been mainly a result of lower raw material costs, which have declined from 75% of 3QCY04 sales to 72% of sales in 3QCY05. Based on segments, while PBIT margins for PT expanded by 300 basis points, those for AT improved strongly by 340 basis points.

It boils down to the bottomline: Despite lower other income and a strong rise in interest costs, ABB has managed to grow its bottomline at a far greater pace than the growth in topline. This has been mainly on account of the expansion in operating margins.

What to expect?
At the current price of Rs 1,685, the stock is trading at a price to earnings multiple of 33.5 times our estimated CY05 earnings, which is at the higher end of the valuation spectrum. We had recommended a ‘Sell’ on the stock in September 2005 at Rs 1,713. While we do not doubt the strong growth prospects of the company on the back of improved investment scenario in the power T&D and automation segments, we believe that the same has already been captured in the stock price. As such, investors need to practice utmost caution.

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