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ABB India: Momentum maintained - Views on News from Equitymaster

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ABB India: Momentum maintained
Oct 25, 2007

Performance summary
  • Sales grow 29% YoY during 3QCY07 (December ending fiscal), 44% YoY during 9mCY07 – power systems and automation products drive topline
  • Operating margins expand by 2.2% in 3QCY07, owing to lower raw material and other costs (both as percentage of sales).

  • Net profits grow 41% YoY in 3QCY07, 51% YoY in 9mCY07.

  • First half order bookings at over Rs 56 bn, up 35% YoY. Order backlog at the end of September 2007 stood at Rs 49 bn.

    Financial performance snapshot
    (Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
    Sales 10,706 13,775 28.7% 28,477 40,909 43.7%
    Expenditure 9,600 12,052 25.5% 25,657 36,265 41.3%
    Operating profit (EBDITA) 1,106 1,724 55.9% 2,820 4,644 64.7%
    Operating profit margin (%) 10.3% 12.5%   9.9% 11.4%  
    Other income 230 158 -31.6% 563 457 -18.8%
    Interest 2 16 529.1% 6 48 685.2%
    Depreciation 66 79 19.7% 194 242 25.3%
    Profit before tax 1,267 1,787 41.0% 3,184 4,810 51.1%
    Extraordinary income/(expense) - -   - -  
    Tax 446 630 41.3% 1,130 1,701 50.5%
    Profit after tax/(loss) 821 1,157 40.8% 2,054 3,109 51.4%
    Net profit margin (%) 7.7% 8.4%   7.2% 7.6%  
    No. of shares         211.9  
    Diluted earnings per share* (Rs)         21.0  
    P/E ratio* (x)         68.4  
    * On a trailing 12-month basis

    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 power and automation segments. The former caters chiefly to electric, gas and water utilities through its range of products and services for the power transmission and distribution business. The automation business serves customers across industries like metals, paper, automotive, chemicals and petrochemicals. During the period CY01 to CY06, ABB’s net sales and profits grew at compounded rates of 33% and 39% respectively.

    What has driven performance in 3QCY07?
    Automation division drives topline: ABB recorded a 29% YoY growth in its topline during 3QCY07. This growth was largely due to strong performances from its automation segment, where the sub-segments - process automation and automation products recorded growth of 45% YoY and 42% YoY respectively. The company’s power sub-segments – power systems and power products also fared strongly and recorded growth of 26% YoY and 12% YoY respectively during 3QCY07.

    Growth in these segments was on the back of robust order booking and execution. During the quarter, ABB recorded an order of Rs 17 bn, which was 23% higher than the orders booked in 3QCY06. What is more, at the end of September 2007, the company’s order backlog stood at Rs 49 bn. The company received significant orders for rural and urban electrification driven by new power capacity additions as well as strengthening of transmission and distribution systems to improve grid reliability and improve efficiency.

    Segment-wise performance
    (Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
    Power systems            
    Revenue 4,073 5,135 26.1% 11,466 15,112 31.8%
    % share 35.8% 35.2%   37.7% 34.8%  
    PBIT margin 10.1% 9.6%   8.4% 9.0%  
    Power products            
    Revenue 3,238 3,617 11.7% 8,252 11,451 38.8%
    % share 28.4% 24.8%   27.1% 26.3%  
    PBIT margin 10.6% 11.3%   9.3% 11.3%  
    Process automation            
    Revenue 1,717 2,496 45.3% 4,306 7,540 75.1%
    % share 15.1% 17.1%   14.2% 17.3%  
    PBIT margin 11.1% 13.2%   12.7% 11.7%  
    Automation products            
    Revenue 2,320 3,283 41.5% 6,322 9,173 45.1%
    % share 20.4% 22.5%   20.8% 21.1%  
    PBIT margin 9.9% 14.4%   11.4% 12.7%  
    Others            
    Revenue 34 59 74.3% 83 186 122.9%
    % share 0.3% 0.4%   0.3% 0.4%  
    PBIT margin -4.9% 5.2%   3.5% 1.4%  
    Total*            
    Revenue 11,382 14,590 28.2% 30,430 43,462 42.8%
    PBIT margin 10.3% 11.7%   9.9% 10.8%  
    * Excluding inter-segment adjustments

    Lower input, other costs aid margin expansion: ABB’s operating margins expanded by 2.2% YoY during 3QCY07. This was owing to lower raw material and other costs (both as percentage of sales). While the former declined from 69.2% of 3QCY06 sales to 67.7% in 3QCY07, the latter reduced from 16.2% to 14.1%. Based on segments, all except power systems recorded expansion in EBIT margins during the quarter.

    Margin expansion aids bottomline: ABB recorded a 41% YoY growth in its 3QCY07 bottomline, which was largely a result of expansion in operating margins. But for a lower other income and higher interest outgo, the net profit growth would have been better.

    What to expect?
    At the current price of Rs 1,435, the stock is trading at a multiple of 29.2 times our estimated CY09 earnings. While the company’s topline performance has been in line with our estimates for CY07, we shall take a re-look at our profitability estimates, considering that these have improved over the past two quarters of this fiscal. However, we maintain our cautious view with respect to the stock’s valuations.

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