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ABB India: ‘Wiring’ on all cylinders - Views on News from Equitymaster
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ABB India: ‘Wiring’ on all cylinders
Oct 30, 2006

Performance summary
Power T&D equipment and services major, ABB India has announced strong set of numbers for the third quarter and nine-months ended September 2006 (December ending fiscal). For 3QCY06, revenues and net profits have grown by 51% YoY and 55% YoY respectively. However, higher raw material costs (as percentage of sales) have impacted operating margins, which have contracted by 120 basis points (1.2%).

Financial performance: A snapshot…
(Rs m) 3QCY05 3QCY06 Change 9mCY05 9mCY06 Change
Sales 7,107 10,706 50.6% 19,773 28,477 44.0%
Expenditure 6,293 9,600 52.6% 17,983 25,657 42.7%
Operating profit (EBDITA) 815 1,106 35.7% 1,790 2,820 57.5%
Operating profit margin (%) 11.5% 10.3%   9.1% 9.9%  
Other income 92 230 151.1% 352 563 60.0%
Interest 20 2 -87.9% 40 6 -84.6%
Depreciation 59 66 12.9% 169 194 14.2%
Profit before tax 827 1,267 53.2% 1,933 3,184 64.7%
Tax 298 446 49.7% 692 1,130 63.3%
Profit after tax/(loss) 529 821 55.2% 1,241 2,054 65.5%
Net profit margin (%) 7.4% 7.7%   6.3% 7.2%  
No. of shares       42.4 42.4  
Diluted earnings per share* (Rs)         70.8  
P/E ratio* (x)         51.4  
* 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 CY00 to CY05, ABB’s net sales and profits have grown at compounded rates of 30% and 32% respectively. The company has over 3,500 employees, 8 manufacturing units and 26 marketing offices across the country.

What has driven performance in 3QCY06?
All-round show: Strong traction across all the business divisions of ABB (see table below) has aided the overall topline growth of the company during 3QCY06. Significant performances have been raked by the company’s Automation sub-divisions (automation products and process automation), with a combined sales growth of 53% YoY during 3QCY06. These two sub-segments together contribute to around 40% of ABB’s total revenues and 38% of the total PBIT.

As for the other major division of Power, the products and systems sub-divisions have grown sales by around 60% YoY and 44% YoY respectively during the quarter. Strong order booking and execution of existing backlog has aided the company’s topline performance. ABB received orders of Rs 13.6 bn during 3QCY06, representing a growth of 48% YoY. This has taken the total order backlog at the end of 9mCY06 to Rs 35.6 bn, which is almost 1.2 time the company total sales in CY05. The management has indicated that, in the power division, the company has received big orders for sub-stations and rural and urban distribution systems, which have been driven by generation capacity additions, transmission network augmentation, grid reliability and efficiency improvements. On the automation front, capacity addition and productivity improvement initiatives from India Inc. has helped the segment’s stellar performance during the said quarter.

Segment-wise performance…
(Rs m) 3QCY05 3QCY06 Change 9mCY05 9mCY06 Change
Power products
Revenue 2,030 3,238 59.5% 5,734 8,252 43.9%
% share 27.1% 28.4%   27.5% 27.1%  
PBIT margin 13.2% 10.6%   10.5% 9.3%  
Power systems
Revenue 2,454 3,541 44.3% 6,964 10,121 45.3%
% share 32.8% 31.1%   33.4% 33.3%  
PBIT margin 7.8% 10.8%   6.4% 8.9%  
Automation products
Revenue 1,611 2,320 44.0% 4,431 6,322 42.7%
% share 21.5% 20.4%   21.2% 20.8%  
PBIT margin 13.3% 9.9%   11.1% 11.4%  
Process automation
Revenue 1,366 2,250 64.7% 3,650 5,652 54.9%
% share 18.3% 19.8%   17.5% 18.6%  
PBIT margin 9.8% 9.7%   9.0% 10.8%  
Revenue 20 34 67.8% 89 83 -6.7%
% share 0.3% 0.3%   0.4% 0.3%  
PBIT margin 3.2% -4.9%   10.0% 3.5%  
Revenue 7,481 11,382 52.1% 20,868 30,430 45.8%
PBIT margin 10.8% 10.3%   9.0% 9.9%  
* Excluding inter-segment adjustments

Higher input costs dent margins: ABB’s operating margins contracted by 120 basis points during 3QCY06, mainly on the back of higher raw material costs. These costs, as percentage of sales, increased from 72% in 3QCY05 to nearly 75% during 3QCY06. But for lower staff and other costs, the operating margin performance would have been worse. ABB’s average operating margins during third quarters of last seven fiscals (CY00 to CY06) has been 9.7%. As such, earning 10.3% margins during 3QCY06, despite increased pressure of higher raw material costs and greater competitive pressures, is commendable. This is indicative of the increasing value add nature of ABB’s products across the power and automation segments. The company’s performance on the margins front is almost in line with our full year estimates.

Higher other income aids bottomline: On the back of a robust growth in topline and substantially higher other income, ABB has reported a strong growth in its bottomline during 3QCY06. The growth in net profits during the nine-month period has been relatively better, and is largely on the back of expansion in operating margins during this period.

What to expect?
At the current price of Rs 3,640, the stock trades at a price to earnings multiple of 31.7 times our estimated CY07 earnings, which we have to upgrade marginally, considering the strong show during the nine-months ended September 2006. ABB’s initiatives on capacity and range expansion are seemingly beginning to bear fruit in times of higher demand and increasing competition in the electrical equipment industry. We also remain enthused by vibrations emanating from the parent regarding its increasing commitment towards taking the India operations to the next level (through increased role of ABB India in the parent’s global outsourcing programme).

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