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ABB: The fall continues - Views on News from Equitymaster
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ABB: The fall continues
Oct 30, 2009

Performance summary
  • Sales fall by 4.3% YoY during 3QCY09 (December ending fiscal), 7% YoY in 9mCY09. Fall during the quarter led by the power systems 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 21% YoY during the quarter, decline 31% YoY during for the nine month period. Apart from contraction in operating margins, higher depreciation charges and lower other income compared to the same quarter last year also pared the bottomline growth.


Financial performance snapshot
(Rs m) 3QCY08 3QCY09 Change 9mCY08 9mCY09 Change
Sales 15,191 14,538 -4.3% 46,707 43,520 -6.8%
Expenditure 13,843 13,315 -3.8% 41,666 39,744 -4.6%
Operating profit (EBDITA) 1,348 1,223 -9.3% 5,041 3,776 -25.1%
Operating profit margin (%) 8.9% 8.4%   10.8% 8.7%  
Other income 399 159 -60.2% 798 510 -36.0%
Interest 67 44 -34.2% 166 228 36.8%
Depreciation 92 127 37.1% 264 360 36.5%
Profit before tax 1,588 1,212 -23.7% 5,408 3,698 -31.6%
Extraordinary income/(expense) - -   - -  
Tax 540 381 -29.5% 1,865 1,248 -33.1%
Profit after tax/(loss) 1,048 831 -20.7% 3,543 2,450 -30.8%
Net profit margin (%) 6.9% 5.7%   7.6% 5.6%  
No. of shares       211.9 211.9  
Diluted earnings per share (Rs)*         20.7  
P/E ratio (x)*         37  
* On a trailing 12 months basis

What has driven performance in 3QCY09?
  • ABB saw its net sales fall sales by 4.3% YoY during 3QCY09. This fall was led by the company’s power systems which reported a miserable fall of 25% YoY. On the other hand, the power products and process automation segments too saw a fall, albeit to a lesser extent (see table below). During the quarter, ABB recorded an order inflow of Rs 19 bn, which was almost the same as the orders booked during 3QCY08. The cumulative order inflow for the 9mCY09 was Rs 63 bn. The order backlog at the end of the quarter stood at Rs 80 bn which was higher by about 13% YoY.

    Segment-wise performance
    (Rs m) 3QCY08 3QCY09 Change 9mCY08 9mCY09 Change
    Power systems            
    Revenue 5,109 3,813 -25.4% 15,552 12,927 -16.9%
    % share 30.3% 24.6%   30.6% 27.3%  
    PBIT margin 10.1% 1.2%   8.8% 3.6%  
    Power products            
    Revenue 4,921 4,734 -3.8% 14,311 14,009 -2.1%
    % share 29.1% 30.5%   28.2% 29.5%  
    PBIT margin 9.2% 11.9%   11.4% 12.7%  
    Process automation            
    Revenue 2,474 2,402 -2.9% 8,271 7,679 -7.1%
    % share 14.6% 15.5%   16.3% 16.2%  
    PBIT margin 12.2% 7.0%   12.6% 10.1%  
    Automation products            
    Revenue 4,169 4,478 7.4% 12,072 12,365 2.4%
    % share 24.7% 28.8%   23.8% 26.1%  
    PBIT margin 7.3% 13.5%   10.7% 9.0%  
    Others            
    Revenue 218 103 -52.6% 604 442 -26.8%
    % share 1.3% 0.7%   1.2% 0.9%  
    PBIT margin 5.1% 2.4%   6.5% 3.9%  
    Total*            
    Revenue 16,890 15,530 -8.1% 50,809 47,423 -6.7%
    PBIT margin 9.4% 8.9%   10.6% 8.7%  
    * Excluding inter-segment adjustments

  • ABB’s operating margins contracted during 3QCY09. This decline was due to higher raw material costs as also higher staff costs (both as percentage of sales). Based on segments, the power systems segment got battered during the quarter. While the process automation segment also saw a fall in margins, the other two segments of power products and automation products saw their EBIT margins rise.

  • The company’s bottomline witnessed a decline of 21% YoY during the quarter, while it fell an even higher 31% YoY for the nine-month period. Apart from contraction in operating margins, higher depreciation expenses and lower other income compared to the same period last year also added to the bottomline woes.

What to expect?
At the current price of Rs 765, the stock is trading at a multiple of 22.9 times our CY11 estimated earnings. Based on the company’s dismal nine-month performance, we will have to slightly revise our numbers downwards.

As per the ABB’s management, the Indian economy continues showing signs of recovery. While the performance of the core infrastructure sectors in the country will decide business performance, it feels that we may be in a phase of bottoming out of the slowdown here in India.

The company’s lacklustre performance in combination with its high valuations makes us cautious about the stock.

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