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ABB: Margins continue to get battered

Oct 30, 2010

ABB declared its 3QCY10 results. The company has reported 8% YoY fall in sales while its net profits have fallen 86% year on year. Here is our analysis of the results.

Performance summary
  • Sales fall by 8% YoY during 3QCY10 (December ending fiscal). Revenue decline led by the power products and the process automation businesses.
  • Operating margins contract drastically by 7% YoY during the quarter on the back of a rise in all the company's cost heads (all as percentage of sales).
  • Net profits fall by 86% YoY during the quarter, led by a poor performance at the operating level.

Financial performance snapshot
(Rs m) 3QCY09 3QCY10 Change 9mCY09 9mCY10 Change
Sales      14,538      13,340 -8.2%       43,520       42,365 -2.7%
Expenditure      13,315      13,145 -1.3%       39,744       41,640 4.8%
Operating profit (EBDITA)         1,223             195 -84.0%          3,776              724 -80.8%
Operating profit margin (%) 8.4% 1.5%   8.7% 1.7%  
Other income             159             184 15.7%              510              616 20.6%
Interest               44               45 2.3%              228              126 -44.9%
Depreciation            127             126 -0.6%              360              368 2.2%
Profit before tax         1,212            208 -82.8%          3,698              846 -77.1%
Tax             381               93 -75.6%           1,248              282 -77.4%
Profit after tax/(loss)             831             115 -86.1%          2,450              565 -77.0%
Net profit margin (%) 5.7% 0.9%   5.6% 1.3%  
No. of shares                 211.9           211.9  
Diluted earnings per share (Rs)*                       7.8  
P/E ratio (x)*         105.1  
* On a trailing 12 months basis

What has driven performance in 3QCY10?
  • ABB's net sales declined by 8% YoY during 3QCY10. This was led by the company's power products business which reported a decline of 16% YoY. The process automation business too recorded a dull performance during the quarter. The company continues to face price pressures on the power side of the business on account of intense competition. On the other hand, the power systems division saw a marginal sales growth of about 3% YoY during the quarter.

    Segment-wise performance
    (Rs m) 3QCY09 3QCY10 Change 9mCY09 9mCY10 Change
    Power systems            
    Revenue         3,813         3,919 2.8%        12,927        11,917 -7.8%
    % share  24% 27%   27% 26%  
    PBIT margin 1.2% -0.7%   3.6% -6.1%  
    Power products            
    Revenue        4,734        3,992 -15.7%       14,009        12,751 -9.0%
    % share  30% 27%   29% 28%  
    PBIT margin 11.9% -0.7%   12.7% 4.8%  
    Process automation            
    Revenue        2,599        2,180 -16.1%          8,239         7,305 -11.3%
    % share  17% 15%   17% 16%  
    PBIT margin 7.2% -1.9%   9.7% 6.4%  
    Discrete Automation and Motion            
    Revenue        3,459        3,445 -0.4%          9,726        11,054 13.7%
    % share  22% 24%   20% 24%  
    PBIT margin 10.4% 14.0%   8.4% 9.5%  
    Low Voltage Products            
    Revenue            995        1,038 4.3%          2,592          3,046 17.5%
    % share  6% 7%   5% 7%  
    PBIT margin 22.6% 3.9%   10.8% 1.0%  
    Total*            
    Revenue     15,600      14,574 -6.6%       47,493       46,073 -3.0%
    PBIT margin 8.9% 2.9%   8.7% 3.1%  
    * Excluding inter-segment adjustments

    During the quarter, the company received large orders in the power systems and process automation segments which will fuel the growth in revenues going forward. Overall, order inflows during the quarter stood at Rs 20.3 bn, a growth of 8% YoY. ABB's order backlog at the end of the quarter stood at Rs 91.8 bn which is a growth of 14% YoY.

  • ABB's operating margins contracted by 7% during 3QCY10. This fall was due to an increase in all the company's cost heads (as a percentage of sales) including raw material costs, employee costs and other expenditure. The adverse impact on profits was mainly due to lower price realisations and continued costs on exit from rural electrification business. Based on segments, only the discrete automation and motion segment saw a good performance on the margins front. The power systems, power products and process automation segments all saw negative PBIT margins.

  • On the back of a severe fall in operating margins and decline in topline, ABB reported a 86% YoY fall in profits during 3QCY10.

What to expect?
At the current price of Rs 824, the stock is trading at a multiple of 24.4 times our estimated CY12 earnings. ABB continues to disappoint in terms of its financial performance. We have a cautious view on the stock at current levels (ResearchPro subscribers, kindly click here)

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