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ABB Ltd: Still waiting for a revival
Oct 31, 2014

ABB Ltd has announced third quarter results for the financial year 2014 (It is a December ending company). The company has reported 3.2% YoY growth in sales. Profit after tax has increased by 18.3% YoY. Here is our analysis of the results.

Performance summary
  • Sales for the company increased by 3% YoY during 3QCY14. Power Systems, one of the largest contributors to sales, saw a 9% YoY growth in sales. The Discrete Automation and Motion segment too posted a 8% YoY sales growth.
  • Operating profit increased 19% YoY during the quarter. Therefore, operating margins increased by 0.7% to 5.5% YoY.
  • The increase in operating margins led to a 18% YoY increase in net profits during the quarter.

Standalone performance snapshot
(Rs m) 3QCY13 3QCY14 Change 9mCY13 9mCY14 Change
Total operating income  17,648 18,214 3.2% 54,591 54,258 -0.6%
Expenditure 16,805 17,208 2.4% 51,977 51,192 -1.5%
Operating profit (EBDITA) 843 1,005 19.2% 2,615 3,066 17.2%
Operating profit margin (%) 4.8% 5.5%   4.8% 5.7%  
Other income 244 246 0.9% 677 717 5.9%
Interest 270 275 2.0% 723 750 3.6%
Depreciation 257 283 10.1% 763 836 9.6%
Profit before tax 560 693 23.7% 1,805 2,197 21.7%
Tax 180 243 35.0% 598 753 25.9%
Profit after tax/(loss) 380 450 18.3% 1,207 1,444 19.6%
Net profit margin (%) 2.2% 2.5%   2.2% 2.7%  
No. of shares         211.9  
Basic & diluted earnings per share (Rs)*         9.6  
P/E ratio (x)*         122.2  
* On a trailing 12 month basis.

What has driven performance in 3QCY14?
  • While the segments of Power Systems and Discrete Automation drove sales during the quarter, the other three segments of Power Products, Process Automation and Low Voltage Products posted a rather dull performance. Slow execution on the ground is still a factor dragging down performance.

  • The increase in margins has been propelled by a fall in raw material costs as well as charges incurred by the company for subcontracting its work.

  • Order inflow during the quarter was Rs 14.2 bn, compared to an inflow of Rs 17.6 bn in 3QCY13 (down 19% YoY). The order backlog at the end of the quarter stood at Rs 76.7 bn (down 7% YoY). There were few large orders that were awarded in the quarter gone by and some were awaiting contract closure and thus could not be booked. These delays in finalization of some large orders is the reason why performance has been dull on the new order inflows front.

    Segment-wise performance
    (Rs m) 3QCY13 3QCY14 Change 9mCY13 9mCY14 Change
    Power systems
    Revenue 4,533 4,939 9.0% 17,087 15,070 -11.8%
    % share  24% 25%   29% 25%  
    PBIT margin 5.5% 5.2%   4.9% 5.3%  
    Power products
    Revenue 5,195 5,402 4.0% 14,866 16,676 12.2%
    % share  27% 27%   25% 28%  
    PBIT margin 8.3% 5.9%   7.4% 7.5%  
    Process automation
    Revenue 3,008 3,090 2.7% 9,022 8,998 -0.3%
    % share  16% 15%   15% 15%  
    PBIT margin 2.5% 7.2%   3.9% 7.9%  
    Discrete Automation and Motion
    Revenue 4,554 4,923 8.1% 13,264 13,231 -0.2%
    % share  24% 25%   23% 22%  
    PBIT margin 6.1% 6.5%   6.5% 5.5%  
    Low Voltage Products
    Revenue 1,733 1,726 -0.4% 4,710 5,472 16.2%
    % share  9% 9%   8% 9%  
    PBIT margin 4.6% 7.0%   3.5% 5.7%  
    Total*
    Revenue 19,023 20,080 5.6% 58,949 59,447 0.8%
    PBIT margin 5.8% 6.2%   5.6% 6.4%  
    * Excluding inter-segment adjustments & unallocated revenues
What to expect?

The management has pointed out that while the sentiment has definitely improved, the on-ground activity has not really picked up yet. Additionally, the effects of over capacity in the industry and high competitive intensity while bidding for business still continues to be an overhang.

The mismatch between demand and supply has meant that it continues to be a buyers' market. As a response, the management is currently laying emphasis on being selective about taking orders, and not taking them just to fill up its production capacities. The company doesn't mind keeping a part of its capacity idle rather than taking up business which is not lucrative. It expects that this strategy will also help it swiftly capitalize on a revival in demand, whenever it takes place.

At current price of Rs 1,170, the stock is trading at 50.4 times our estimated FY17 earnings for the company. Considering these expensive valuations, we retain our SELL view on the company's stock.

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