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ABB Ltd: Reaps benefits of cost rationalization
Nov 11, 2013

ABB Ltd has announced third quarter results for calendar year 2013 (It is a December ending company). The company has reported 1.3% YoY decline in sales. Profit after tax has improved by 67% YoY. Here is our analysis of the results.

Performance summary
  • Sales for the company decreased by 1.3% YoY during 3QCY13.
  • Operating profit increased by 58.8% YoY during the quarter despite drop in sales. The company has substantially decreased its other expenses and sub-contracting charges.
  • Interest cost of the company increased by 130% YoY. Profit after tax increased by 66.6% during the quarter.


Financial performance snapshot
(Rs m) 3QCY12 3QCY13 Change 9MCY12 9MCY13 Change
Total operating income  18,086 17,859 -1.3% 54,827 55,181 0.6%
Expenditure 17,422 16,805 -3.5% 52,128 51,977 -0.3%
Operating profit (EBDITA) 664 1,054 58.8% 2,699 3,205 18.7%
Operating profit margin (%) 3.7% 5.9%   4.9% 5.8%  
Other income 10 9 -3.2% 42 63 48.9%
Interest 117 270 130.3% 248 723 192.0%
Depreciation 240 257 7.1% 695 763 9.8%
Profit before tax 316 536 69.7% 1,799 1,781 -1.0%
Tax 102 180 76.2% 592 598 1.0%
Profit after tax/(loss) 214 356 66.6% 1,206 1,183 -1.9%
Net profit margin (%) 1.2% 2.0%   2.2% 2.1%  
No. of shares         211.9  
Basic & diluted earnings per share (Rs)         5.6  
P/E ratio (x)*         97.3  
* Excluding inter-segment adjustments & unallocated revenues

What has driven performance in 3QCY13 and 9MCY13?
  • ABB's net sales declined marginally by 1.3% YoY during 3QCY13. This was mainly due to de growth of 10.3% YoY and 4.1% YoY in Power Systems and Process automation segments respectively. On the other hand, its industrial segment- Discrete Automation and Motion as well as Low Voltage products reported impressive growth of 9.2% and 12.6% YoY respectively.

  • Operating profit for the company increased by 58.8% YoY. While raw material cost as a proportion of sales has not changed YoY, there has been a sharp decline in other expenses and sub contracting charges on an absolute basis. Therefore, operating margins increased by 2.2% from 3.7% in 3QCY12 to 5.9% in 3QCY13.

  • All the segments except Low voltage products have either registered considerable improvement in margins or have reported flat margins. In fact, Power systems and Process automation segments have shown profits as compared to loss in last year's corresponding quarter.

  • Increase in interest expenses (over 130% YoY) impacted profitability. However, better operating level performance and slight decrease in tax rate led to 66.6% YoY increase in net profit.

  • ABB's order inflow during the quarter was Rs 17.6 bn (up 4.9% YoY). However, there was a decline of about 9% YoY in the order backlog; which stood at Rs 82.5 bn.

  • For 9MCY13, ABB reported flat sales on a YoY basis. Operating profit for the same period has improved by 18.7% YoY. However, high interest cost led to 1.9% YoY decline in profit after tax.

    Segment-wise performance
    (Rs m) 3QCY12 3QCY13 Change 9MCY12 9MCY13 Change
    Power systems
    Revenue 5,055 4,533 -10.3% 16,432 17,087 4.0%
    % share 27% 24%   28% 29%  
    PBIT margin -1.8% 4.9%   2.8% 5.1%  
    Power products
    Revenue 5,151 5,195 0.9% 15,009 14,866 -1.0%
    % share 27% 27%   26% 25%  
    PBIT margin 8.4% 8.3%   5.6% 7.3%  
    Process automation
    Revenue 3,136 3,008 -4.1% 9,468 9,022 -4.7%
    % share 16% 16%   16% 15%  
    PBIT margin -4.8% 2.4%   -1.6% 3.7%  
    Discrete Automation and Motion
    Revenue 4,172 4,554 9.2% 12,819 13,264 3.5%
    % share 22% 24%   22% 23%  
    PBIT margin 6.7% 6.7%   9.9% 6.7%  
    Low Voltage Products
    Revenue 1,539 1,733 12.6% 4,491 4,710 4.9%
    % share 8% 9%   8% 8%  
    PBIT margin 7.2% 5.2%   6.0% 3.7%  
    Total*
    Revenue 19,053 19,023 -0.2% 58,219 58,949 1.3%
    PBIT margin 3.3% 5.8%   4.8% 5.6%  
    * Excluding inter-segment adjustments & unallocated revenues
What to expect?
ABB's operating performance has been improving since couple of quarters. The improved operating performance is a result of the various cost cutting initiatives that the company has taken. This includes increased localization, improving efficiency and development of better project management skills. As far as macro environment is concerned, demand from power sector has witnessed a slight upward trend. However, sectors such as steel and cement are yet to see pickup in demand. The company has managed to secure small orders from solar power and oil & gas sectors.

At the current price of Rs 620, the stock is trading at 58.4 times our estimated CY16 earnings. The valuations seem expensive given the macro headwinds may still hamper the company's growth. We maintain our SELL view on the stock.

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