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ABB: Focus on margin restoration
Nov 21, 2011

ABB has announced third quarter results of financial year 2010-2011 (3QCY11) (It is a December ending company). The company has reported 29.2% YoY and 92.6% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales increase by 29.2% YoY during 3QCY11 (December ending fiscal). Sales growth was led by strong performance from power systems, process automation and low voltage products.
  • Operating margins rise to 3.8% during the quarter due to fall in raw material expenses as a percentage of sales.
  • Net profits increase 92.6% YoY during the quarter, due to strong performance at the operating level. However, increase in depreciation and interest expenses impacted the overall profitability growth for the quarter.
  • Order inflow during the quarter stood at Rs 24.9 bn, up 22.7% YoY. Large orders from steel, paper and power boosted the growth in order book. Further, at the end of the quarter, the company had an order backlog of approximately Rs 91.5 bn.

Financial performance snapshot
(Rs m) 3QCY10 3QCY11 Change 9MCY10 9MCY11 Change
Total operating income 13,490 17,435 29.2% 42,873 52,491 22.4%
Expenditure 13,145 16,769 27.6% 41,640 49,953 20.0%
Operating profit (EBDITA) 345 666 93.3% 1,233 2,537 105.8%
Operating profit margin (%) 2.6% 3.8%   2.9% 4.8%  
Other income 34 38 11.0% 107 148 38.3%
Interest 45 71 57.9% 12 178 41.5%
Depreciation 12 263 108.7% 368 671 82.2%
Profit before tax 208 371 78.2% 846 1,837 117.0%
Tax 93 149 60.5% 282 633 124.6%
Profit after tax/(loss) 115 222 92.6% 565 1,204 113.3%
Net profit margin (%) 0.9% 1.3%   1.3% 2.3%  
No. of shares         211.9  
Basic & diluted earnings per share (Rs)         5.7  
P/E ratio (x)*         100.2  
* On a trailing 12-months basis

What has driven performance in 3QCY11?
  • ABB's net sales increased by 29.2% YoY during 3QCY11. This was led by the company's power systems business which reported an increase of 39.4% YoY. The process automation and low voltage products business too recorded strong performance and increased 27.5% YoY and 33.8% YoY respectively.

    Segment-wise performance
    (Rs m) 3QCY10 3QCY11 Change 9MCY10 9MCY11 Change
    Power systems
    Revenue 3,919 5,462 39.4% 11,917 16,310 36.9%
    % share 27% 29%   26% 29%  
    PBIT margin -0.7% 0.4%   -6.1% 0.0%  
    Power products
    Revenue 3,992 4,975 24.6% 12,751 14,056 10.2%
    % share 27% 26%   28% 25%  
    PBIT margin -0.7% 3.3%   4.8% 4.3%  
    Process automation
    Revenue 2,180 2,781 27.5% 7,305 8,964 22.7%
    % share 15% 15%   16% 16%  
    PBIT margin -1.9% 2.3%   6.4% 4.8%  
    Discrete Automation and Motion
    Revenue 3,445 4,344 26.1% 11,054 12,722 15.1%
    % share 24% 23%   24% 23%  
    PBIT margin 14.0% 10.6%   9.5% 10.1%  
    Low Voltage Products
    Revenue 1,039 1,391 33.8% 3,046 3,949 29.7%
    % share 7% 7%   7% 7%  
    PBIT margin 3.9% 2.1%   1.0% 6.6%  
    Total*
    Revenue 14,575 18,952 30.0% 46,073 56,001 21.5%
    PBIT margin 2.9% 3.9%   3.1% 4.6%  
    * Excluding inter-segment adjustments

  • ABB's operating margins increased to 3.8% during 3QCY11 due to fall in raw material expenses as a percentage of sales. The raw material expenses (excluding stock adjustments) fell from 72.1% in 3QCY10 to 68.5% in 3QCY11. However, other expenditure (as a percentage of sales) increased from 13.4% to 15.0% in 3QCY11.

  • Net profits increased 92.6% YoY during the quarter. However, the profitability growth was impacted by 57.9% YoY and 108.7% YoY growth in interest and depreciation expenses respectively.

What to expect?
While the company managed to report strong performance on the top-line front, margins continue to remain under pressure. However, management is confident of restoring the margins to historical levels of 8-10% over the longer term. It may be noted that the cost optimization strategies have already started yielding fruits as evident from the current quarter results (Overall raw material expenses as a percentage of sales registered an improvement of 3%). Rural electrification backlog is also expected to culminate by the mid-next year, thereby easing margin pressures. However, with stiff competition prevailing in the sector and expensive valuations, we remain vigilant and maintain our negative view on the stock.

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