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ABB Ltd: Order inflows decline sharply
Nov 29, 2012

ABB has announced third quarter results of financial year 2012 (It is a December ending company). The company has reported 3.7% YoY growth in sales while net profits have declined by 3.5% YoY. Here is our analysis of the results.

Performance summary
  • Sales increase by 3.7% YoY during 3QCY12 (December ending fiscal). Strong performance from process automation and low voltage products drove topline growth.
  • Operating margins were flat at 3.7% during the quarter.
  • Net profits decline 3.5% YoY during the quarter, due to muted performance at the operating level and fall in other income. Also, it should be noted that until now the company used to account for changes in fair value of embedded derivative contracts. However, it has decided to discontinue with the said policy. Due to a change in accounting policy the profit before tax was higher by Rs 130.1 m.
  • Order inflow during the quarter stood at Rs 16.7 bn, compared to an inflow of Rs 24.9 in 3QCY11, representing a fall of 33% YoY. The order backlog at the end of the quarter stood at Rs 90.6 bn.

Financial performance snapshot
(Rs m) 3QCY11 3QCY12 Change 9MCY11 9MCY12 Change
Total operating income 17,435 18,086 3.7% 52,491 54,827 4.5%
Expenditure 16,769 17,422 3.9% 49,953 52,128 4.4%
Operating profit (EBDITA) 666 664 -0.4% 2,538 2,699 6.4%
Operating profit margin (%) 3.8% 3.7%   4.8% 4.9%  
Other income 38 10 -74.8% 148 42 -71.5%
Interest 71 117 64.8% 178 248 39.5%
Depreciation 263 240 -8.5% 671 695 3.6%
Profit before tax 370 316 -14.7% 1,837 1,799 -2.1%
Tax 149 102 -31.4% 633 592 -6.4%
Profit after tax/(loss) 221 214 -3.5% 1,204 1,206 0.2%
Net profit margin (%) 1.3% 1.2%   2.3% 2.2%  
No. of shares         211.9  
Basic & diluted earnings per share (Rs)         5.7  
P/E ratio (x)*         81.1  
*On trailing 12 months earnings

What has driven performance in 3QCY12?
  • ABB's net sales increased by 3.7% YoY during 3QCY12. This was led by the company's process automation business which reported a growth of 12.8% YoY. The low voltage business also recorded strong performance with revenue growth of 10.7% YoY. However, revenues from power systems and discrete automation & motion services declined 7.4% YoY and 4% YoY respectively.

  • Margins from the power systems and process automation systems were in negative territory during the quarter. In the process automation segment, recognizing cost escalations upfront resulted in losses. With regards to power systems, delays from the customer side impacted execution and thus margins as absorption of fixed costs became difficult.

    Segment-wise performance
    (Rs m) 3QCY11 3QCY12 Change 9MCY11 9MCY12 Change
    Power systems
    Revenue 5,462 5,055 -7.4% 16,310 16,432 0.7%
    % share 29% 27%   29% 28%  
    PBIT margin 0.4% -1.6%   0.0% 2.9%  
    Power products
    Revenue 4,975 5,151 3.5% 14,056 15,009 6.8%
    % share 26% 27%   25% 26%  
    PBIT margin 3.3% 8.5%   4.3% 5.6%  
    Process automation
    Revenue 2,781 3,136 12.8% 8,964 9,468 5.6%
    % share 15% 16%   16% 16%  
    PBIT margin 2.3% -4.6%   4.8% -1.5%  
    Discrete Automation and Motion
    Revenue 4,344 4,172 -4.0% 12,722 12,819 0.8%
    % share 23% 22%   23% 22%  
    PBIT margin 10.6% 7.3%   10.1% 10.2%  
    Low Voltage Products
    Revenue 1,391 1,539 10.7% 3,949 4,491 13.7%
    % share 7% 8%   7% 8%  
    PBIT margin 2.1% 8.2%   6.6% 6.3%  
    Total*
    Revenue 18,952 19,053 0.5% 56,001 58,219 4.0%
    PBIT margin 3.9% 3.3%   4.6% 4.8%  
    * Excluding inter-segment adjustments

  • ABB's operating margins were relatively flat during the quarter. Management's cost control measures have started bearing fruits. The total raw material cost as a percentage of sales declined from 65.1% in 3QCY11 to 63.4% in 3QCY12. Staff cost also declined from 9.2% in 3QCY11 to 8.3% during the quarter.

  • Net profits declined 3.5% YoY during the quarter. Muted performance at the operating level and fall in other income by 74.8% YoY impacted profitability. However, adjusting for the exchange gains/losses during the quarter net profits increased 40.9% YoY.

What to expect?
The performance in the current quarter was impacted due to slowdown in the product business. On the project side the situation is slightly better. As far as the segmental performance is concerned, the power systems and discrete automation segment were impacted by the economic slowdown. The power systems segment suffered due to execution issues while the automation segment suffered due to slowdown in the end user industries.

The order inflows also declined in the current quarter amidst a challenging environment. Margins were under stress due to cost overruns and advance provisioning (provisioning figure for the quarter stood at Rs 150 m) on certain projects. Considering the expensive valuations and competitive scenario in the power sector we maintain our SELL view on the stock.

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