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ABB: Appraising the future

Dec 10, 2003

Increasing orderbook size, focus on infrastructure, reforms in power sector, higher growth expectations and better financial results are few of the factors that have led to spurt in investor interest towards engineering stocks. Reflecting the trend, transmission major, ABB has seen its stock price nearly double in the last four months. With the current Electricity Act focusing on reduction of T&D losses, the orderbook of the company is expected to remain healthy. But does this justify the sharp appreciation in valuations? Let's have a close look at the company's performance and try to get an answer.

(Rs m) FY03 9mFY04
Net Sales 11,758 9,512
Other Income 248 226
Total expenditure 10,587 8,836
Operating Profit (EBDIT) 1,171 676
Operating Profit Margin (%) 10.0% 7.1%
Profit after Tax/(Loss) 972 748
Net profit margin (%) 8.3% 7.9%

The 9mFY04 performance of the company has remained satisfactory with around 18% increase in topline and 30% increase in bottomline. But being an engineering company, fourth quarter is supposed to be the deciding factor of the annual performance. Historically, fourth quarter has contributed around 33% to the company's annual topline and around 45% to the annual bottomline. Going by the same trends, the topline growth for FY04, on a conservative basis, should be around 18% and bottomline growth at around 33%.

The company has received orders worth Rs 12.5 bn during 9mFY04, registering an increase of 34% YoY. The order backlog of ABB stood at Rs 11.4 bn as on September 2003, which works out to be around 0.9x FY03 revenues. ABB is currently focusing on taking advantage of the APDRP (accelerated power development reform program) policy, as its success could translate into higher orders from the T&D side. So, in ABB's case, we expect a steady growth in the orderbook size.

Apart from power, the company is currently focusing on increasing the revenues from industrial segment. It has increased the dealer network by more than 100% in last one year. Once the exercise gets over, the volumes will increase, leading to spurt in the PBIT contribution from this segment. However, PBIT margins from this segment will continue to face pressure.

(Rs m) ABB BHEL Siemens
Net Sales 13,750 84,870 17,191
PAT 1,292 6,454 1,781
Operating Profit margins (%) 10.3% 14.0% 9.5%
Net Profit margins (%) 9.4% 7.6% 10.4%
Market Cap/Sales (x) 1.9 1.3 1.7
P/E ratio (x) 20.1 17.5 15.8

At the current price level or Rs 612, the stock is trading at P/E multiple of 20.2x, expected FY04 earnings. We have upgraded our earnings estimates based on good performance in last nine months and better order inflow expectations. The market capitalisation to sales ratio of ABB is at around 1.9x, which is on the higher side as compared to its peers like BHEL and Siemens. However, with the effect of APDRP policy yet to kick in, ABB could look at higher order inflows going forward, as reforms gain pace. From that perspective, the company's long-term (3-5 years) prospects look promising.

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