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ABB Ltd: Needs recharging - Outside View

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ABB Ltd: Needs recharging
May 6, 2010

Electrical engineering companies of the operational size of ABB (sales revenue of Rs 62 bn in calendar year 2009) and which makes and sells assorted motors, switchgears, transformers, electrical control equipment, and above all are in the biz of turnkey project management, run truly humungous operations. A veritable flat world MNC so to speak, which in the course of its daily workout has to deal with some 120 subsidiaries of its parent, among other things, in assorted trade related revenue and capital account transactions-or so its annual report reveals!!!

The amount of juggling that it has to resort to, to get its act together is truly mindboggling!!!! In a sense therefore, being a subsidiary of an MNC can also have its pitfalls as it may also be forced to deal with all and sundry just to humor its principals.

For sure ABB India also appears to be in the good books of its principals. ABB brings value to customers in India through leading edge technologies it says, adding that India is the largest engineering design and R&D resource base for the ABB group worldwide.

Dealing with the parent ABB's subsidiaries is only a larger part of the overall equation. Just consider what else it has to do. Its cross border dealings are multifarious, though almost 92% of gross revenue is India centric. The value of all imports exceeds Rs 20 bn, its export revenues are close to Rs 9 bn, it bought materials worth Rs 14.5 bn from other subsidiaries of its parent, sold Rs 3.6 bn to them, purchased project items worth Rs 23 bn, has assorted big buck forward covers for--- foreign currency debtors, for similar sales, for such creditors and for future purchases--- which also, please note. Contract revenues in excess of billings and billings in excess of contract revenues seemingly add to the confusion. The list is actually endless and considerably complicated to boot. A Finance Director's nightmare if you please.

Prospective investors who rifle through the annual report are likely to get the fright of their lives for sure. It is also no small wonder that it chose to spend over Rs 1 bn (Rs 900m) during the year on information technology related expenses. There is no other way forward you see.

Its biggest item of revenue per se is turnkey project management including erection and commissioning which is a cool 41% of all revenues. But the company seeks to project its business under 5 other groupings---Power Systems, Power Products, Process Automation, Automation Products and Other Segment.

It got whacked on the profitability front in 2009 under all heads with the Power Systems division taking the brunt of the whacking. Profits in this division dipped sharply to Rs 70 m from Rs 2 bn previously. Overall sales too declined .The directors are at considerable pains to explain the strange turn of events especially when the country is powering ahead in the infrastructure arena.

The ills range from its decision to exit the rural electrification biz in the Power Systems Division, to customers deferring their contractual obligations, to making wrong calls on the forex front, to a higher level of bad debts on receivables(which appears strange given its clientele), et all. The directors also reveal that the pickings in the short term do not look very favourable either.

Given its line of biz and the customer base that it caters too, which is mainly in the Government or quasi Government sector, the pretax margins hover in the region of 11-12.5% or so the accounts reveal. But in 2009 the margins were reduced to 8.4%.Working capital management in such a biz calls for considerable dexterity as trade debtors and inventories are on the higher side and are a necessary burden.

Creditably enough through all this, the company managed to be a debt free unit though it made good by borrowing some cash from one of the many affiliates that it deals with. Helping ease the cash flow burden is its ability to get its customers pay in advance for future deliveries of capital equipment. And it also drew down on its investment portfolio just in case.

In spite of adverse business conditions, it stepped on the pedal and generated significantly more cash from operations than in the preceding year—to Rs 3.5 bn from Rs 200 m previously, which as usual begets the question as to why companies reveal their full colours only when they are faced with adverse times. Besides, such low generation of cash from operations for a biz as big as that of ABB appears very unflattering.

All in all a very difficult business to decipher

Disclosure: Please note that I am not a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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