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ABB India Facing Challenges

Monday, August 13, 2012

The recent quarter was a challenging one for engineering major ABB India. While the company has posted a good intrinsic performance, it is operating in a challenging environment. The company is taking efforts to reduce the cost of production as well as other measures to boost performance.

However, going forward costs overruns and over-capacity will be things to watch out for ABB India.  

“The process automation intake remained weak due to poor industrial sentiment, particularly in projects,” says Amit Mahawar of Edelweiss in a Q2 CY12 (Second Quarter Calendar Year 2012) review of the company. Some good news for ABB India was a decent pick up in the drives business; largely due to an increased thrust on energy conservation across industrials.

Besides the business per se, ABB India is also undertaking some intrinsic moves to boost margins. “Measures to improve indigenisation content have improved the profitability of power products segment as well as discrete automation and motion segment,” says Chirag Muchhala or Nirmal Bang.

The power systems division of ABB India turned positive in 1H CY12 (First Half of Calendar Year 2012) after incurring operating losses over the past two years as the volume of loss-making rural electrification work is on the decline.

The power segment for ABB India is expected to see a sustained intake as far as the future orders go. The negative will be from the high value industrial projects business which is witnessing an intense competition and slowdown, thus limiting the overall margin profile.

But, even while the company is posting good performance intrinsically the operating environment will be a challenge.  “In 4Q FY12 (Fourth Quarter FY12), project investments declined 26% Year-on-Year; the seventh consecutive decline,” said Satyam Agarwal and Deepak Narnolia of Motilal Oswal in a Q1 review of the entire Capital Goods segment.

The growth in bank credit to the infrastructure segment has declined 17 to 18% and incremental sanctions have declined sharply. Structural issues like SEB (State Electricity Board) finances, resource availability, issues relating to land/water/environment, and tight liquidity are challenges.

So how are the prospects for ABB India in the near-future? “While the revenue growth visibility remains modest for ABB on the back of a healthy book to bill, cost overrun across the projects business is the key challenge in the near to medium term,” says Mahawar of Edelweiss.

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