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ABB India under pressure?

Wednesday, December 01, 2010
By Manik K. Malakar

One learns from experience and that is probably what capital goods major ABB is going through. The company has been under some pressure across most of its verticals primarily due to severe competition. Even worse for the company this pressure is set to continue.

“ABB has been reporting disappointing results over the past several quarters amidst heightening competitive pressures,” noted analysts John Perincherry and Hemang Thaker of Angel Broking. For the Third Quarter of Calendar Year 2010 (Q3CY10) ABB India’s revenues declined by 8 per cent (on a Year-on-Year) basis to stand at Rs 1,349 crore. Similarly, Q3 CY 10 Profit before Interest and other exceptional items was Rs 2529.29 crore vis-à-vis Rs 12556.23 crore in the same period in the previous year.

The bad news for the company was across all of her operating areas. Power products, process automation and automation all reported revenue declines. Operating margins (EBIT) across most segments was also hit with low-voltage products being one of the few exceptions. “The only saving grace was forex gain of Rs 48 crore, which technically enabled the company to report marginal profits at the operational and net levels,” Perincherry and Thaker.

Also the inputs and employee costs for the company are on the upswing. The cost of raw material as a percentage of total income increased by 445 basis points to 79 per cent. One basis point is one/hundredth of a percentage point. Employee costs hiked by 206 basis points to 9.2 per cent for the quarter. Even at the operating level other expenditure increased by 17.2 per cent due to their exit from the Rural Electrification (RE) segment.

However there is some good news for ABB India in the term of an order book that stands at Rs 9,178 crore, ‘providing revenue visibility for the next five-six quarters,’ the Angel Broking analysts noted.

Edelweiss’ analysts Amit Mahawar and Rahul Gajare interacted with the management of the ABB India recently. “The management expects improvement in the performance of the power division post Q4 CY10,” the analysts noted. They too did note that several factors like the RE exit as also cost overruns in certain orders had hit the margins of ABB India. “Margins are however expected to improve on the back of improved quality of orders bagged in the last three to four quarters,” Mahawar and Gajare noted.

Unfortunately for ABB India pressures will be on the company for some time to come. “Peer commentary indicates that pricing pressures in the T&D segment are expected to continue on account of increased competition from Foreign JVs and relaxation of pre-qualification norms by PGCIL,” Perincherry and Thaker.

“While we are optimistic on ABB’s overall business growth over the long term, given its strong product profile, client reference base, strong balance sheet and new management with global experience, we feel current valuations largely capture all major near term positives,” note Mahawar and Gajare of Edelweiss.

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