No major surprises from ABB India

ABB India continues to pay the price for high expectations it set after the results for the quarter ended December 2015. Despite posting nine per cent revenue growth and 35 per cent increase in net profit in the June quarter, ABB’s stock declined around two per cent on Thursday. In fact, the results were ahead of expectations.

Revenue of Rs 2,073 crore and net profit of Rs 77 crore exceeded the Bloomberg estimate of Rs 2,052 crore and Rs 75 crore, respectively. However, ABB has found it difficult to maintain the 11 per cent operating profit margin it registered in the December quarter. This is a reason for analysts not being too pleased, despite operating margin improving 34 basis points year-on-year (y-o-y) to 8.2 per cent in the quarter.

Similarly, despite   order inflows expanding seven per cent y-o-y to Rs 2,040 crore in the quarter when the going has been tough for the domestic capital goods industry, analysts expected more. Orders pending execution at Rs 7,752 crore, however, provide one year’s revenue visibility. Margins are expected to stabilise at 8-9 per cent levels (as has been the case in past six quarters, excluding the December quarter) with some upward bias. With stability setting in on operational front, incremental gains in net profit were driven by rationalisation of interest cost and depreciation.

According to Renu Baid of IIFL, with no material traction seen in the order book, growth in earnings will continue to be driven by rationalising non-operational items. But, this is not a cause for concern yet. However, sustained order flows from power utilities and renewable energy utilities offsetting sluggishness demand in traditional segments are major positives.

In fact, revenue growth in the quarter was largely driven by the transmission and discrete automation and motion segments, which grew seven-10 per cent y-o-y. Transmission remains key, accounting for about 40 per cent of ABB’s revenues. Consistent growth in this segment reinforces investor faith as the Power Grid Corporation continues with its robust capex plans. However, for the stock to see further re-rating, this vertical’s contribution has to be more, or orders from the distribution side must improve. This, though, is at least a year away.

ABB India’s stock valuation has moderated in the past year and is off its historical asking rates of 70-75 times price earnings (PE). While it currently trades at 68 times its CY16 earnings, analysts say prospects are getting better.

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