ABB India left with little after power grid unit sale, stock falls over 4%

Division accounts for 40% of firm's revenues and about half the order book

The flip side to owning a foreign company’s stock is the uncertainty around what its parent company has in store for its Indian operations. Siemens, GE T&D, and Gillette are few examples, where Indian investors are a minority as about 75 per cent of shares of such companies are held by their overseas parent. 

ABB India joined the list on Monday evening, when its Swedish parent ABB decided to sell the power grid division to Hitachi for $9.1 billion. ABB India’s stock price took a 5 per cent hit on Tuesday readjusting to value the remaining businesses.

While experts agree with ABB’s decision to move away from the brick and mortar model to a technology driven model, the situation back home is different.

Investors have given a thumbs down to the deal, considering the relevance of the power division to the Indian arm. It accounts for 40 per cent of its revenues and roughly about half its order book.

Therefore, the division going away not only means a sharp reduction in revenues starting from the December quarter, but it also takes away earnings visibility that the company offered to its investors. The decision also comes just when ABB India is garnering a reasonable share of high-value orders from Power Grid Corporation (PGCIL). In fact, it has been the front-runner with respect to the upgrade-oriented HDVC (high-voltage direct current) orders from PGCIL.

The power grid division, after three years of lull, is meaningfully contributing to overall operating margins of ABB India. The division’s EBIT (earnings before interest and tax) margins rose from 5 per cent in calendar year or CY15, to 12 per cent in the September quarter of CY18. 

ABB follows a calendar year pattern for reporting its numbers. Accordingly, analysts at ICICI Securities have downgraded their rating from ‘buy’ to ‘hold’ as they see 27 per cent decline in CY19’s earnings. 

“Though the technological landscape is changing towards automation, robotics and digitisation globally, we believe the growth potential of power grids is strong in the Indian market. Hence, in the domestic market context, we don’t see the deal to be value-accretive,” they explain. 

However, further downside may be capped, given the Street awaits clarity on the road ahead. ABB is expected to make announcements in this regard in February 2019.