Business transition produces mixed results for ABB India; stock up over 2%

September quarter witnessed improvement in profitability, while business predictability took a knock

ABB India stock rose by over 2 per cent on Wednesday on the back of its September quarter results (third quarter, Q3; the company follows January–December accounting year) meeting the Street’s expectations.

Revenues grew by 17 per cent year-on-year (YoY) to Rs 1,746 crore, while profit before tax more than doubled to Rs 113 crore, on the back of better portfolio mix and improved efficiency. The quarter’s results don’t include the performance of the power grid division, which is in the process of being hived off from the listed entity.

Given that this is also the third quarter after the Indian business was reorganised into four critical pockets — electrification, motion, industrial automation, and robotics — Q3 assumes importance in terms of judging the effectiveness of the decision. On the face of it, the move seems to be good, with much of the positive rub-off being felt in improved profitability. Q3’s operating margin increased by 370 basis points YoY to 6.8 per cent.

Orders received during the quarter increased by 5 per cent YoY, considering the overall environment hasn’t turned positive for engineering companies just yet. Order inflow at Rs 1,606 crore was helped largely by sectors such as orders for smart cities, steel plants, and transportation industries.

With this, Arafat Saiyed of Reliance Securities says ABB is steadily shifting its business model to high growth opportunities in automation and digitisation, from low-growth and low-return businesses.

However, the business reorganisation also comes with some drawback, largely to do with the predictability of the order book. In Q3, ABB India’s order book (excluding large ticket orders) fell to Rs 4,256 crore, from Rs 4,910 crore a year ago. Including large orders, the outstanding order book stood at Rs 4,372 crore, or roughly 0.6x the bill-book ratio or one-year’s revenues, making it the first time ABB India’s bill-book ratio fell below the 1-per cent mark. This indicates that while there isn’t much lag between order win and execution, client sourcing will become critical for ABB India to maintain a robust order backlog as seen in the past. This could be challenging in the near-term, particularly for the industrial automation and robotics divisions, where the operational headwinds are more pronounced.

ABB India hopes this situation should reverse soon — a factor critical to help improve efficiency and productivity.

However, trading at 70x the estimated 2019-20 earnings, the upside potential for ABB India stock seems capped in the near term.