Tide may be turning for ABB India

Order book at Rs 12,094 cr secures over a year of revenue

ABB India’s quarterly numbers have bettered the Street’s expectations for the second time in a row. The company’s June quarter (Q2) net profit expanded 35 per cent to Rs 75 crore year-on-year, while revenues were up 6 per cent at Rs 2,361 crore. ABB follows the January-December financial year.

However, after the adoption of new accounting standards (IndAS), operating margins remained depressed. The Q2 number at around 7 per cent seemed higher than the adjusted year-ago level of 5.8 per cent, but lower than 7.9 per cent in Q1. The 6-7 per cent increase in employee and other expenses may have dented Q2 margins. Higher employee costs were due to routine salary increments, while other expenses were bumped up as ABB India focused on some new products. Therefore, incremental costs may be a one-off.

Efforts are on to revive the margins back to 8–9 per cent levels. The current order book stands at Rs 12,094 crore. The management’s assurance that the order book equally comprises project and product orders offers comfort. “The capital expenditure-driven orders still remain the growth driver. Customers are happy to spend on operating expenditure orders,” ABB India Managing Director Sanjeev Sharma said. This indicates there should be better traction in the core segments such as power grid and electrification products. The mobility and industrial automation verticals may sustain the current momentum with better execution opportunities in segments such as railways, metros, food & beverages and agriculture. 

In Q2, revenues of the power grid segment remained flat at Rs 960 crore, while the electrification products segment posted a 20 per cent growth at Rs 645 crore. The increasing share of exports in total revenues, to 18 per cent from 15 per cent in Q2 of 2016, is a positive as it improves capacity utilisation and profitability, given that unlike India, foreign markets aren’t price competitive. 

The share of services income maintained at 13 per cent is good. An improvement in working capital (from 140 days in the December quarter to 120 days now) may prompt investors to think if the worst is behind the capital goods sector. With the focus on cash over revenues, one should expect a further betterment.

But, unless a clear improvement in operating margins is demonstrated, investors may shy away from ABB India’s stock. Valuations at 37 times of 2018 earnings, after a steep year-to-date rally, are certainly not cheap. While the management sounded confident, how much of this is converted into financial performance will be closely watched.