Low visibility, high valuations

ABB’s announcement to acquire a wholly owned subsidiary of its foreign parent for Rs 400 crore is unlikely to alter its fundamentals in a significant manner. Though its share price rose 1.6 per cent on Monday, as against the Sensex’s 1.5 per cent rise, analysts believe it is a temporary phenomenon. In fact, most analysts have a sell rating on the stock due to concerns over the company’s poor financial performance in the recent quarters (pricing pressure and falling margins) and steep stock valuations.

The stock, at Rs 746.25, is currently trading at almost 31 times its 2011 estimated earnings. Given that larger peers like engineering and construction company L&T and equipment major BHEL are trading at 15-18 times 2011-12 estimated earnings, analyst believe they are better options.

Little impact
ABB on March 11, 2011, approved a proposal to acquire ABS Global Industries and Services, a wholly owned Indian subsidiary of its Zurich-based parent ABB Group, for Rs 400 crore. In terms of size and impact, the acquisition is not significant, given ABS Global’s annual turnover of just Rs 250 crore, as against ABB’s over Rs 6,000 crore. Though detailed information is not available, analysts believe even if we assume the product business margin of about 8-10 per cent, ABS Global’s net profit works out to an estimated Rs 20-25 crore. These figures suggest the deal is being done at 1.6 times ABS Global’s sales or 16-20 times its profits. Analysts believe valuations are in line with expectations. However, more than the size and valuations, the move is considered in line with the management’s focus of consolidation of its Indian businesses under one roof, which is seen as a positive move.
 

STIFF VALUATIONS
In Rs crore	CY10	CY11E
Net sales	6,359	7,602
% change	2.0	19.5
Ebitda (%)	2.5	10.0
Net profit	63	502
% change	-82.2	694.0
EPS (Rs)	3.0	23.7
PE (x)	244.0	30.9
P/BV (x)	6.2	5.4
Return on Eq (%)	2.6	18.7
E: Analysts' estimates

Business prospects
Meanwhile, ABB’s performance continues to be uninspiring. For the quarter ended December 2010, the company reported a nine per cent increase in revenue to Rs 2,050 crore, but its net profit declined sharply by 93.8 per cent to Rs 6.8 crore. The decline in profits was due to the impact of costs related to its earlier exit from the rural electrification space, sharp increase in employee expenses, coupled with forex losses of Rs 21.7 crore.

For a company like ABB, its order book and inflows provide an indication of its future prospects, which doesn’t look good. ABB’s order inflows in the quarter ended December declined 41.3 per cent as a result of high competition and pressure on the pricing front. Order inflows also declined 27 per cent during 2010 to Rs 6,350 crore, as against Rs 8,685 crore in 2009. It now has an order book of Rs 8,436 crore, which is just 1.3 times its 2010 revenue. In the current year that ends December 2011, analysts expects revenue growth of 18-20 per cent to Rs 7,600 crore and profits to normalise at about Rs 50 crore. Against this backdrop and given the future prospects, the stock is expensive.