Slight let-down from ABB India

Higher other expenses curb margin gains; analysts to watch progress on order wins

After ABB India’s good show in the December ’15 quarter, analysts expected a spillover effect to be visible in the March ’16 quarter as well. However, what came forth on Monday was a bit disappointing.

While revenue at Rs 1,976 crore was in line with expectations (up about 11 per cent over a year before) in the March quarter (Q1 for ABB, which follows a January to December accounting year), net profit at Rs 71 crore, though up 54 per cent year-on-year, was below the Bloomberg estimate of Rs 75 crore. Other expenses (Rs 381 crore) spoilt the show, rising 29 per cent over a year before. This restricted the gain in operating margin at 8.5 per cent (up 50 basis points) after the 11 per cent of the December quarter.

The management says a global business centre for shared accounting services is being set up in Bengaluru. As ABB India is also contributing to this facility, other expenses will be higher in the next two to three quarters as well.

That apart, by the management’s commentary, there seems no material change in outlook. Renu Baid, analysts at domestic brokerage IIFL, feels that pick up in large order flows (volumes) and overall recovery in capex cycle is needed to see the next leg of profitability improvement.

On the brighter side, Q1 was the first in several quarters that ABB India closed on a cash-positive note. This came on the back of higher recovery from customers. Also, in terms of segmental revenue, while the key power grids division registered an eight per cent decline over a year before, the discrete automation and motion division (largely catering to solar and wind energy plants) saw a 32 per cent growth in revenue. Export, 13 per cent of revenue, also posted comfortable growth in Q1. While the management says it expects double-digit growth in export and discrete automation, analysts say that though the near-term prospects are secure, one needs to be cautious given that the discrete automation is largely a short-cycle business and hence sustained order flows become crucial for this segment.

Overall, the order book (those yet to be executed) at Rs 7,804 crore declined marginally by 1.8 per cent from the December quarter numbers. Though analysts are not significantly concerned about it yet, given ABB's improving execution, they will keep a tab on order announcements. ABB India, in collaboration with its parent (ABB Sweden) and Bharat Heavy Electricals, is expected to secure a high-value order from Power Grid Corporation, emerging the lowest bidder. However, the amount of benefit accruing to ABB India has not been defined by the management.

With these loose ends, analysts say even as there are no major misses from ABB, except for net profit, its lack of clear forecast on order flows and the higher operating expenses had led to its stock price falling around four per cent on Tuesday. Given the high valuations, further upside in the stock might remain capped.