ABB: Year-end cheer

The company’s order inflows have been subdued, due to which its results have been below estimates in the last five quarters.

A ray of hope emerged through the clouds on the capital goods multinational, ABB, which bagged a Rs 506-crore contract for the Bangalore metro rail project. This has resulted in an 8 per cent boost to its order inflow of Rs 6,308 crore during the nine months ended September 2009.

The trend in ABB’s order inflows has been subdued, due to which its results have been below estimates in the last five quarters. The stock has underperformed 46 per cent than the BSE Capital Goods index in the last one year. The sector is seeing high competition pressures and the business environment indicates that the industrial capex cycle and benefits of infra-spend are still at some distance.

For the nine months ended September 2009, sales were down 7 per cent year-on-year to Rs 4,352 crore due to weak order inflow. The company hasn’t seen material flow-through from its parent and couldn’t enter the domestic EHV (extra high voltage-765 kV) transmission project space, since it doesn’t have domestic manufacturing capabilities for the equipment. Also, subcontracting the same to its foreign facilities is not economical, given the competitive pricing environment.

According to analysts, entry of Chinese and Korean competitors has led to acute pricing pressures in the power equipment space. The segment hasn’t been able to tap benefits from lower input costs. This in turn has hit the operating margins of the company. For the nine months ended September, ABB’s Ebitda margins were down 265 basis points to 9.85 per cent; its post-tax profit fell 31 per cent to Rs 245 crore, compared with the year-ago period.

At the current price of Rs 740, the stock is trading at a PE of about 36 times 2009 and 29 times 2010 analysts’ estimated EPS, and is richly valued given its limited medium-term earnings growth prospects. While the order win is a good news, one would need to see faster pick-up in industrial capex to justify the current valuations.