Private orders trickle in for ABB India

More orders like Technopark critical to support the profitability of its core power grid division

ABB India's stock gained over five per cent on the back of a critical order win from Technopark to build a digital substation for an information technology park. The order win is important for ABB on two counts. Technopark's order is the first order win for a digital substation from a private player. Therefore, in a sense, this win can be seen as private orders on the cusp of revival for the heavy engineering sector, though there is still a long way to go if numbers were to touch the 2011-13 levels. Second, the order is important to support the profitability of ABB's core revenue segment, power grid division, which has of late been under pressure with significant stress seen in December quarter. This factor, in fact, overshadowed a good set of Q4 (ABB follows January-December accounting year) results and an encouraging improvement in order book and order execution. 

ABB's order inflow more than doubled to Rs 5,628 crore, thanks to the high-value Rs 4,350-crore high-voltage direct-current order from Power Grid Corporation. With this, full-year order book also more than doubled to Rs 12,466 crore. 

Even the execution momentum, which picked up in early 2016, seemed sustained. Consequently, revenues at Rs 2,441 crore grew by over a per cent, while the cost rationalisation measures undertaken earlier helped operating profit expand 16 per cent year over year to Rs 281 crore. The overall operating profit margin, largely helped by higher revenues from the services division, expanded 140 basis points year over year to 11.3 per cent in Q4. Net profit was up 14 per cent year over year to Rs 147 crore.

However, an analysis of segmental performance indicates that the trend of dwindling margin for its core power grid segment worsened in Q4 to 5.13 per cent from 10.82 per cent a year ago. 

"The comparable quarter of the previous year had higher component of exports and lower contribution from projects," T K Sridhar, finance chief, ABB India, explains. Q4 saw lower exports and higher share of project contracts, which tend to be relatively low margin, thus justifying the variation. 

Full year, too, margin for the division contracted from 6.12 per cent to 4.95 per cent. The performance of power grid division is important as it accounted for nearly 40 per cent of revenue and over 21 per cent of Ebit  (earnings before interest and tax) in 2016; its profit share is down from about 29 per cent in 2015.

Presently, majority of executable orders for 2017 are skewed towards power grid segment. Additions such as digital substations orders from private players could help ABB strengthen its margin profile. 

But, until visibility emerges on this front, the Street could take a more calculated call on ABB stock. For now, the prohibitive valuation (50.7 times estimated 2017 earnings) may cap near-term upside.