Gains in tech firm ABB India may sustain on strong margin outlook

ABB India’s March quarter results (Q1CY24) were led by strong margin performance. Revenue was, however, largely in line with estimates at Rs 3,080 crore (up 28 per cent Y-o-Y and up 12 per cent Q-o-Q). The growth was across electrification (30 per cent Y-o-Y), process automation (73 per cent Y-o-Y) and robotics & motion (8 per cent Y-o-Y).

The gross margin at 40.2 per cent saw a healthy 390 basis points Y-o-Y (270 basis points Q-o-Q) expansion, led by better product mix, improved pricing power, higher share of services and exports, more localisation, and cost control. Employee costs moved up due to salary revisions and headcount increase. Other expenses as a percentage of sales were lower due to better operating leverage and a one-time tax refund. Overall share of services rose to 16 per cent from 13 per cent in Q1CY23.

The operating profit margin was at record levels of 18.3 per cent (650 basis points higher Y-o-Y and 320 basis points Q-o-Q). The large cash balance (Rs 5,040 crore) yielded 21 per cent growth Y-o-Y in other income. This led to net profit growth of 87 per cent Y-o-Y at Rs 460 crore. Order inflow was at Rs 3,610 crore (15 per cent Y-o-Y), while the order book stood at Rs 8,930 crore (25 per cent Y-o-Y). While electrification and process automation saw strong order inflow, inflows declined Y-o-Y in motion and robotics. Segment level margins improved across its businesses.

The margin outperformance is driven by operating leverage on higher volumes, good execution of cost cutting initiatives, price hikes to pass on inflation and cost increase, higher shares of service and export revenues, stable currency, and commodity price levels.
 

ABB India’s order inflow and revenues grew by 15 per cent and 28 per cent Y-o-Y, respectively, beating the global parent growth rates. Orders were driven by continued demand growth in India, coupled with demand from group companies outside India as well as third-party customers outside India.

ABB is well positioned to benefit from private capex growth, industrial automation, PLI-led capex, global offshoring, improved energy demand, and technological advancements across user industries. ABB India’s segmental margins have also surpassed the parent.

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Management anticipates that increased demand for technologically superior solutions, coupled with the government's focus on themes such as energy efficiency, decarbonisation, and digitalisation, will continue to significantly drive order momentum. The growth areas could be the automotive sector, electronics, data centres, smart power and better penetration of Tier-II and Tier-III markets.

There’s room for further margin improvement as ABB is now one of the top five/ six players in segments, like electrification, automation, and data centres. The improved product mix, higher services share, better operating leverage (despite nearly 8 percent of sales going to the parent as royalty), IT fee, and group management fee. The pass on of lower raw material prices and improved products will still be good for margins. Revenue growth could be between 25 and 30 per cent in CY24 and CY25 with operating profit margins being maintained at above 17 per cent. This would mean net profit growth at over 30 per cent in these two years.

The stock has zoomed by over 11 per cent since the results. It is expensive for an engineering concern but ABB has historically been expensive due to its MNC parentage. Analysts remain 'positive' on the stock.