Pace of order inflow, peak margin worries for ABB after strong Q4

The company believes slowdown in transient and that growth will rebound going ahead

Engineering giant ABB India reported strong operating profit in the fourth quarter of the calendar year (Q4 CY24), with better execution and operating leverage. However, gross margin may have peaked and order inflow has weakened. This has led to analysts cutting growth estimates although many have positive recommendations. The stock may also be vulnerable to valuation downgrades.

 

The company follows a January to December financial year. Its Q4 CY24 results showed revenue at Rs 3,365 crore grew 22 per cent year-on-year (Y-o-Y). Gross margin expanded 190 basis points Y-o-Y to 40.5 per cent. This led to operating profit growth of 58 per cent to Rs 660 crore. Operating profit margin expanded 440 basis points to 19.5 per cent. Net profit grew 54 per cent to Rs 530 crore, aided by a lower tax rate of 24.6 per cent.

 

Order inflows for Q4 CY24 stood at Rs 2,700 crore, down 14 per cent Y-o-Y, partly due to a high base of last year. Overall order inflows for CY24 were up 6 per cent Y-o-Y at Rs 13,100 crore.

 

The cash balance stood at Rs 5,390 crore at the end of Q4 CY24. Net working capital increase was mainly due to inventory (backlog delivery). For CY24, ABB India reported revenue growth of 17 per cent, operating profit growth of 55 per cent and net profit growth of 50 per cent Y-o-Y.

 

Order inflow growth for CY24 stood at 6 per cent Y-o-Y. It was impacted by weak government orders and low private capex.

 

ABB India may be relatively better placed than peers, as it has over a 50 per cent exposure to high- and moderate-growth segments, and it has the ability to gain more on exports as it is preferred by group companies for exports. 

 

Management expects moderate or high-growth trends in capex until a broad-based capex revival happens. Motion and process automation segment inflows declined, while electrification and robotics inflows remained strong. ABB expects to benefit from segments like renewable and power transmission and distribution, data centres, transportation and food and beverages within the electrification space.

 

Headwinds are visible in industries, such as metals, oil and gas, and cement. In process automation, ABB India expects strong growth across automotive, electric vehicles, electronics and warehousing.

 

ABB India expects net profit margin to be broadly around 12-15 per cent going forward. But operating profit margins are expected to reduce from the current 18.9 per cent in CY24.

 

The electrification segment witnessed 33 per cent Y-o-Y revenue growth in Q4 CY24, aided by seamless execution of data centre orders from engineering, procurement, and construction customers, and exports from the distribution solution division. Order inflow for the segment was flat Y-o-Y but down quarter-on-quarter.

 

Motion segment ordering was weak, while robotics saw strong execution and increased order inflows by 161 per cent Y-o-Y. Ordering in the motion segment was down 30 per cent Y-o-Y on the high base of last year.

 

Process automation witnessed both inflow and revenue decline. Inflows were down 18 per cent Y-o-Y in Q4 CY24. The segment faced headwinds but management believes it to be a transient period.

 

Management feels that the slowdown is transient in nature and growth will rebound backed by strong demand in electrification, data centres, renewable energy, and industrial automation.

 

ABB India is trading at 53 times price to earnings times its CY25 estimates. Slowdown in order inflows, pricing pressure across segments, increased competition, supply chain issues, and geopolitical risks could all affect future projections adversely.

 

On the other hand, proven execution skills, a wide portfolio with technical competence across many high growth areas, and a strong presence overseas along with its parent and group companies, gives ABB India an edge over competitors. Analyst opinions are therefore split between buy and reduce.