Asea Brown Boveri

Background

Born in 1989 as a result of the global merger between Asea of Sweden and Brown Boveri of Switzerland, ABB is a 51 per cent subsidiary of ABB Worldwide. A bout of restructuring saw ABB Worldwide hive off its transportation business in 1996 to a joint venture with Daimler Benz, which affected India as well. In 1999, the parent de-merged its power generation division to Alstom. Similarly, back in India, that division was handed over to Alstom Power.

The parent

ABB Worldwide provides products and services to utilties, the oil and gas industry and provides equipment and comprehensive systems for transmission and distribution (T&D). Its revenues in 2000 fell from $24.36 bn to $22.97 bn while net profit grew 6 per cent to $1.44 bn.

 

Performance

It is now a major provider of the high-voltage (HV) and medium-voltage (MV) switchgears used in the T&D segment. Further, it has also forayed into providing industrial automation and building systems. Automation technologies provide an industrial IT architecture providing measurement control systems, instrumentation-enabling process and batch manufacturing operations to be optimised. The company also provides stand-alone power systems for electrical and ventilation systems.

ABB has been a victim of delayed implementation of power projects in the country. Revenues fell sharply in 1998 to Rs 869 crore due to a steep drop in power generation. (Results are not comparable over the past five years as the power generation division was divested to Alstom Power in 1999).

The move to de-merge its power generation business in 1999 has benefitted the company since it now allows faster turnaround of projects and at lower cost. This is evident from the fact that operating margins have increased from 8.21 per cent in 1998 to 13.61 per cent in 2000.

Consequently, return on capital employed has risen from 8.91 per cent to 17.82 per cent. Besides, indigenisation of components and cost-cutting measures also contributed significantly to margins.

ABB's performance for the third quarter 2001, however, does not show evidence of the pressures power equipment suppliers are facing. It showed a growth of 15 per cent in topline for the quarter at Rs 223.16 crore over the same quarter last year.

One trend worth mentioning is that in the past two years, as the company moved through each quarter, margins have tended to improve significantly. For instance, last year operating profit margin jumped from as low as 2.39 per cent in the first quarter to 13.41 per cent in the fourth quarter.

This year, too, margins have improved to 10.13 over the quarters. One reason cited for this trend is that projects tend to get booked (revenues come in) only towards the end of the year. While costs are accounted for as and when they are incurred, revenues are only recognised in stages.

However, one concern is that 43 per cent of its capital is employed in power technology products. This segment contributes to 30 per cent to turnover. But margins are low in this segment - around 1.8 per cent for the quarter and 6.14 per cent for nine months.

Accordingly, the return on capital, at six per cent for the nine months, is low for this segment.Though higher volumes in this segment will, over a period, lead to higher margins, it is difficult to get a fix on the time period.

ABB now plans to step into the mass market with low-voltage switches, fuses, circuit breakers and wiring accessories. It also intends to increase the contribution from standard products and services, although the impact will be beneficial only when critical mass volumes are achieved.

Since these are mass market products, significant volumes will be needed to generate better returns. At around Rs 198, the stock is discounted 14 times to its trailing one-year earnings. The fourth quarter should see some uptrend in the stock given that the company has a track record of putting up its best performance in the final quarter.]