ABB India's short-cycle play to beat slump

The company hopes to cut imports, currently at 30-32% of expenditure, through an indigenisation programme

ABB India’s stock has surged 36 per cent since the December quarter results were declared in mid-February this year. While the stock market has remained bullish, the performance and outlook for capital goods makers in India has been tepid. ABB India, too, has been hit by the downturn. Large-scale orders have been far and few, with infrastructure and power projects getting stuck owing to regulatory and funding problems.

However, the Indian arm of the Swiss-Swedish engineering giant is looking to tide over the rough weather by focusing on low-risk short-cycle orders, product indigenisation and higher exports. ABB India’s net profit rose three times to Rs 59 crore for the December quarter and Rs 179 crore for FY13, a 30 per cent rise over the full-year profit of the previous year. (It follows a January-December financial calendar.)

Order inflow in FY13, though, fell 3.5 per cent and revenue showed a two per cent growth year-on-year. Power systems and power products contribute 60 per cent of the firm’s revenue and the segment showed a modest growth in the last financial year, while process automation revenue fell eight per cent.

The company has been able to hold steady its revenue and order book by focusing on short-cycle orders. According to ABB India’s managing director Bazmi Husain, short-cycle orders have lesser risk of cancellation. “From a customer perspective, customers are more likely to go ahead with smaller projects. So I think base orders growing has clearly been a result of intense focus,” he told equity analysts in a recent interaction.

Husain said the stress on short-cycle orders, which can be executed within a year, also reflected market situation. “Whatever orders we take, we have to execute them and 70 per cent of our cost is what we buy (material costs). So we do not want to take a lot of orders in bad times and have to execute them when the market turns around,” he added.

The company did not respond to an email questionnaire from Business Standard.

On February 28, the firm had issued a clarification to the BSE, stating it had no information or announcement which could impact stock price and volume. Stock market speculation is that ABB’s Swiss-Swedish promoters plan to de-list the Indian arm, but this buzz was there last year, too. The other focus areas have been exports, product indigenisation and renewable energy. Exports make up about 15 per cent of the company’s revenue; exports grew 30 per cent in the last financial year. Wind and solar energy business grew 300 per cent last year, the company management told analysts.

“India is a key market for us. We have a fully-dedicated team, a manufacturing capacity and a solid services set up in India. We want to leverage on the infrastructure that we already have in India,” Maxine Ghavi, ABB’s head of solar business, had said in an interview with a business publication last year.

ABB’s thrust on renewable energy is in contrast with its peers. The Indian arm of German company Siemens had shut down its wind turbine manufacturing facility at Vadodara in Gujarat last year. Siemens, however, says green energy continues to contribute significantly to its global revenues. Even in India, the market demand is addressed on a case-to-case basis.

According to Husain, ABB is also hopeful of cutting down its import bill, which is currently pegged at 30-32 per cent of its expenditure, by carrying out an indigenisation programme.

The programme does not just cover local sourcing or local manufacturing; it also looks at the design aspect of the products. In the initial phase, the focus of indigenisation has been power products and it has also helped boost competitiveness and exports. “Over the past three years, ABB has indigenised low-voltage products and railway product portfolio. This will help the company once industry recovers,” says a research note prepared by Edelweiss Securities.

JP Morgan, in its research note, says that ABB has managed to improve gross margins; it has down-sized the employee work force (down 5.6 per cent in calendar year 2013; ABB terms it ‘right sizing’) and reined in other expenses. All these actions were taken when the average capacity utilisation was 80-90 per cent across ABB India’s factories. So, in the event of a capex cycle turnaround, there is significant scope for improving profitability and margins.