Power packed

POUND WISE

Power equipment manufacturer ABB looks set to ride the growth in the power sector.

When a sector grows, the segments and companies related to it - directly or indirectly - stand to avail themselves of fringe benefits. This is especially true about power equipment manufacturers who seem to gain from the growth the power sector is witnessing.

The passing of the Electricity Act enhanced the prospects of power companies as it allows players to enter the arena of transmission and distribution and gives utility companies freedom in terms of providing electricity.

Plans by power companies to expand capacities to match the rise in demand emanating from reforms in the sector naturally opened a window of opportunity for leading power equipment manufacturer ABB. It's stock hit an all-time high of Rs 1,329 around two weeks ago.

The counter has been seeing lot of action in the past two months after the company posted healthy FY04 numbers. Foreign institutional investors are also said to have picked up a substantial chunk of the company's shares from the market, sending the stock price to dizzying heights.

It is certain that market sees potential in the company. No surprise then that the stock price has zoomed 88 per cent over the past one year to Rs 1,250 levels.

Power points
Revenues from supply of power equipment form over 60 per cent of ABB's total sales. Key growth drivers for the company are a resurgence in the domestic capex cycle and investments in the power sector through the accelerated power development reform programme (APDRP).

The power sector is going to attract huge investments in terms of capacity additions. Capacity additions to the extent of 41,000 mw have been earmarked for the Tenth Plan (2002-2007). Of this over 50 per cent is either commissioned or in the final stages of commissioning.

Considering ABB's standing as a major capital goods player, it is likely to gain a substantial chunk of new orders. For FY04, the company's order backlog stood at Rs 1,335.6 crore, up 24 per cent from FY03. Going forward, as capacity additions increase, ABB is likely to bag more orders.

APDRP is another obvious factor that will benefit ABB. The government has earmarked a total of Rs 40,000 crore under the scheme which aims to provide financial assistance through concessional loans to state electricity boards (SEBs) to upgrade sub-transmission and distribution networks.

This helps SEBs lower transmission and distribution losses. On March 31, 2004, the government made an allocation of Rs 16,600 crore under the plan for 2004-05 of which Rs 9,270 was for power projects. Around Rs 4,110 crore has been released for some of these projects - of this Rs 3,300 crore has been utilised.

This implies that over 75 per cent of the amount announced for 2004-05 is yet to be released and utilised. Analysts expect a market leader like ABB to bag more orders than others when the remaining amount is released.

Electrifying financials
ABB has posted decent financial results for the year ended December 31, 2004, in line with analysts' expectations. Operating profit increased 54.7 per cent, on the back of impressive net sales which grew 54 per cent to Rs 2,260.22 crore.

However, margins remained under pressure due to rising costs of inputs - mainly steel, aluminium and copper. Operating margins stood stagnant at 9.4 per cent, following the rise in raw material costs - up 65 per cent to Rs 1,678.31 crore. Net profit rose 24.2 per cent to Rs 154.31 crore after the inclusion of exceptional items. 
 

Financials
(Rs crore)	FY04	FY03	%
Net sales	2260.22	1468.35	53.93
Total expenditure	2047.34	1330.76	53.85
Operating profit	212.88	137.59	54.72
OPM (%)	9.42	9.37	-
Other income	28.72	16.62	72.80
Net profit	154.31	124.19	24.25
NPM (%)	6.83	8.46	-
EPS (Rs)	36.41	29.30	-

Excluding such income, net profit surged 49 per cent to Rs 150.52 crore. Net margins excluding exceptional items fell marginally by 20 basis points to 6.65 per cent.

Analysts say though raw material costs will remain a concern, the effect will be cushioned to an extent as the company get more orders. In FY04, the company's order intake registered a growth of 51 per cent to Rs 2587.8 crore and is expected to grow at a higher pace going forward.

Going forward
ABB plans to invest Rs 100 crore in FY05 to expand capacity. This should help it cater to the higher demand from the power sector.

The Budget has not done too much harm for the power sector as the cut in depreciation rates and reduction in corporate taxes will negate the effect of one another. At the current price levels of Rs 1250, ABB trades at a trailing 12-month P/E of 35.

For FY05 and FY06, the company's stock trades at 29 and 26 times forward earnings respectively. Analysts say since the stock has already touched highs, it may well be bought on declines.

NEWS IMPACT

Dishman Pharma
Dishman Pharma rose nearly 10 per cent to close at Rs 692.30 on Friday, after the company announced the acquisition of a UK-based contract research firm. The stock had earlier hit an all-time high of Rs 729. Around 29,769 shares were traded at the BSE on Friday. Over the past week the stock had risen nearly 13 per cent.

According to a release issued by the company to the BSE, the acquisition will be done through its 100 per cent wholly-owned subsidiary - Dishman Europe.

The company has not named the UK company which it has acquired, though the cost of acquisition is said to be around Rs 35 crore. With this acquisition, Dishman is expected to strengthen its base in contract research and manufacturing.

It focuses on contract manufacturing for MNC pharma companies. This is Dishman's second overseas acquisition. It recently acquired a Holland-based company for manufacturing phosthanium quats which have applications in pharma, dyes intermediates, paints and polymers.

UB group stocks
Vijay Mallya-controlled UB group's stocks, McDowell and United Breweries were on a high after the Supreme Court approved a settlement between Mallya and Kishore Chhabria for control of Herbertsons. McDowell rose 10 per cent on Friday to close at Rs 227.35.

The scrip gained a whopping 37.91 per cent over the past week. United Breweries also rose nearly 11 per cent last week. Sebi has put certain conditions in terms of consent which will go in favour of the shareholders.

With the settlement, Mallya will get control of Herbertsons by buying out Chhabria's 49.06 per cent stake in Herbertsons for Rs 131.60 crore. Following the acquisition, UB group would have 92.2 per cent stake in Herbertsons.

Chhabria would get control over BDA Distilleries which owns the Officer's Choice brand. The acquisition is expected to strengthen UB group's leadership over the Indian liquor industry. Herbertsons has three major brands - Bagpiper Whisky, Honey Bee Brandy and Romanov Vodka.

Indian Overseas Bank
Indian Overseas Bank (IOB) posted its life-time high of Rs 90 on Friday before closing the week lower at Rs 85.10. Nearly 23 lakh shares were traded at the BSE.

The upsides at the counter came on the back of reports that the bank's governing body has granted an in-principle approval to raise equity capital overseas through global depository receipts and list them abroad. The board has asked the bank management to submit details of the size and timing of the issue.

The stock gained 11.97 per cent last week and 27.30 per cent over the past month. Recently the bank had informed stock exchanges about the GDR issue. IOB is planning to raise equity worth Singapore $250 million through GDRs from Singapore to meet Basel II norms.

If the bank raises GDRs as expected, the government's holding in IOB will be reduced to 51 per cent from 61.23 per cent. IOB had come out with its follow-up public issue in September 2003 after its initial public offering in 2000.