ABB: Low voltage

Sales and margin growth in the fourth quarter of CY07 disappoint

The ABB counter lost 3 per cent lower to close at Rs 1,308 on Tuesday as the engineering firm's numbers for the December 2007 quarter were somewhat below expectations.

With the demand for capital goods still strong, the market was expecting a much higher topline growth. However, ABB's sales at Rs 1,839 crore, were up just 29 per cent. In the September quarter too, revenues had grown at just 29 per cent though some of it was attributed to disruptions during the monsoon.

The operating profit margin in the December quarter rose just 45 basis points to 14.1 per cent. ABB was able to offset higher costs of inputs like steel; contracts allow it to pass on higher input costs to customers and the adjusted raw material costs as a percentage of net sales fell 360 basis points y-o-y to 65.5 per cent.

However, other expenses rose, depressing margins. Rival BHEL's operating profit margin had declined 140 basis points y-o-y to 20 per cent in the December 2007 quarter because of higher staff costs as a percentage of net sales that rose 325 basis points.

Meanwhile, ABB's growth in the last quarter was powered by its order intake of Rs 2003 crore, a rise of 42 per cent. Prominent orders won by the company include a Rs 512 crore contract from JSW and associated firms to provide turnkey power and automation solutions for steel and power plants.

While the outstanding order book of Rs 5026 crore, a rise of 49 per cent y-o-y, will provide it with momentum, the pressure on margins is a cause for concern. Over the past six months, the stock has gained 32 per cent as compared to a 27.6 per cent rise in the Sensex.

At Rs 1308, the stock trades at an expensive 38 times estimated CY08 earnings and near-term upsides appear to be factored into the price.

Idea Cellular: Weak signal

Idea Cellular posted its highest ever monthly net additions to its subscriber base in January, the 9.01 lakh subscribers accounting for 14.5 per cent of total GSM net adds.

However, the stock, which listed in March 2007, has been an underperformer though it hit a price of Rs 161 in November.

That's because the telco turned in disappointing numbers for both the September and December quarters. For the December 2007 quarter, revenues were up just 9.3 per cent q-o-q at Rs 1,708 crore, which were below expectations.

The lower than expected growth was because of a fall in the blended average revenue per user (ARPU), which fell 3 per cent sequentially to Rs 279.

In the September quarter too, the ARPU had dropped 10 per cent sequentially. The reason for the fall was a new accounting policy that excludes commissions paid to dealers from the revenues.  As a result, the topline was understated by about Rs 50 crore.That helped improve the operating margin, which rose 50 basis points 33.2 per cent; had the change not been effected it would have been lower at 32.3 per cent.  One reason for the depressed margin was the higher network operating costs "" with towers being shared, the rents have worked out higher than operating expenses for owned towers.  Besides, interconnect costs too have risen though the telco saved on sales and marketing costs, which were down 340 basis points sequentially, again the result of the changed accounting policy.  Idea proposes to enter the Mumbai and Bihar circles soon, before it forays into the seven other circles for which it has licences, and even though the brand is a strong one, margins are likely to be under pressure.  At the current price of Rs 107, the stock trades at 20.5 times estimated FY09 earnings and is unlikely to outperform the market.