The company has been doing well on revenue, but margin pressure hasn’t eased
Infrastructure stocks were in the limelight on Friday, with most frontline companies gaining at least one per cent. The ABB stock rose 3.5 per cent on news that its parent, ABB Group, had bagged an ultra high-voltage direct current power transmission order from Power Grid Corporation. Of the total project value of Rs 4,000 crore, about Rs 500 crore will go to the Indian arm, which added to the positive sentiment.
The Indian subsidiary’s management had already intimated that its parent was in the final stages of booking a large order in its September quarter results conference call but the quantity has come as a surprise. In addition to the Rs 500-crore order, the Indian arm will contribute with design and engineering services.
ABB has been doing well in order inflow and revenue, both of which grew a little over 20 per cent in the nine months ended September. However, analysts feel this is not why the stock should trade at an expensive valuation of 55 times calendar 2012 estimated earnings. Its margins have recovered in the nine months of 2011.
Accordingly, the management has said it expects an eight to 10 per cent operating margin (expected to be sustainable) from the current five per cent, as loss-making rural electrification projects are nearly complete, and lower copper and steel prices would help.
But analysts have not revised their margin outlook, as they expect some weakness to continue across all segments. Sequentially, margins have come down, which indicates cost and competitive pressures. Shailesh Kanani, analyst at Angel Broking, feels it will be tough for the company to achieve the targeted eight to 10 per cent margin due to existing low margin orders and intense competition in new orders, plus a slower order pipeline.
The outlook would continue to hinge on sustainable margin improvement rather than top line growth and is the key factor for any re-rating. The stock has gained nine per cent from its 52-week low of Rs 541 touched on Tuesday but it may lose momentum again if the company disappoints in the December quarter.