Charging up

BS Compass

ABB's results in the second quarter ended June 2003 were in line with expectations. As in Q2, 2002, the quarter ending June 2003 also had an extraordinary income component from sale of its business division.

While in the corresponding quarter, ABB had divested of its air handling business, this quarter saw a sale of its metering business. As a result, extraordinary income contributed 71 per cent of profits before tax in the June quarter compared with 52 per cent in the corresponding one.

ABB's performance in the core business has been stable. On the back of a 16 per cent growth in revenues, the company maintained its operating margins at around 9 per cent.

Further, ABB's order backlog improved 15 per cent while order booking (new orders) jumped 44 per cent compared to the same period last year. Its order backlog improved 10 per cent compared to the order backlog at the end of the quarter ended March, while order booking improved 19 per cent.

With new orders growing at a higher rate than revenues, the scope for revenue growth in the future is pretty clear. The company had said at the beginning of the year that expected revenue growth would be around 25 per cent, and this would imply a 32 per cent revenue growth in the second half.

That however, should not be too difficult with the second half historically performing better than the first half. The compulsory change in the basis of accounting from a full contract basis to a percentage completion basis has led to a downward revision of revenues by Rs 2.45 crore for the current year and Rs 8.98 crore for the previous year with a negligible impact on profits.

Interestingly, recent data shows that project investments in June 2003 in the power sector witnessed the highest growth compared to other segments like manufacturing, mining and utilities. ABB therefore, looks set to post a robust growth in earnings in the current year.

Digital GlobalSoft

Digital GlobalSoft reported a double-digit sequential growth in revenues for the third quarter in a row. Besides, unlike the March quarter when operating margin had fallen 400 basis points, it also managed to maintain its operating margin last quarter.

Interestingly, all of the growth came from the parent, HP, revenues from which grew 18.1 per cent sequentially. Revenues from non-HP customers (including external customers billed by HP), on the other hand, fell 6.7 per cent sequentially.

Needless to say, the result of this is that Digital's dependence on HP has gone up further. Despite this, the company has held on to billing rates, thanks to which the operating margin has been maintained at 27 per cent.

Another factor supporting margins was an increased proportion of offshore work, which grew 29 per cent last quarter, while onsite revenues were almost the same as the March quarter levels. However, lower other income and a 39 per cent increase in depreciation led to a flat 0.5 per cent growth in net profit.

More work coming from HP is an encouraging sign, to the extent that it supports the management's assertion that thanks to its merger with HP's software services arm in India, HP-ISO, it's now the preferred vendor for HP's outsourcing work globally. It seems HP has committed revenues of $215-270 by FY2004-05, and Digital expects the commitment to grow rapidly thereafter.

The only issue is after the merger, which is expected to be completed by the end of this fiscal, HP would account for almost 90 per cent of Digital's revenues. It's reasonable to assume that HP too, like most other outsourcing majors, will eventually ask for billing rate cuts.

Last quarter, the average offshore billing rate that Digital got from HP was around $24 per manhour, which is very near market rates.

Considering that Digital would have lower sales and marketing expenses compared to peers, coupled with the fact that HP-ISO operates as a cost centre (basically at much lower rates), it's reasonable to assume that there could be quite some downside to billing rates going forward.

But going by the healthy trend in Digital's stock price, the markets seem to be banking on the fact that increased work from HP would make up for any drop in profitability.

With contributions from Sameer Ranade and Mobis Philipose