Sluggish capex cycle hits ABB's March quarter earnings

Net profit rises 5.7% despite margin expansion; valuations remain expensive

Corporate India is not in a hurry to make investments just yet, if ABB’s March quarter numbers are anything to go by.

The company’s revenues during the quarter remained flat year-on-year at Rs 1,815 crore, as the industry continued to face “liquidity and excess capacity”. ABB is a power and automation engineering company, with a portfolio that ranges from light switches to robots and electrical transformers. While it exited calendar 2014 with growth in   power transmission and distribution, renewables and railways, industrial orders remained weak. With most industries operating at low utilisation levels, there is surplus capacity across industries, which has capped capital expenditure.  

  The trend continues to persist, going by its order inflows and revenue trajectory. The company conveyed to analysts on Wednesday that revenue of Rs 150 crore had to be deferred due to liquidity issues at the client end. In the March quarter, order inflows declined six per cent year-on-year to Rs 1,856 crore.

Analysts, however, believe power transmission and distribution, renewables, railways, mining and smaller sectors would drive order inflows  in calendar 2015. IIFL, in a note dated April 10, says demand from steel, cement, aluminium and upstream oil & gas remains sluggish. During the March quarter, double-digit growth in short-cycle orders helped sustain business momentum. Decision on large orders continue to get deferred.

Despite the weakness in business momentum, ABB managed to expand margins year-on-year by 50 basis points to eight per cent during the quarter. margin expansion was due to cost control, currency benefit and operational efficiency. Net profit grew 5.7 per cent y-o-y to Rs 54 crore during the quarter. Kunal Sheth of Prabhudas Lilladher says despite the margin improvement, net profit was not impacted in a meaningful way, as depreciation increased. Finance costs also declined 10 per cent year-on-year to Rs 20 crore.  Though most analysts believe the company will benefit if investments pick up, the stock is trading at 55 times its CY16 earnings, which is expensive. The Street expects investments to stay tepid in the first half of the year and a pick-up to only happen in the second half of the year. In case this does not happen, earnings could be impacted.