Despite reporting a superior financial performance for the December quarter on Thursday, compared to its peers like Alstom T&D (the erstwhile Areva T&D) and Siemens, ABB’s stocks fell 4.3 per cent. Analysts attributed it to profit taking opportunities, as the stock had surged over 48 per cent since the start of 2012. And at those levels, it was trading at a price-to-earnings (PE) ratio of 33, based on 2012 calendar year earnings, much higher than analysts’ one-year forward target multiple of about 25 times.
Misal Singh, analyst, Religare Securities, said, “The stock’s current valuations are unwarranted, given the low possibility of the company’s quick turnaround. We maintain ‘sell’.” Added Rahul Garg, analyst, HSBC Global Research: “ABB is most likely to continue to miss expectations in the near term. In addition, the stock remains priced to perfection factoring in a solid beat to our numbers, which appears unlikely. We reiterate our ‘underweight’ rating and would take profits at current levels.”
Siemens, its larger peer, trades at 31 times 2012-13 (year ending September) earnings, higher than its historical average of about 28 times. Analysts say fundamentals of the sector and the outlook for these companies have not changed positively and, hence, valuations look expensive.
| ABB LEADS THE SHOW | |||
| December ‘11 (Rs crore) | ABB India | Siemens India | Alstom T&D |
| Net sales | 2,200.0 | 2,397.0 | 683.0 |
| % chg y-o-y | 6.2 | -5.6 | NA |
| Operating profit | 108.5 | 123.0 | 57.0 |
| % chg y-o-y | 229.0 | -66.0 | NA |
| Net profit | 64.0 | 70.7 | 16.0 |
| % chg y-o-y | 855.0 | -71.0 | NA |
| Order inflow | 2,209.0 | 2,834.0 | 660.0 |
| % chg y-o-y | 58.5 | -27.3 | -49.0 |
| Order book | 9,130.0 | 14,000.0 | 4,336.0 |
| % chg y-o-y | 8.2 | -7.3 | -11.0 |
| Source: Companies | |||
| ABB: ORDER INFLOW IMPROVING | |||||
| In Rs crore | 10-Dec | 11-Mar | 11-Jun | 11-Sep | 11-Dec |
| Order book | 8,436 | 8,329 | 8,415 | 9,150 | 9,129 |
| % chg y-o-y | -0.8 | -4.9 | -1.4 | -0.3 | 8.2 |
| Order inflows | 1,394 | 1,695 | 1,792 | 2,493 | 2,209 |
| % chg y-o-y | -41.4 | 0.3 | 45.1 | 24.7 | 58.5 |
| Source: Company | |||||
Dec quarter: Good show
ABB’s sales growth met analysts’ expectations and was better than its peers, led by power business (power systems and products) that accounts for 55 per cent of the company’s total revenues, wherein segment sales grew by 13 per cent. In contrast, Siemens reported a dip in sales, the first time in eight quarters, due to decline in sales across all verticals, slower execution in some large projects in the energy segment and industrial slowdown. Though Alstom T&D saw some contraction in revenues, its performance (on an annualised basis) is not truly comparable, as after the global acquisition of Areva T&D’s transmission business by the Alstom group in June 2011, the transmission business has been retained, while the distribution business has been transferred to Schneider Electric.
ABB’s operating and net profits zoomed, led by short-cycle business, namely discrete automation and power products. Even in the power systems business, loss before interest and tax declined significantly. On the other hand, Siemens’ operating and net profits tanked, as the energy segment (which contributes 38 per cent to its total revenues) slipped into losses (at the earnings before interest and tax level) due to project delays and slower execution resulting in cost overruns.
ABB reported a 59 per cent jump in order inflows, which led to a rise (first time after five quarters) of eight per cent in order book. However, a large part of the growth could be attributed to the parent bagging an HVDC order worth $900 million from Power Grid Corporation, wherein ABB India’s share was Rs 560 crore. Also, success in large and medium power projects, coupled with double-digit growth in base orders, contributed to the growth in order intake, pointed out Bazmi Husain, managing director of the company. On the other hand, Siemens and Alstom T&D continued to report a decline in both, order inflow and order book.
Future, not so certain
Given a strong order backlog, sales growth is expected to be in double digits for ABB. However, rising input costs, forex volatility and low price realisation may put pressure on its margins, though the overhang of exit costs related to rural electrification projects on profitability has almost gone, as the unexecuted order book stands at only Rs 25 crore. A tight liquidity situation in the economy also indicates capex plans of India Inc will remain muted.
Rathin Basu, managing director, Alstom T&D, said, “The market continues to be extremely tough due to postponement of investments as well as huge state electricity board losses, preventing investments in the power sector.” Added Armin Bruck, managing director, Siemens India: “We witness delays in financial closure of projects and caution in decision making of our customers. However, lower inflation and easing of credit rates by the Reserve Bank of India are pointing to better economic conditions and will lead to improved business confidence in coming quarters.”
According to Singh of Religare, the business environment remains challenging, as lower capacity utilisation in the industry and elevated interest rates are prompting prospective customers to defer their capex plans. The existing pricing pressure in the industry is also impacting business margins. Garg from HSBC sees low visibility on margin recovery.
But the ABB management is optimistic about future growth. Said Husain: “The company is back on growth path. Our actions to increase competitiveness in early 2011 have started to deliver and will continue to do so.” ABB plans to focus on localisation, new product development and high-growth areas like renewable and energy efficiency.
Well, the market will be keenly watching these events and whether ABB lives up to its promises or not. If it doesn’t sustain, these premium valuations will surely prove difficult for the stock.
