Disappointing performance of transmission and distribution (T&D) equipment companies, including ABB India, Areva T&D and Siemens India, in the June quarter was in line with the expectations. While revenues grew at a healthy pace due to the execution of robust order backlogs, the operating profit margin continued to decline for most companies, because of competition and rising input costs. Net profit margins, however, better due to the near-zero debt position of the companies.
Despite dismal performance amid tough market conditions, the stocks traded at high valuations — 20-35 times their FY12 estimated earnings. Analysts do not favour the stocks given the weak outlook — long-cycle projects are getting delayed due to an erosion in the macroeconomic scenario and improving margins are a distant possibility.
JUNE QUARTER: A MIXED BAG
While Siemens did well on the sales front, ABB reported marginal improvement in margins. Siemens’ highest revenue growth was helped by its energy (up 22 per cent) and healthcare (up 30 per cent) segments, which form 59 per cent of its total revenues. Additionally, its industry business reported the highest growth in the past five quarters (revenues were up 13.5 per cent) despite the high cost scenario.
| MARGIN CONCERNS | |||
| Rs crore | ABB | Siemens | Areva |
| Net sales | 1,712 | 2,796 | 999 |
| Change (%) | 17.0 | 25.0 | 13.0 |
| Operating profit | 86 | 249 | 78 |
| Change (%) | 30.0 | 3.0 | -4.0 |
| OPM (%) | 5.0 | 9.0 | 8.0 |
| Change (bps) | 48 | -187 | -136 |
| Net profit | 39 | 155 | 26 |
| Change (%) | 2.0 | -0.6 | -27.0 |
| Order inflows | 1,792 | 2,282 | 962 |
| Change (%) | 45.0 | 8.0 | -12.0 |
| Order book | 8,415 | 14,964 | 5,150 |
| Change (%) | -1.4 | 10.4 | 0.8 |
| Change is on year-on-year basis Results for quarter ended June 2011 Source: Companies | |||
ABB witnessed a 25 per cent jump in revenues of its projects business (44 per cent of its total revenues). However, the gains were partly offset due to the subdued growth of around 12 per cent in the products business (56 per cent of total revenues), mainly led by power products, which reported only six per cent growth across various segments. Areva reported the lowest revenue growth among the three companies.
On the margin front, ABB reported an improvement in both its operating profit (OPM) amd net profit margins (NPM) while Siemens and Areva reported a decline. Although ABB’s industry division witnessed severe margin erosion, its power business showed an improvement helped by lower losses in the power systems segment. Net profit margins would have been better but for higher interest and depreciation expenses.
While Siemens OPMs fell the most among the three companies (led by energy and healthcare businesses), other higher incomes and a decline in taxation provided support at the net level. Areva was a laggard among the three companies, and recorded a dip in both OPM and NPM, as well as order inflows.
CONSENSUS VIEW
Barring ABB, which reported strong growth in new orders, the trend was muted to poor for Siemens and Areva. Most analysts believe that a pick up in a handful of segments like road and transmission lines is expected after the September quarter. However, overall prospects of the T&D equipment sector is unlikely to reverse in the second half of FY12, as order inflows will remain subdued and margin profile is unlikely to recover in the distant future thanks to competition and tough macroeconomic scenario.
Most companies are witnessing delays in finalisating long-cycle projects, which are important to provide stability and consistency to future revenue growth.
Majority of analysts have issued sell, hold, neutral or underperformer ratings on these companies because they believe that fundamentals do not support valuations. ABB and Siemens were trading at just 20 per cent and eight per cent below their 52-week high prices. Based on an average estimated target price, there is potential downside (of at least 15 per cent) in ABB, while Siemens provides limited upside. On the flip side, Areva traded close to its 52-week low and seems to have factored in the negatives.
