Business Standard

Exit opportunity for short-term investors

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Vishal Chhabria Mumbai

The open offer by ABB’s Switzerland-based parent, while reaffirming its commitment towards the Indian subsidiary, is also substantially positive for ABB in the long run. The offer for 22.89 per cent of ABB’s equity (48.51 million shares at Rs 900 each) will see the foreign parent fork out Rs 4,366 crore, which will push its stake up to 75 per cent if fully subscribed.

While ABB’s long-term growth prospects look good and there are some signs of an industrial revival, analysts suggest the open offer provides a good exit opportunity for investors.

Increased commitment, greater flexibility
On the face of it, the offer at a premium of about 34 per cent over the pre-offer closing price of ABB and 14 per cent over the mandatory floor price looks surprising. However, the premium ABB’s parent is offering is not without reason. Most important, ABB’s parent is very optimistic about the long-term future of the Indian economy and sees potential for development of ABB’s activities in India. It also expects an increasing role for ABB in its global franchise, which could mean higher investments and revenues in future.
 

MARGIN PRESSURE
 Q1CY10% chgCY10ECY11E
Net sales1,4754.908,77610,420
EBITDA92-37.809201,126
Net profit *76-11.30582721
EPS (Rs) *- 27.5034.00
PE (x)- 30.2024.40
* Adjusted; %chg is year-on-year E: Estimates         Source: Edelweiss Securities

 

Additionally, a 75 per cent stake in ABB will give the parent higher flexibility in decision-making, especially when it comes to special resolutions that require a three-fourths majority, and enhanced management control. Adding new business lines and acquisitions will be much easier.

Short-term pains
In the backdrop of planned investments in India’s power and industrial sectors, the long-term prospects of players like ABB appear bright. However, unlike its peers, ABB has reported a lacklustre performance in the last few quarters. For the March quarter, too, it disappointed the markets, with margins falling almost by half and adjusted net profits by 10 per cent.

ABB’s order inflows were also down. The poor show is consequent to intensifying competition (from Chinese and Korean players) and oversupply in the power business, among a few others.

While pricing pressure in the sector continues, analysts expect ABB’s overall margins to remain under pressure for a few more quarters, with a revival seen only in the calendar year (CY) 2011.

The way ahead
Post results, many analysts have a bearish view on the stock, which slipped from Rs 803.90 (April 29) to Rs 673.55 (May 14). However, post the open offer, the stock surged and closed Tuesday’s trade on the BSE at Rs 830.65 — a price-to-earnings (PE) ratio of 28 times its estimated consensus CY2011 earnings per share (EPS), and is expensive.

Given the attractive offer price, a large number of shareholders are likely to tender their shares, which could translate into an acceptance ratio of as low as 47.8 per cent. Even then, it would make sense to tender the shares. Investors with a near- to medium-term perspective could use the offer to exit and re-enter at lower levels later.

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First Published: May 19 2010 | 12:53 AM IST

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