ABB reported lower-than-expected results for the December 2009 quarter last Thursday. The 43 per cent decline in power systems revenues, which was primarily due to ABB’s decision to exit the rural electrification business, was largely responsible for the 13 per cent year-on-year fall in revenue to Rs 1,885 crore. That apart, sluggish economic conditions and project delays witnessed earlier, besides a larger share of long gestation projects, impacted revenues, which were down 8 per cent in 2009.
At the operating level, poor show by the power business impacted profitability. One-time costs due to exit from rural electrification business saw the power systems business report a loss before interest and tax of Rs 39.4 crore, as against a profit of Rs 66.4 crore in the December 2008 quarter. The power technologies business reported a 60 per cent fall in profit to Rs 38.6 crore. Overall, in addition to lower revenues and one-off costs, a Rs 12.1 crore forex loss and higher raw material costs saw operating profit fall sharply by 43.6 per cent year-on-year to Rs 151.2 crore during the quarter.
Positively, with economic conditions improving, ABB’s order inflow jumped 88 per cent year-on-year to Rs 2,377 crore in the quarter. While a part of this is due to the low base of the previous year’s quarter, when order inflows had slipped to lowest levels, the trend is improving --- order inflows were up 26 per cent sequentially. Thus, ABB’s order backlog was up 37.5 per cent year-on-year to Rs 8,479 crore at the end of December 2009, which provides good revenue visibility. Hence, analysts have raised their revenue and profit estimates for ABB by 2-6 per cent for 2010 and 2011. Going ahead, with the government enhancing focus on power and infrastructure sectors, ABB hopes to do well. However, even as order inflow and backlog have been improving, execution will be among the key things to watch out for.
At Rs 788, the stock trades at a price to earnings (PE) of 30 times its estimated earnings of Rs 26.3 for 2011. While it historically traded at much higher PE multiples, the current lower valuations can be attributed to slower revenue growth in recent quarters. Unless growth rates pick up, expect the stock to perform in line with the markets.
