ABB’s stable performance priced into valuation

 

ABB India Ltd’s recovery in order inflows and profitability for the March quarter may stand out on the global map. Even though it comprises a minuscule portion of global business, the India-listed entity posted a 29% growth in order inflows and about 1.47 percentage point rise in operating margin compared with a year ago. But revenue and profit growth was marginally below Bloomberg’s consensus estimates.

 

For capital goods companies, new orders is the star that guides future revenue and profit growth. New order growth beat the growth rates in other Asian regions including China. ABB India’s statement says it got large orders for transformers, substations and medium voltage drives. However, the quarter posted a 4% drop in order backlog. Meanwhile, only a pick-up in the infrastructure sector’s capital expenditure cycle will improve the situation, which remains challenging. 

 

The highlight for the quarter was the 6.9% operating margin—higher compared with the year-ago period and the preceding quarter. Profitability improved as a result of strategic cost-savings initiatives and a huge cost-saving on raw materials. Hence, operating profit expanded by around 18% to Rs.126 crore in spite of a 7% contraction in net revenue to Rs.1,982 crore. 

 

In line with the parent company’s performance, ABB India was able to offset cost pressures and delays in long-gestation, large orders with short-cycle projects that fared well. The same trend has been seen in the March quarter results of most capital goods makers. 

 

 

In its March quarter results presentation, the Swiss parent said that negative volumes plus higher sales and research and development expenses have weighed on margins at the global level. But what matters is that the profit margin has improved across most critical divisions both for the parent and the domestic company. 

 

ABB India’s net profit jumped by nearly 22% year-on-year to Rs.52 crore, again slightly lower than forecast. The capital goods maker is trying to focus on profitability through difficult times. Fitch Ratings Inc. upgraded ABB India’s ratings, citing improved business profile, cost savings, and healthy and free cash flows.

Yet, from an investor’s standpoint, ABB India’s market price of Rs.823.85 prices in all the positives. Any strong upsides in stock price will come from large order inflows and receding economic headwinds. Until then, leading brokerages reckon there would be no scope for any earning or valuation upgrades.

 

Rahul kumar Gupta..

PGDm,1st Year..

Source:-Mint..