Concerns about ABB Ltd’s falling profitability and poor order inflows should ebb with the company’s December quarter results. The multinational capital goods maker’s operating margin had slid dramatically from 14.3% in the December quarter of 2007 to a pitiful 0.6% in the same quarter of 2010. It has now rebounded to around 3.6%.
Cues for a better performance during the quarter had come from Swedish parent ABB Group results announced about a week ago. Since then, ABB’s share price has been inching up, as the parent indicated that the profitability of short-cycle business products in the country had improved.
The profit margin (before interest and tax) of the discrete automation segment, which accounts for around one-fourth of the total revenue, trebled to around 15% from the year-ago period—the best performance within its business segments.
Low-voltage products and power products, too, recorded better profit margins compared with a year ago.
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But what’s worrisome is that the profitability of its power systems segment, accounting for 30% of revenue, did not get better. The management attributed it to long-cycle businesses (which take a long time to execute) and the overhang of the rural electrification business, which it plans to exit.
On the whole, operating profit rose seven times from the year-ago period to Rs 77.3 crore. This is in spite of a moderate 6% revenue growth to Rs 2,199.9 crore. Cost savings, mainly in raw materials, were aided by the increased focus on domestic sourcing (localization) of materials and components. Raw material costs as a percentage of sales fell noticeably to 74% in the December quarter from around 80% a year ago.
The ABB stock rose marginally on BSE to close at Rs 875 after the results, in response to improving fundamentals. Incidentally, the stock trades close to the buy-back price of Rs 900 a share announced almost two years ago.
Net profit jumped eight times to Rs 64.1 crore during the quarter from a paltry Rs 6.8 crore in the year-ago period. What brings the stock back into the investor comfort zone, though, is the 58% year-on-year jump in order inflows during the December quarter that takes the order book up to Rs 9,188 crore at the end of calendar year 2011, securing revenue growth in the near term.
For investors, the trouble is that the ABB stock, as always, trades at rich valuations, nearly 50 times estimated earnings for 2012.
Graphics by Yogesh Kumar