A company whose stock trades between 29 and 31 times calendar 2010 earnings will have to not just pleasantly surprise analysts but positively amaze them to boost its share price.
ABB Ltd’s December quarter results did nothing of the sort, posting revenue and profit below analyst estimates. The stock fell 2% as a result on Friday, in a relatively bullish post Budget market.
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For the December quarter, ABB’s net revenue was down 13% compared with the year-ago period, while net profit fell a steep 43% to Rs109.6 crore.
Part of the reason is a foreign exchange loss during the quarter and an exchange gain during the corresponding quarter of 2008. Nevertheless, profit has declined steeply even after taking this into consideration. Another reason for lower profit despite a relatively better second half for most capital goods manufacturers is the company’s decision to exit the rural electrification business. This is a part of the power systems division, which accounted for 27% of ABB’s revenues in 2009 against 33% in the previous year.
During the December quarter, revenue from the power systems business fell 43% compared with the year-ago period and the division went into the red to the tune of Rs39 crore, compared with a profit of Rs66 crore in the December 2008 quarter. The power products division, the largest revenue earner for the company, saw profit decline to Rs39 crore in the December quarter, compared with Rs96 crore in the year-ago period. Other divisions too posted profit declines, although revenue from automation products improved.
Operating margins continued to decline, not only year-on-year but also compared with the previous quarter, reflecting strong competition and pricing pressures.
The silver lining is that order flow is back. New orders worth Rs2,377 crore were received in the December quarter, 88% higher than in the year-ago period—but the percentage change is exaggerated because there was a significant drop in order inflows in the December 2008 quarter. Order backlog, at Rs8,479 crore, is up 38% since the beginning of 2009 and 1.36 times 2009 revenue.
The revival of the investment cycle in 2010 should boost revenue and profit, although margin pressures are likely to persist. But the stock is too pricey for these uncertain times.