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Business News/ Market / Mark-to-market/  ABB’s performance belies run-up in stock
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ABB’s performance belies run-up in stock

A slightly lower order book position and high valuations led to a decline in stock price on Wednesday

Analysts forecast that the power transmission segment within capital goods could see faster recovery in terms of fresh order inflows, which may translate into better visibility on revenues and if that does happen, it can prop up the ABB stock. Premium
Analysts forecast that the power transmission segment within capital goods could see faster recovery in terms of fresh order inflows, which may translate into better visibility on revenues and if that does happen, it can prop up the ABB stock.

Multinational capital goods company ABB India Ltd’s shares fell by 1.57% on Wednesday, despite its June quarter results being in line with expectations. This can be attributed to two reasons: first, a slightly lower order book position compared with the year-ago period, though order inflows were robust on a low base and second, the stock’s high valuations.

ABB’s net revenue at 1,822.2 crore met analyst forecasts, rising by 4.6% from a year ago. Most of this growth came from short-cycle orders that helped in quick completion. Front-line segments such as power systems and power products clocked single-digit growth in revenue. But its low-voltage segment, which comprises a small portion of overall revenue, posted the biggest jump of 24% in revenue from the year-ago period. The company’s media statement also stated that exports continued to grow at a faster pace than its home market.

However, no positive surprises emerged on the profitability front. At 7%, its operating margin mirrored cost optimization through the company’s localization efforts, which have been highlighted over the past few quarters. The capital goods maker pruned raw material costs and other expenses, while maintaining employee costs as a percentage of sales. Although operating margin was just about 50 basis points higher than the year-ago period, it has been steadily recovering over the last four quarters. One basis point is one-hundredth of a percentage point.

What can prop up the stock price from its current level is an all-round improvement in profit margins. In the June quarter, profit margin (before interest and tax) in the process automation segment rose three times to 22.2%. But, the two key segments—power systems and power products—posted a margin drop, with the latter segment’s margins 13.5 percentage points lower than a year ago.

Analysts had stated in their preview notes that the base effect will amplify performance on order inflows and profits for most companies in the universe. ABB’s net profit did jump by 20.5% year-on-year to 47.7 crore. But investors must note that the stock has doubled in the past one year, in anticipation of strong performance and macro-economic revival.

At 1,085.9, ABB’s shares trade at a price-to-earnings multiple of 50 times its estimated fiscal 2016 earnings, which is expensive. That said, analysts forecast that the power transmission segment within capital goods could see faster recovery in terms of fresh order inflows. This may translate into better visibility on revenues for ABB and if that does happen, it can prop up the stock.

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Published: 23 Jul 2014, 08:22 PM IST
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