For ABB Ltd, healthy order inflows during the June quarter came as a relief amid disappointing operating performance.
Order inflows rose 45%, albeit on a low base, after virtually no year-on-year order accretion in the March quarter. Most of these orders are from short-cycle projects, which implies faster revenue realization. But concerns remain on ABB’s profitability, which is still limping back due to competitive pricing and rising costs—not to forget its write-offs in the rural electrification business.
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The firm’s revenue grew by a healthy 17% when compared with a year ago, though the growth was slightly lower than that seen in the March quarter. About three-fourths of its revenue accrue from the power systems, power products and discrete automation and motion segments, with the power systems segment clocking 22% growth from the year-ago period. Unfortunately, this segment has eaten into ABB’s profitability in the last nine quarters, as a result of the firm’s exit from the rural electrification business. Analysts, however, are unable to get a fix on the quantum of losses that remain to be written off on account of the exit.
The profitability boost for the quarter came from the discrete automation segment, which accounts for around one-fourth of its revenue and from low-voltage products, which, however, comprise less than one-tenth of its revenue.
On the whole, ABB’s lacklustre operating profit margins at around 4% were reflective of rising input costs, especially in the power business. Further, analysts reiterated the management’s view that the absence of price variation clauses in some longer-cycle projects has also hit margins. A Rs 10 crore forex loss also pulled down profitability.
Given these factors, it does appear that ABB is not yet on a firm footing. Net profit at Rs 38 crore was flat when compared with the year-ago period, a disappointment for the Street that estimated a much higher figure of around Rs 80 crore. Although the management is optimistic about strong order inflows in future and of an improvement in margins, the story is far from exciting in the near to medium term.
ABB’s stock has outperformed the Sensex and the BSE Capital Goods Index in the last one month in anticipation of strong recovery in performance. However, despite good orders, the stock ended flat at Rs 805, a price that discounts the company’s estimated calendar year 2012 earnings about 35 times. Only a consistent improvement from the present level could inspire investor confidence.
Graphics by Yogesh Kumar/Mint
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