Swedish capital goods firm ABB Group’s September quarter performance mirrors the recessionary trend across regions, including India. Revenue was marginally better compared with a year ago, growing by 4%.
New orders, the key discretionary factor that determines outlook, grew only by 5%. A regional break-up indicates a 39% decline in order inflows in India, among the steepest declines, as there was a dearth of large project finalizations. This compares poorly with the 15% annual growth in order inflows posted in the June quarter. The management had warned in an earlier analysts’ conference call that near-term order inflows in India will be bleak. What buoyed the parent firm’s order inflows during the September quarter were the American and Middle-Eastern markets, which registered 38% and 73% annual growth, respectively—perhaps, on a lower base. While order inflows from Canada, the US, Brazil and the Middle East were strong, its Europe operations declined due to lower business from Germany, according to an Edelweiss Securities Ltd report.
The group also stated challenges faced in short cycle businesses, as growth prospects for the near term are limited. Further, subdued revenue growth and rising cost pressures led to a 1.4 percentage point dip in operating margin at 15.3% for the quarter. The highest drop in profitability was seen in the power systems business globally. This segment accounts for one-third of its business.
But the power systems segment in the Indian subsidiary turned around in the three months ended June after making losses for about eight quarters. Analysts expect that on the whole, operating margin here will expand by 1-1.2 percentage point to around 6%, especially since the company exited the loss-making rural electrification business.
That said, in spite of a marginal decline in the Indian firm’s share price in the last couple of trading sessions to around Rs.748, it always trades at high valuations—nearly 34-36 times fiscal 2014 earnings. Hopes of a buy-back by the management and the strong parentage, with no borrowings in an industry where local peers are ridden with debt, helps sustain such high valuations. After all, there is underlying optimism at the global level, given that the parent has maintained its long-term guidance for a 10-15 % growth in earnings between 2011 and 2015.