ABB Ltd has reported year-on-year profit growth for the first time in eight quarters. Net operating profit grew 21.7% from a year ago and profit after tax grew nine times. One reason for the spectacular growth in profit is that the year-ago quarter was depressed, as the company exited the rural electrification business.
The power systems division made losses of Rs 48.48 crore at the earnings before interest and tax (Ebit) level in the March 2010 quarter. But for these losses, the profit growth this quarter would have been less impressive, though still robust. What drove the growth at the Ebit level were the huge increase in the discrete automation segment and a turnaround in the low voltage product division.
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With the firm restricting cost growth to 16.6%—a reasonable number since raw material costs are increasing—operating profit gained four-and-a-half times from a year ago.
The management’s commentary during a conference call after the results was generally positive and said that there was traction in orders across the board. Indeed, the company booked decent order flows in the March quarter. New orders grew 21% sequentially to Rs 1,695 crore, though they were flat from a year ago.
However, as ABB noted in an emailed statement, the strong growth was led by base orders or short-cycle orders. Large order inflows were relatively fewer because they were under “procedural clearances”.
While the management indicates strong large-order prospects in the next two quarters, the macro environment is far from favourable. Increasing interest rates are putting pressure on investment demand, something that is evident in the March quarter itself.
Bharat Heavy Electricals Ltd, Thermax Ltd and KEC International Ltd, three other companies competing in the same segments as ABB, didn’t boast great order inflows in the March quarter.
A CMIE (Centre for Monitoring Indian Economy) report puts total projects announced in the March quarter at Rs 2.1 trillion, less than the Rs 2.8 trillion announced in December and Rs 3.56 trillion in September. And things are likely to get tougher as the interest rate hike cycle hasn’t peaked.
Not only that, companies in the infrastructure sector, especially those in the power segment, face tough competition from Korean and Chinese firms. This may not decrease their share in the market, but tough aggressive bidding could put further pressure on margins.
While the ABB stock has gained 12% since the beginning of this year compared with a 9% decline in the Sensex, most of it was in the anticipation of good results this quarter. Further upside will depend on increases in its order book.
Graphic by Yogesh Kumar/Mint
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