ABB India trips on regulatory and policy obstacles in September quarter
ABB India Ltd’s September quarter results fell short of the Street’s estimates on all counts. Except for its services division and exports doing well, a large part of the company’s domestic business slowed because of the impact of the goods and services tax (GST) and regulatory changes.
The first disappointment was that fresh order flows, at Rs1,936 crore, were stagnant at the year-ago level (after adjusting for a single large order bagged last year).
The management said teething issues under GST led to small and medium businesses deferring orders. Larger industries chose to improve efficiencies, resulting in some order traction from the oil and gas, cement, food processing, mining, and automobile sectors.
Meanwhile, the renewable energy segment, in which ABB India has made great strides, has been subdued for the past few months because of falling tariffs and regulatory changes in solar and wind energy sectors.
Secondly, lack of clarity around input tax credit procedures slowed execution and billing during the quarter. Therefore, net revenue was 7% lower than a year back and 17% lower than Bloomberg’s estimate.
The company’s industrial automation segment was the worst hit, recording a 29% revenue drop. Even the power grid segment, which accounts for almost half the total revenue and has been the beneficiary of orders from Power Grid Corp. of India Ltd and state electricity boards so far, recorded a 14% revenue decline from a year ago.
Thirdly, the above factors saw ABB India’s operating profit come in at Rs134 crore, falling short of Bloomberg’s estimate by nearly 25%, even though it was 13% higher from a year ago on a low base.
What saved the day were the company’s conscious efforts in the recent past to step up its services business across segments, and exports, both of which improved margins.
Meanwhile, the Swedish parent’s decision to make Bengaluru a global sourcing hub is reckoned to improve ABB India’s material costs and therefore profitability. This was reflected in the 120 basis-point improvement in operating margin from the year-ago period. A basis point is one-hundredth of a percentage point.
ABB India’s internal efficiencies have partially mitigated the risk to profitability posed by external economic factors and regulatory changes. Perhaps this is why the stock held up despite results falling short of investor expectations. On Thursday, it closed 1% higher at Rs1,399 on BSE, which discounts its fiscal year 2019 earnings estimate by around 30 times—fairly valued, but could see a rerating if earnings grow as expected by 30-35% annually over the next two years.