Shares of ABB Ltd have dropped by about 14% from their highs in mid-April, at a time when the broad market and other capital goods firms have extended their gains since early March.
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The BSE Capital Goods Index has risen by about 6% from its highs in April. The reason for the divergent trend in ABB shares is owing to profit booking on account of high valuations.
Besides, the company has reported weak results for the second consecutive quarter.
Revenue declined by 9.3% on a year-on-year basis to Rs1,393 crore, and was way below analysts’ expectations of Rs1,673 crore. Evidently, order execution has been much slower than expected. Operating margin fell by about 200 basis points primarily owing to the impact of forex losses, leading to a 26% drop in operating profit. The reported net profit of Rs78 crore was about 35% lower than consensus estimates.
In the December quarter, the company had disappointed in terms of order intake.
Things were better on this front in the March 2009 quarter. Although the company reported a 14.6% drop in order inflows, it must be noted that the year-ago period represented an unusually high base.
Order inflows in the March 2008 quarter had accounted for more than a third of order inflows in 2008.
But although order inflows have bounced back from the lows in the December quarter, the outlook for the company’s shares isn’t bright.
Analysts are concerned about the rise in working capital requirements of the company and the resultant rise in interest costs.
Besides, the company enjoys a rich price-earnings multiple of nearly 20 times trailing earnings, even though the average rate of growth in earnings in the coming two years is expected to be in low single digits. With fresh worries emerging on order execution and concerns about the rise in working capital remaining, ABB shares need to correct more to reflect ground realities.
Graphics by Ahmed Raza Khan / Mint
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