Shares of ABB Ltd, India, had fallen to fresh three-year lows of Rs365 just before the company announced results for the quarter ended December. But soon after the results announcement, the stock jumped by about 10% from its lows.
There was nothing spectacular in the results. Earnings before tax rose by 6.2% in the December quarter, exactly half the rate at which earnings grew in the first three quarters of the year.
According to an analyst with a domestic institutional broker, the stock had fallen sharply few days before the results announcement, and the jump in the stock could be explained by covering of short positions.
Indeed, the stock had corrected by one-fifth compared with week-ago levels, in anticipation of weak results. While the company disappointed on order intake, there were no major negatives in the results.
Operating revenues grew by 19%, slightly better than the 15% recorded in the first three quarters. Of course, revenue growth has dropped substantially from the compounded annual average growth rate of 48% between 2004 and 2007, but this has been factored in the company’s share price.
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One worrying aspect about the results, however, is the slowdown in order intake. Even after adjusting for a large order of more than Rs500 crore the company received in the year-ago December quarter, order inflows fell by 15% on a year-on-year basis. One point of view is that a slowdown in order intake is a good thing in a slowing market since the quality of orders could be suspect. Based on this school of thought, while growth in the near-term may take a hit, the company is better-off because of the lower risk.
But an analyst points out that lower growth would impact profit badly. Already, operating margin fell by 90 basis points in the December quarter because of raw material cost pressure and higher employee costs. Lower revenues would result in even lower margins. Apart from lower operating margin, the company has also been hit by a higher interest burden. This coupled with lower other income led to a 160 basis points drop in pre-tax margins in the fourth quarter.
All told, the 10% growth in the company’s pre-tax earnings in 2008 is rather unexciting, especially since ABB still gets a valuation of 15.5 times trailing earnings.
Graphic by Sandeep Bhatnagar / Mint
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