The September quarter results of multinational capital goods company ABB Ltd reinforced the belief that the firm has been on the road to recovery since early this year. The results showed higher sales and order inflows than a year ago. These two key factors sparked a 4.3% jump in ABB’s stock price on Tuesday to Rs 708.20.
Net sales at Rs 1,726.3 crore were 9% above Bloomberg’s consensus estimates and 29.4% higher than a year ago. This also compares well with a 7% contraction in net sales seen during the September 2010 quarter.
There has been an all-round improvement in sales performance. The power systems division, contributing 28% to the total sales, clocked the highest growth rate of 39.4% from the year-ago period. Sales in two other key divisions, power products and discrete automation and motion (industrial assembling), also grew by 25% and 26%, respectively.
Improved sales helped register a two-and-a-half times increase in operating profit to rs 49.4 crore. Raw material cost as a percentage to sales at 72% dipped by about 300 basis points from a year ago and was in line with the June quarter.
•Tightening up (PDF)
•Quarterly performance (PDF)
Given the strong sales growth, one would have expected profitability to improve. Here, the company let down investor expectations. Operating profit margins at 2.9% were double than those in the year-ago period, but about 100 basis points lower than the June quarter and significantly lower than the consensus estimates.
According to Deepak Narnolia of Motilal Oswal Securities Ltd, “Recovery in margins was below expectations, given that the company is facing acute pricing pressure in power segments and due to low-margin legacy orders (rural electrification business).”
ABB also reported a drop in profit margins (before interest and tax) sequentially across business segments, except for discrete automation and motion.
Given the cost pressures, rising sales did not have the desired impact on net profit. At Rs 22.2 crore, it was 92.5% higher than a year ago, but way below consensus estimates of Rs 53.6 crore. Further, the management has cautioned that rising interest rates and slowing industrial growth could hinder near-term growth.
That said, the fact that the company is slowly yet steadily recovering from the losses and low order inflows that besieged it a year ago, seems to have enthused investors.
September quarter order inflows were 23% higher from the year-ago period, which came mainly from core sectors such as steel, pulp and power, and assured revenue growth for several quarters ahead. The strong performance in the last three quarters has helped ABB’s shares outperform the BSE capital goods index. How soon it can combat competition to improve profit margins and increase its net profit will determine investor outlook towards the stock.
PDF by Ahmed Raza Khan/Mint