ABB India: surge in order inflow signals investment demand revival
What impressed most in ABB India Ltd’s March quarter results is the stellar 28% jump in order inflows at Rs2,342 crore. Better still is that the orders have come from across sectors and industries, unlike the December quarter when the order inflow growth was due to a few large orders. It is the long-awaited signal that India’s investment drought is coming to an end.
So, with a respectable order book of Rs12,023 crore, most of which is to be executed over a 12-15 month horizon, there is hope for strong revenue growth. The March quarter’s revenue growth, which rode on previous orders was 8.3%—not superlative but sufficient to appease investors. This came mainly from two of the company’s larger segments namely robotics and motion, and power grids. ABB India’s media release that attributes this growth to sector-specific demand revival and easing customer payment options, underpins economic recovery both in the public sector and industrial areas.
Be that as it may, the company’s operating performance for the March quarter was a dampener. Margins across segments fell from the year-ago and preceding quarter levels, with industrial automation, and robotics and motion segments portraying steep declines. However, the management in a telephonic conversation with Mint attributed the reason to the new Indian Accounting Standards, which would get streamlined in the next few quarters.
Yet, operating margin at 8.8% was in tune with Bloomberg’s average estimate, although lower than 9.4% posted in the year-ago period. What’s material, however, is that the company’s profitability has steadily risen from the abyss it hit about four-five years ago.
The moot question is—will margins get better as the recently acquired orders get executed?
So, while revenue growth follows robust order inflows, investor attention would shift to profit expansion too. For the March quarter, operating profit was just a tad better than the year-ago period. Even the net profit at Rs88 crore was a mere 3% higher.
Yet, the surge in order inflows may be a positive trigger for the stock that currently trades at a rich valuation of 49 times the estimated earnings for calendar year 2017. Indeed, ABB like the other multinational capital goods firms in the listed universe commands a premium valuation over its domestic peers. An increase in short-gestation orders and margin expansion are a must to support valuation.