ABB: short-lived optimism as profit plunges

ABB: short-lived optimism as profit plunges

ABB Ltd posted a paltry net profit of Rs6.8 crore on net revenue of Rs2,072 crore. Net profit for the December quarter fell 94% from a year ago and 41% when compared with the preceding quarter. Bloomberg consensus had pegged net profit at Rs108.03 crore—flat compared with a year ago.

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According to the ABB management, provisioning of about Rs100 crore during 2010 for its strategic exit from the rural electrification business, along with foreign exchange fluctuations, lowered profits. The firm’s exit from the business has reduced orders in the segment during the December quarter to one-fourth that at the end of the March quarter.

Further, raw material costs rose 350 basis points year-on-year (y-o-y) to 80% of sales. Operating profit margin for the quarter, therefore, plunged to 1.6% compared with 8.8% a year ago and 2.5% in the preceding quarter. Operating profit consequently fell 81% y-o-y and 5% quarter-on-quarter.

Order inflows were 41% lower than a year before, though this is in part due to the falling off of orders from the rural electrification business. ABB’s total order book at the end of calendar year 2010 at Rs8,436 crore, was about the same level as a year before.

But the firm’s shares closed 5% higher at Rs698 apiece, after having underperformed the broader market and the capital goods index for about a year. The results hardly justify this optimism, as across segments, the firm appears to be faced with execution challenges, cost overruns and low margins. In fact, profit margins (before interest and tax) were reduced by half or even more in three business segments—power products, process automation and automation products. Analysts feel the firm is finding it tough to compete against Chinese and South Korean companies, even globally.

What could have boosted the stock is the expectation of a few large orders in the power transmission space. Also, revenue of the key power systems segment grew by 49% y-o-y during the quarter. Following the write-offs from the rural electrification business, profitability could improve, though this would not be until a couple of quarters later. The ABB management says, “We are taking actions to improve our competitiveness, including localization of some product lines and strengthening our competence locally in R&D (research and development)."

In the near term, the jump in the stock is likely to be a short-lived surge of hope rather than any fundamental improvement.

Graphics by Yogesh Kumar/Mint

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