Over the last few quarters, engineering and automation technology conglomerate ABB India Ltd’s order flow trajectory shows the compelling need for the capital goods sector to reposition itself and cater to a changing industrial environment. The so-called green shoots of recovery expected in traditional core sectors that drive orders for capital goods firms are yet to see the light.
ABB India’s June quarter media release reinforces that view. It says that the order book contains multiple contract wins balanced between traditional and emergent market sectors including smart cities, marine, railways, digitalization, and food and beverages.
This implies a steady though gradual shift in orders to these emerging sectors that are relatively smaller in value compared to the erstwhile big-ticket ones from high-voltage power transmission and core sector industries such as cement and steel. Not surprisingly, therefore, June quarter orders rose 7% year-on-year to ₹ 2,474 crore, which is not so impressive for the Street. Especially when it grew by 12% in the same period last year.
The order backlog too fell to ₹ 10,717 crore, down 11% year-on-year. On the one hand, this mirrors smooth and efficient project execution, which led to a 21% jump in net revenue. On the other hand, it indicates that large project orders from utilities and core sectors are few and far between. It is known that orders from Power Grid Corp. of India Ltd have been low key for some time.
Indeed, this is where the power of a multinational parent comes in handy. ABB India’s export orders, driven partly by catering to global group companies, rose by a solid 68% to support order flows in the quarter.
Given this scenario, the company is being nimble-footed in shifting track to cater to emerging sectors such as process and service industries, and renewables. In this context, note that the Swiss parent’s shares rose 4% after the results were announced on Thursday as the firm continued to streamline its portfolio. A Reuters report said that it has shed businesses including power cables in developed regions and quit overseeing engineering projects over the last couple of years.
That apart, ABB India’s Ebitda (earnings before interest, tax, depreciation and amortization) margin rose by 150 basis points year-on-year. This could disappoint the Street as expectations were even higher. Ebitda too was a tad below Bloomberg’s forecast, though up by a robust 65% on the back of strong execution and internal efficiencies.
Indeed, ABB India is toeing the line of its parent in a transformation needed to grab a share of new businesses. The biggest improvement, coming from its robotics and motion, and industrial automation segments, echoes this trend.
The stock has had a steep downhill run as investor sentiment towards the capital goods sector remains weak. ABB India’s shares closed 2.5% lower even ahead of the results. The current price of ₹ 1,158 discounts one-year forward earnings by about 37 times. This is far lower than the peaks it scaled along with other multinational peers, but it is likely to languish at this level given the near-term challenges of elections, rising interest rates and the tepid economic environment, all of which are deterrents to capital expenditure.