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Home >Markets >Mark To Market >ABB India’s rising valuations defy its sluggish order intake in Dec quarter

Shares of capital goods company ABB India Ltd have surged about 70% since October-end during the so-called reopening rally. While some of the companies that took part in the rally have also seen an improvement in revenues/orders; in ABB’s case, sluggishness in order inflow continues. The firm’s order inflows fell 8% year-on-year (y-o-y) in the December quarter. Its order book stood flat at 4,114 crore at the end of last quarter.

ABB India follows the calendar year as its financial year. Ordering activity in the company’s core sectors of cement, steel and construction remained muted, although segments such as data centres, renewables and electronics are seeing better traction in terms of order inflows.

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Unfortunately, investors in the stock don’t have much to look forward to, at least on order inflows for now. In a post-earnings conference call, the ABB management said order inflows are expected to remain soft over the next two quarters and witness an uptick in the second half of 2021. The company expects its core segments to benefit from higher allocation to the infrastructure sector in the latest Union budget.

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Improved performance

Analysts caution that absence of large order inflows from core sectors point to a slower-than-expected recovery.

“With current order book, there is revenue visibility for the next six-nine months as ABB is expected to improve execution at a decent pace across all five factories. We believe order inflows may be volatile over the near term, given the current economic scenario," analysts at brokerage Prabhudas Lilladher Ltd said in a 12 February report.

On the bright side, ABB’s cash balance improved sequentially by 40% to 2,200 crore at the end of the December quarter. The company attributed this to faster collections and prudent working capital management. The management intends to use these funds for capacity expansion once the covid-related uncertainties are completely out of the way.

Further, cost control and a favourable sales mix led to a sharp recovery in operating margin, which increased by 440 basis points to 11.5% in the December quarter. One basis point is one hundredth of a percentage point.

“Near term sales and order inflows may continue to disappoint, due to deferment of capex, but cleaning up of legacy low margin orders and pruning of cost base is likely to result in faster improvement in profit margins," analysts at JM Financial Institutional Securities Ltd said in a report on 15 February.

While the December quarter margin beat drove earnings, investors need to watch out for the order book, especially given the capital goods company’s shares are now comfortably higher than their pre-covid highs.

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