ABB may find it hard to keep up margin show in coming quarters | Mint

ABB may find it hard to keep up margin show in coming quarters

Overall, last quarter, ABB India saw 31% y-o-y revenue growth at  ₹2,769 crore. (Photo: iStockphoto)
Overall, last quarter, ABB India saw 31% y-o-y revenue growth at 2,769 crore. (Photo: iStockphoto)

Summary

  • Thanks to a more favourable mix of products and revenues, improved utilization levels and price realization, and better priced older orders, operating margin expanded 580 basis points (bps) y-o-y.

ABB India Ltd’s September quarter earnings were better than expected on several counts. Thanks to a more favourable mix of products and revenues, improved utilization levels and price realization, and better priced older orders, operating margin expanded 580 basis points (bps) year-on-year (y-o-y) to a multi-quarter high of 15.8%, while gross margin was up 190 bps at 36.7%. The company follows a January to December financial year.

However, investors worry if ABB will be able to sustain such margin performance. This concern surfaced after the company said in its earnings call that it has benefitted from executing orders secured earlier at higher prices; however, these advantages will diminish as conditions stabilize. This hinted at potentially weaker gross margins going ahead. Given this, Nuvama Institutional Equities believes current gross margin levels are unsustainable and may remain under pressure.

 

(Graphics: Mint)
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(Graphics: Mint)

Having said that, lower costs through localization, enhanced supplier network, better service mix, and benign commodity prices could help offset a potential moderation in margin. According to Amit Anwani, an analyst at Prabhudas Lilladher, ABB has maintained its gross margin exceptionally well in the past two quarters. He added that gross margin will be sustainable for the rest of the year, given the company’s emphasis on high-growth sectors and expansion into tier 2 and 3 cities, which are margin-accretive.

Overall, last quarter, ABB India saw 31% y-o-y revenue growth at 2,769 crore, led by higher sales in motion and process automation segments. Meanwhile, helped by margin expansion, profit after tax grew at a faster pace of 79% to 362 crore.

Over the long run, spending on domestic infrastructure along with a pickup in exports is seen benefiting ABB. Overall, investors believe growth over the medium to long term will be driven by robust demand in key sectors like cement, metal and mining, as well as a focus on high-growth areas such as food & beverages, electronics, warehouse, pharma, automotive and water. Moreover, new initiatives in data centres, railways, and renewables are expected to support this growth. ABB’s stock has rallied 58% in 2023 so far, reflecting this optimism, though some have cautioned about valuations being hefty. Based on Prabhudas Lilladher’s CY25 earnings estimates, the stock now trades at 55.9 times.

Investors will closely track the momentum in public and private capital expenditure in both key and high-growth sectors, commodity costs, increased efforts in localization, and any potential slowdown in process automation orders.

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