ABB India’s growth prospects trip after dismal Q1 across segments

ABB India Ltd’s March quarter (Q1CY20) earnings missed analysts’ forecasts, mirroring the challenges across domestic industrial sectors.

The Indian arm of Swiss-Swedish capital goods maker posted wafer-thin profit margins as it battled covid-19 woes. Earnings before interest, tax, depreciation and amortization (Ebitda) margin at 2.8% for the quarter, was 400 basis points lower year-on-year (y-o-y). Investors would be disappointed given the expectation of 7.3% Ebitda margin. One basis point is one hundredth of a percentage point. Q1’s operating profit at ₹43 crore was down to a third of the year-ago period.

Click here to enlarge graphic

This was partly led by the 18% y-o-y drop in net revenue. Impacting revenue was “lower sales, non-receipt of delivery clearance, lower service revenue in the nationwide lockdown due to the covid-19 pandemic,” said the firm in the results media release. Indeed, pain was felt across business segments. The largest segments, electrification and motion that account for about three-fourths of the revenue, posted a 15% and 21% y-o-y drop, respectively.

Negative operating leverage dragged profits clocked by these two segments by 38% and 70%, respectively. Unfortunately, even the industrial automation and robotics that enjoyed relatively high margins in the recent past, staged a weak show.

Umesh Raut, lead analyst-industrials, Yes Securities (India) Ltd, said: “Profitability during the quarter was significantly impacted from negative operating leverage, adverse product mix and foreign exchange loss.” The only bright spot in the quarter’s results was the 10% y-o-y growth in order flows. In spite of this, the overall order book of ₹4,444 crore offers barely a year’s revenue visibility.

Besides, prospects are dim, too. The company highlighted that the global economy is expected to contract in 2020 after a rapid deterioration in outlook driven by the covid-19 pandemic.

It is not surprising that ABB India’s stock closed 2.2% lower on Thursday even after its precipitous 33% fall since early January. Triggers for a strong rebound in stock price would come only from a margin improvement and sustained order flow in the coming quarters.