Margin risks could dampen order inflow delight for ABB India investors

For ABB India, future order growth will hinge on how quickly orders are finalized and the recovery pace of private sector capex. (Photo: Company website)
For ABB India, future order growth will hinge on how quickly orders are finalized and the recovery pace of private sector capex. (Photo: Company website)

Summary

  • Large project orders have risen to 15% of the 2023 order book from 7-8% in 2022, raising concerns due to their lower gross margins and extended execution times compared to short-cycle product orders

ABB India Ltd reported a 35% year-on-year increase in new orders to nearly 3,150 crore in the December-ended quarter (Q4CY23), helping its order book grow 30% to 8,400 crore. This has investors excited, with shares of the capital goods company having risen 20% since it announced its quarterly results on Tuesday. ABB follows a January to December financial year.

Rising demand from high-growth sectors such as renewables, data centres, railways, metros, and electronics has been benefitting ABB. While traditional industries like cement, metals, oil & gas, and pharma are growing slower than anticipated, they continue to form the bulk of ABB's order book. The management believes that as these sectors pick up pace, they will contribute to the company's growth in the medium term. Notably, the domestic market is expanding quicker than the export market.

Moreover, most believe that ABB’s margin are sustainable, driven by the launch of value-added and differentiated products, higher capacity utilization, premiumization, and increased localization.

In Q4CY23, gross margin expanded by 145 basis points year-on-year to 37.9%, while Ebitda margin improved 12 basis points to 15.1%. Despite a larger share of big projects and diminishing benefits from lower raw material costs, ABB is confident about maintaining gross margin at 36.8% levels in CY23. Importantly, large project orders now represent about 15% of the CY23 order book, a rise from 7-8% in CY22. These projects, which have lower gross margins compared to short-cycle product orders, are expected to be completed within 18-24 months.

Additionally, short-cycle base order growth has been plateauing, with longer gestation large orders, including metro, rail, data centres, supporting a consistent quarterly order inflow of over 3,000 crore, pointed out analysts from Nuvama Institutional Equities. This has been the trend for four consecutive quarters now, which is slightly concerning. The management also sees growth momentum slowing down given the high base in recent years. Keeping that in mind, Nuvama analysts said, “With private capex yet to pick up and shift in order inflow mix, we find risks to pace of sales growth and margins."

Despite these challenges, ABB's shares have risen 71% over the past year, suggesting investors are factoring in most of the positives. Future order growth will hinge on how quickly orders are finalized and the recovery pace of private sector capex. As for profitability, Parikshit Kandpal, an analyst at HDFC Securities, said, “Whilst the commodities prices remain stable, future margin expansion will depend on productivity, better capacity utilization and value-based selling."

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