Superior execution powers ABB India, but lofty valuations set the bar high
2 min read.Updated: 05 Mar 2019, 12:03 AM ISTR. Sree Ram
The ABB India stock is down more than 10% since the divestment announcement in mid-December
According to analysts at Motilal Oswal Securities Ltd, the lower visibility in the order book is due to the short-cycle nature of the business ABB India is now left with
Shares of ABB India Ltd, the local arm of Swedish multinational corporation ABB Group, have barely moved even after it reported impressive results for the December quarter. ABB India follows a January-December fiscal year.
In the period between October and December, the company’s revenue increased 15%, reflecting decent execution, while order inflows were up 17%, indicating that the growth momentum should continue. What’s more, with profit margins improving as well, operating profits jumped 48% from the year-ago period. The muted response of investors suggests that the high valuations of ABB India’s stock are a bit of a concern. Analysts peg its price-to-earnings valuation multiple at 38 times based on estimates for the year till December 2020. Revenue and margins also expanded in the last quarter.
The numbers, however, exclude ABB’s power grid business in India, wherein the local entity and its parent are divesting. Given the sizeable contribution and the lack of clarity on the divestment proceeds, the announcement has been met with scepticism.
The ABB India stock is down more than 10% since the divestment announcement in mid-December. The power grid business contributes 40% to its revenue.
In this backdrop, the December quarter results give some idea of how the residual entity is performing. The residual business is growing faster than the power grid segment, where revenue grew 6% last quarter.
The growing market for digitally-enabled solutions, which help improve efficiency and productivity for customers, has helped ABB India’s performance. “The management indicated that ABB’s expertise in the core sector is the key differentiator for its digital solutions, compared to its competitors," SBICAP Securities Ltd said in a note on 1 March .
Of course, it remains to be seen if the performance will be sustainable. Also note, that while the robotics motion division fared well, operating profit dropped at the other two divisions— electrification products and industrial automation.
The impending general election, and the potential slowdown in government decision-making and spending can affect order flow as well. Transportation and power sectors, key business segments for ABB India, see large government spends. And, while the company’s order backlog increased 10% to ₹4,227 crore, it only amounts to 63% of its annual revenue, excluding the contribution of the power grid business.
According to analysts at Motilal Oswal Securities Ltd, the lower visibility in the order book is due to the short-cycle nature of the business ABB India is now left with. While that puts the onus on a continuing order-flow momentum, clarity on divestment proceeds from the power grid business, and how the company redistributes them, will also play a key role in determining the stock’s trajectory.