ABB

An improving order backlog and economic climate should help ABB do better this year

 

 

ABB's stock has been consistently doing better than the broader markets despite the company reporting weak numbers for the last four quarters. For the December 2009 quarter, too, ABB reported a decline in revenues and profits. While the stock initially slipped from Rs 808 to Rs 783 post results, it moved up and is now at Rs 823.10. The market is perhaps looking at the improving trend in economic outlook which has resulted in ABB's order backlog rising to the highest levels and, strong rise in new orders in the December quarter.

 

Poor show The December 2009 quarter saw ABB report a 13 per cent year-on-year fall in revenues to Rs 1,885 crore. ABB's decision to exit the rural electrification business was largely responsible for the 43 per cent fall in revenues at its power systems division. Sluggish economic conditions and project delays witnessed in the earlier part of the year and relatively larger share of long gestation projects in the company's order backlog have impacted revenue growth in CY2009. At the operating level though, one-time pre-closure costs arising due to the company's exit from rural electrification business impacted profitability. ABB's power systems business reported a loss before interest and tax of Rs 39 crore as against a profit of Rs 66 crore in December 2008 quarter. The power technologies business also saw profits falling sharply by 60 per cent to Rs 38.6 crore. Together, the power division accounted for half of ABB's revenues in the quarter. That apart, forex losses of Rs 12.1 crore along with higher raw material costs saw ABB's operating profits fall sharply by 44 per cent yearon-year to Rs 151 crore during the quarter.

Order inflows up With economic conditions and industrial output looking up, ABB's order inflows jumped 88 per cent year-on-year. While the low base of December 2008 quarter helped, the overall trend is improving --order inflows are up 26 per cent q-o-q. ABB's order backlog at Rs 8,479 crore at end-December 2009 also provides good revenue visibility. The government's focus on infrastructure and power sectors is positive for ABB in the long run. All these events have led analysts to up their revenue and profit estimates for ABB by 5-6 per cent and 1-3 per cent for CY10 and CY11, respectively.

Conclusion

While the improving trend in order backlog and inflows is positive, it's equally essential for ABB's revenues to start looking up, which analysts believe will happen soon. They expect ABB to report over 20 per cent growth in revenues in CY2010, and profits to rise faster. At Rs 823.10, ABB's stock trades at a PE of over 31 times its estimated earnings for CY2010. While the stock has traded at higher PE multiples of over 50 times in the past (during peak economic cycles), current valuations are not cheap and factor in most of the near-term positives.