Stock Review: ABB

It's often said there is an opportunity in every threat, but in the case of ABB, the threat has emerged from an opportunity. For long analysts believed, ABB was the best play in the power equipment sector as the company not only enjoyed technological superiority and had quality management. Given that India's power transmission and distribution (T&D) systems are likely to be overhauled, the sector is likely to see investments for several years to come. Keeping this in mind, ABB was probably a stock one could not go wrong with.

However, a report by Citi says: "Competition and oversupply has derailed the story. Quality management and technological superiority can only help so much in the face of overcapacity/competition. Industry dynamics and the business cycle generally tend to be more powerful than management ability." The company's fourth quarter results clearly establish how the company has gone wrong. ABB India's fourth quarter results in calendar 2010 were abysmal. The company's revenues stood at Rs 2,070 crore (up 10 per cent year-on-year) and above analyst estimates of Rs 1,870 crore. At 0.6 per cent, earnings before interest, taxes, depreciation and amortisation (Ebitda) margins were way below consensus estimate of five per cent and net profit fell 92 per cent annually to Rs 6.8 crore.

ABB India's performance in the fourth quarter of CY10 was impacted by provisions for exit costs on rural electrification projects, increased competition, execution headwinds and pricing pressure.

Also, orders from central utilities have also been delayed due to non-availability of land in the second half of 2010. The number of 765kV projects decided in 2010 is less than 50 per cent of 2009. Ordering from state utilities remained flat in 2010 compared to 2009. Industry and infrastructure sectors are yet to show positive growth in capital expenditure and this is likely to continue till the first half of FY12.

Analysts claim, delays in ordering by both state and central utilities have led to the Korean and Chinese suppliers quoting very aggressive prices in transformers in the second half of 2010.

Rural electrification drive and competition from Korean and Chinese manufacturers hit the company hard