Stock Review: ABB

Electrical equipment manufacturer ABB again reported dismal quarterly results for the December 2010 quarter, with profits dropping 94%. The company faced tough conditions amid low order flows, rising input prices and foreign exchange losses. The only silver lining was the improved execution speed. Much now depends on the company's ability to capitalise on local sourcing – a move that would bring down costs and improve its standing compared to competitors.

The sharp fall in net profits to . 6 crore came on the back of heavy provisioning made for the rural electrification projects the company exited. The company also reported a markto-market loss on foreign exchange derivative contracts worth . 21.7 crore against a gain of . 1 crore in Q4 last year.

Three of its five segments reported lower operating margins compared to the year-ago period due to higher raw material costs. As a percentage of sales, raw material costs increased by around 600 basis points both year-onyear and sequentially. Raw materials formed 82% of net sales for the quarter to December.

Low order inflow is another concern for the company. Fresh orders of . 1,394.2 crore in the December quarter was 41% lower than the year-ago period and 23% lower than its 18-quarter average of . 1,800 crore. Increased competition as well as postponement of various projects was the key reason for this drop.

The only positive in the results was a 9% increase in the company's revenues to . 2,050 crore, hinting at an improved execution speed. Falling revenues in the last couple of quarters had raised concerns about the company's execution ability.

Its power systems and low-voltage products segments, which together contribute 34% to the company's total revenues, curtailed losses compared to the year-ago period, for the first time in the last five quarters. Its outstanding order book at . 8,436.2 crore, stagnant since the end of 2009, gives revenue visibility for the next 16 months.

The promoters had made an open offer in May 2010, which raised their stake to 75% from 52%. Some MNC subsidiaries such as Atlas Copco and Goodyear India are planning to delist from stock exchanges. It is to be seen if ABB will also consider the option.