Stock Review: ABB INDIA

   One of the leading players in the power and automation technologies, ABB India has been passing through a difficult phase for nearly a year now. Its operating margins took a big hit after the company exited from a non-core business — rural electrification — last year. High exit costs in the form of cost for foreclosure of certain contracts in the rural electrification business took a heavy toll. Execution of some strategic orders at relatively lower margins also impacted overall profitability.

FINANCIALS

The company is showing gradual signs of recovery, and reported a 17% y-o-y growth in sales for the quarter ended June 2011 (Q2 for the company as its financial year runs from January to December). However, margins continue to be under pressure as the rising cost of raw materials and labour eats into revenues.

The company operates at an EBIDTA margin of less than 5, which is quite poor when compared to its peers. But the current margins still reflect a marked improvement in the financial performance as its EBIDTA margins for 2010 were less than 2.5.

Power systems is the major business segment for the company, contributing about 28% to its total revenues. Margins for this segment, though negative, have improved significantly by more than 400 basis points y-o-y in the June quarter.

Interestingly, for the company, its low voltage products business, which contributes just 7% to its total revenues, has turned out to be its most profitable segment. Operating margins for this segment improved by more than 1,000 basis points in the quarter y-o-y.

VALUATIONS

Even as financials show a gradual recovery, it is the valuations that remain a key concern for ABB India. Quoting a price over Rs 750 per share, ABB India's stock commands a 12-month trailing priceearnings (P/E) multiple of over 140 which is quite bizarre, especially when its earning per share (EPS) for the trailing 12-month period is as low as Rs 5.5. The stock thus appears very expensive even if one considers the near-zero debt status of the company.

GROWTH DRIVERS

The company has received orders worth Rs 1,791 crore for the quarter. This takes its order backlog as of June 2011 to Rs 8,415 crore. This is 1.2 times its trailing 12-month revenues. While this does provide revenue visibility for the company in the near term, a comparative analysis shows that the y-o-y growth in the order backlog is almost flat reflecting the poor progress in the receipt of fresh orders.

The situation may, however, improve towards the end of 2012 as many orders in the power systems segment, especially from Power Grid (PGCIL) and some states are likely to be finalised and awarded. Competition, off-course is likely to be intense out here as many heavy engineering companies are keenly looking for a share of pie in these deals.

The company has also recently approved the acquisition of Punebased Baldor Electric India, which markets, designs and manufactures industrial electric motors, mechanical power transmission products, drives and generators. The acquisition is expected to add synergies to the existing product lines of ABB India.

CONCLUSION

Even as the outlook looks promising, at the current market price, ABB India's stock is expensive. We do not recommend a buy at these levels.