Stock up over 10% reacting to strong order inflows
If the December quarter was the precursor to improvements in order inflows for ABB India, the March quarter results, announced on Monday, demonstrated the point. Order inflows increased by 28 per cent year-on-year to Rs 2,342 crore, taking the order book to Rs 12,023 crore. The government’s infrastructure spends have largely helped order inflows to stay robust. This has also helped maintain execution at a decent pace. The current operating efficiency (plant utilisation) has risen to 75–80 per cent from less than 70 per cent a year ago. This reflected positively on the March quarter or Q1 results as ABB’s accounting year is January-December. Revenues grew nine per cent year-on-year to Rs 2,318 crore, and much of the growth came from the robotics and power grid segments, in which revenues grew by 11-13 per cent year-on-year.
Net profit growth was 3.5 per cent (Rs 88 crore) and operating profit margin declined from 8.4 per cent a year ago to 7.3 per cent in the March quarter. A lot of this may be attributed to the new accounting norms (Ind AS) in Q1. But, it is equally important to note that short-cycle businesses accounting for a large chunk of the orders. While the company did not quantify the impact of the adoption of Ind AS adoption on its margins, stating that it could change from quarter to quarter, it mentioned that 50-60 per cent of its revenues come from short- to medium-cycle orders. While a short-cycle order has an execution timeframe of 12 months or less, medium-cycle orders could take 12-15 months to be completed. Large-cycle projects have about 36 months’ execution timeframe.
While the Ebit (earnings before interest and tax) margins took a beating across all segments, with the slippage being the least in the power grid segment, the Street isn’t taking this negatively as in some key pockets such as railways, power grid, and industrial automation, newer orders have a short execution period. With the large-cycle orders accounting for at 20-25 per cent of revenues, investors should expect margins to remain in a tight range.
Analysts say as long as the core power grid segment (37 per cent of revenues) remains intact and the order book continuously witnesses an expansion, operating profit margins may once again readjust to the 8-9 per cent range, though it could take another year to 15 months to happen. Renu Baid of IIFL says if ABB India delivers 14 per cent growth in revenues and 30 per cent net profit growth in CY17, maintaining margins at 8 per cent, that is positive. “Also, if ABB maintains the order momentum despite the macros not turning fully favourable yet, that is good too,” she adds.
The other positive is the sharp improvement in exports. The share of exports in product sales doubled to 15 per cent in Q1 and for the services segment exports grew by 40 per cent year-on-year. ABB India is confident that with its Swedish parent wanting to make India as its export hub, the relevance of exports could increase.
All this augurs well for ABB India; except that its valuations are still prohibitive (40x CY17 earnings). The year-to-date gains of 33 per cent could limit further gains on the stock. Long-term investors could wait for a better entry point.