Skip to main content

ABB: Buy


Strength in profit margins

Strong growth in automation

Backing by parent

Robust order inflows, continuing support from the parent, strong financials and a near zero debt status buttress the premium valuations commanded by the stock.




Mr Biplab Mazumder, MD, ABB India

Vidya Bala

ABB, a dual play on infrastructure and capital spending, continues to be among the superior investment options in the sector that has demonstrated consistency in terms of order book as well as execution capabilities.

ABB's revenue growth for the first quarter of CY 2008 failed to keep pace with previous quarters but this appears to be an abnormality. Strong growth in net profit and expanding profit margin indicates continuing pricing power.

Investments in the stock can be considered with a three-year perspective. At the current market price of Rs 1126 the stock trades at 26 times its expected earnings for CY09.

Robust order flow, both in the power segment and in automation, continuing support from the parent company, strong financials and a near-zero debt status underpin the premium valuations commanded by the stock. The premium to closest peer, Siemens, also appears justified given the consistent growth demonstrated by ABB even as the former has witnessed earnings turbulence.

Investors may, however, have to temper their return expectations as the power and capital goods sectors have already witnessed significant re-rating over the past couple of years, aided by a booming stock market.

A diversified play



With capex plan of $100 million, the company remains focussed on its power business.

ABB has a wider business profile compared to peers who are mostly focused on the power equipment space. The company is engaged in manufacturing and providing product and project solutions in the power and automation segments.

While ABB has traditionally received a major share of its revenues from the power systems and products division, process automation and automation products have seen stronger growth recently. Capex spending in sectors such as oil and gas, cement and steel appear to be driving growth in the automation division.

For instance, ABB could have a huge addressable market for products such as control and data acquisition systems, in view of the large number of oil exploration blocks being awarded under the New Exploration Licensing Policy.

Similarly ABB's niche capabilities in offering integrated electrical and automation systems has enabled it to bag orders from the Delhi Metro Rail Corporation as well as from cement and steel players such as Grasim and Jindal Group.

With few players in the country boasting of similar capabilities, ABB is likely to be among the major beneficiaries of green-field as well as replacement capex in these industries.

ABB witnessed a slowdown in its power segment growth last quarter. While the order book continues to remain strong, the increase in the number of projects rather than products (which have a shorter execution cycle) appears to be the reason for moderation in revenue flows over the quarter.

That the company remains focused on its power business is evident from the capex of $100 million that has once again been planned primarily for its power and industrial transformers.

The company had also recently upgraded its production facility to manufacture 765 kV transformers and also commissioned a new plant to make a foray into small transformers.

While competition in this segment could be intense, ABB, with its superior technology, may not find it difficult to penetrate the market.

The company has, in recent times, managed to win key orders from Power Grid Corporation (PGCIL). We consider this development to be significant, given the massive capex plans of over Rs 8,000 crore planned by PGCIL for FY09 alone.

While lack of funding was a concern on the capex plans of PGCIL, the recent signing of agreements with international agencies has brightened the prospects that order flow from the PSU may pick up. We expect ABB to be a key beneficiary of these order flows as the company has already proved its execution capabilities in PGCIL's projects.

Access to markets


ABB India is relatively insulated from significant risks even in the event of a domestic slowdown, as the Indian unit is also catering to demand (for power sub stations) in markets such as Malaysia, Vietnam and Indonesia. Further, with the patronage of its parent company, ABB India may well have easier and wider access to a number of addressable markets when compared to domestic infrastructure players. The parent company has been indicating its plan to use the Indian unit as global outsourcing hub.

However, this is not apparent from the revenues as yet, as exports have contributed only 10 per cent. Nevertheless, the parent's backing provides the company better positioning to tackle a domestic slowdown.

Financials

ABB's financials continue to remain strong. Negligible debt and good cash coffers give it ample opportunities to add leverage to expand or acquire capacity.

Decrease in the proportion of raw materials cost to sales has led to improvement in operating profit margins over several quarters now, despite the key raw materials witnessing steep price hikes.

Any constraints on pricing power in future, amidst spiralling raw material prices pose a risk to now improving margins

Popular posts from this blog

Bio-fuel has top investors powered up

23RD ,JUNE India's fortune-hunters believe their new-found love for biofuel will pay off. India's well-known investors who are known for their Midas touch have spotted an opportunity in bio-fuel, betting big on ethanol, bio-mass and even bio-fuel equipment makers in India and other parts of the globe. Billionaires Rakesh Jhunjhunwala, C Sivasankaran, Vinod Khosla, founder of Sun Microsystems, and Nemish Shah, the media-shy joint partner of Enam Financial Services, are investing in bio-fuel makers quietly, expecting that bio-fuel will have a big play in the coming years as the world looks for a viable alternative to the fast depleting oil reserves. Jhunjhunwala, who is known for his ability to spot a multi-bagger at a very early stage, recently invested in Hyderabad-based bio-fuel firm Nandan Biometrics.He is also a 10 per cent stakeholder in Praj Industries, which is a bio-fuel technology provider…

up to 8,500% return in 5 years! Investors made a killing in these 30 smallcap stocks

U By Rahul Oberoi, ETMarkets.com | Updated: Dec 01, 2017, 04.06 PM IST Post a Comment
Efficiency pays in the long run. Among the top smallcap plays on Dalal Street, 30 companies with stable return on equity (RoE) and return on capital employed (RoCE) have surged up to 8,500 per cent over the past five years.

All these companies had a debt-to-equity ratio of less than 1 and have been maintaining RoE and RoCE of over 20 per cent since 2012-13.

Avanti Feeds emerged the chart topper, with an 8,527 per cent gain to Rs 2,596.60 as of November 28 from Rs 30.10 ..


ovember 28 from Rs 30.10 on November 27, 2012. The company’s return on equity for FY17, FY16, FY15, FY14 and FY13 stood at 42.65 per cent, 46.21 per cent, 52.41 per cent, 45.79 per cent and 27.60 per cent, respectively. Avanti also managed to achieve a return on capital employed of over 50 per cent in last four years. Its RoCE stood at 28.59 per cent inRoE measures net income earned for every rupee of shareholder funds, while…

5 dark-horse picks

Kwadrat/shutterstock.com Kwadrat/shutterstock.com
If you are a conservative investor, using the mutual fund route is the best way to invest in stocks. But if you are game for some excitement, you might want to dabble directly in stocks, especially small-cap stocks. Stocks that are smaller in size, in terms of market capitalisation, carry higher risk. The reasons are — one, lower traded volume increases price volatility, two, information is usually scarce on these companies, three, business risk is higher since many of these companies are dependent on a single product and four, governance risk is also higher in these stocks. That said, small-cap stocks have the capacity to deliver far greater returns when compared to large-cap stocks. Sample this: there were 16 stocks with market cap more than ₹50,000 crore in January 2009. These stocks delivered an average return of 138 per cent in the last eight years but 4 out of every 10 stocks in this group delivered negative returns. On the ot…