Rich valuations aside, ABB India`s performance mirrors stress in economy

ABB India Ltd’s shares stood firm at ₹1,394.55 on Monday even as the rest of the market was in turmoil. The order inflows into the Swiss multinational’s Indian arm in the June quarter seemed to have impressed the Street.

At ₹1,989 crore, orders rose 23% from the year-ago period. The order book has increased a tad to ₹4,656 crore.

But this provides less than a year’s revenue visibility for ABB India. “Lower visibility is mainly due to a short-cycle nature of the business," said Arafat Saiyed, assistant vice president (research) at Reliance Securities Ltd.

Additionally, the stock’s rich valuation in an environment of underlying risks to growth is a concern. Analysts’ consensus pegs the forward price-earnings ratio between 60 and 65 times the estimated calendar year earnings. However, the question is whether there would be commensurate earnings growth in the next two years.

The June quarter’s revenue growth of 4% reflects macroeconomic stress. Although some segments, such as electrification products, measured up with double-digit growth, industrial automation was flat. Robotics and Motion division’s revenue growth was dented by a deceleration in the auto sector’s capital expenditure. Of course, the demerged power grids business is considered as “discontinued operations" and, hence, accounted for separately.

That said, IIFL Holdings Ltd said: “Given uncertainties in the credit environment, ABB has been exercising a cautious approach and preferred to go slow on dispatches maintaining its philosophy of cash over revenue."

Indeed, Ebitda (earnings before interest, tax, depreciation, and amortization) margin expanded by 180 basis points to 7.8%. However, this fell short of the Street’s forecast of 8.3%. A jump in other expenses on account of a high share of project revenue resulted in the margin miss. Higher profitability, though, was good in these challenging times.

Lower interest and depreciation costs lifted net profit by 57% in the June quarter from a year ago, though this was below what most analysts had penciled in.

On the positive side, ABB India has recently exited its low-margin solar business. That could aid margin growth next year. “It will lead to improved margins in the electrification segment’s profitability as falling inverter prices have squeezed margins," said analysts at JM Financial Institutional Securities Ltd in a note to clients.

Project execution, of course, needs to be watched. To be sure, the pain of long-gestation projects and cost overruns are behind ABB India. Though, the underlying liquidity issues in the domestic market are a worry. Working capital needs rose during the quarter and may impact profit expansion.

Given these odds, ABB India’s rich valuation will cap upsides in the near term.

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