ABB India Q2 FY19 review: Leveraging the right business mix

Despite the gloom in the engineering sector, ABB India has been able to report a strong set of numbers for the quarter-ended September 2018 as it benefits from some of its emerging businesses, whose products and services are in demand.

Sales grew 31 percent on a year-on-year basis. The company benefited as a result of positive traction witnessed in most segments. Barring private sector capex, which is still down, segments such as power transmission, railways, automation and digitisation witnessed strong growth.

Power grid business, for instance, grew 70 percent YoY as a result of strong execution, led by the government’s focus on building transmission and distribution infrastructure to electrify remote places.

Similarly, its robotics and motion grew in excess of 25 percent. The management's strategy to focus on certain emerging segments is yielding results now.

Businesses that are commoditised attract more competition, have contracted and the company is exiting them gradually. For instance, the board recently approved discontinuation of the engineering, procurement, and construction sub-station business, which constitutes about 4-5 percent of revenue.

The focus is gradually shifting towards advanced technologies and smart solutions. It recently showcased its electric vehicle charging solutions. Vehicles can be charged in about 8 minutes and last for 200 km.

It is working with the IIT Roorkee on developing technologies that can integrate transmission and distribution solutions for power generated on different fuel types like renewables, thermal, gas and others.

On the operating front, because of the benefits of operating leverage in the business, earnings before interest, tax, depreciation and amortisation (EBITDA) grew 45 percent. This was despite a margin contraction in some segments as a result of an increase in manufacturing and other costs. Reflecting the same, gross operating margin dipped 220 basis points to 34 percent. Nevertheless, net profit rose 30 percent to Rs 110 crore.

The management is upbeat about its future prospects driven by strong traction in segments it is operating in. During the quarter gone by, order inflows grew 22 percent YoY to Rs 2,400 crore. The company is currently seeing strong revenue visibility, with outstanding order book of close to Rs 11,400 crore, or about 1.3 times its annual revenue. At 40 times its CY19 earnings, the stock is richly valued, particularly in light of the 13 percent return on equity.

Follow @jitendra1929