Asea Brown Boveri: Buy

Recommendation: Buy

Anup Menon

TRADING at around Rs 200, the stock of Asea Brown Boveri (ABB) is a good investment option for investors with a moderate risk profile.

The stock trades at a price earnings multiple of around 22 times its latest annualised earnings per share. The stock was last recommended to investors in August 2001 when it was trading at Rs 240. The decline in market price was largely in line with market movements over the last couple of months. The company's earnings performance for the first three quarters of 2001 was fairly impressive.

Though the near-term outlook for the infrastructure industry is not all that impressive, there may not be further deterioration in fundamentals. In fact, ABB's performance is likely to remain stable. A good order book position, coupled with measures taken to improve operational efficiency should help the company keep its earnings stream stable over the next few quarters. Against this backdrop, investors can stay invested and consider accumulating the stock. Investors should also consider booking profits in the Rs 280-290 levels.

Earnings performance: The company's earnings performance for the three quarters ended September 2001 was fairly impressive. Sales revenues rose around 28 per cent to Rs 660.4 crore, compared to the corresponding previous period. Post-tax earnings also improved around 17 per cent to Rs 29.10 crore, compared to the previous year. On an equity base of Rs 41.41 crore, the annualised earnings per share work out to Rs 9.

Prospects: The prospects for the company in the near term look stable. But from the medium-to-long-term perspective, an improvement in the economy will hold the key to the company's future.

The infrastructure segment has been going through a lean phase with little spending. This has had an adverse impact on most players, including ABB. However, on a relative basis, ABB's performance has been reasonably good. The growth in topline indicates the same. Given the state of the sector, large orders seem unlikely over the next couple of quarters. But for now, the backlog of orders should take care of the company's earnings stream.

ABB also plans to leverage on its technological capabilities in the transmission and distributions segment. This apart, it also plans to provide solutions and engage in process automation. Given the economic slowdown, it expects growth from the solutions and process automation business. But revenues from this segment may take some time before it starts contributing to the bottomline.

In a strategic move designed to improve the company's operational efficiency, ABB decided to merge its four subsidiaries in India. This should lead to more efficient allocation of resources within the respective divisions, thereby leading to some savings in terms of costs.

Overall, at present, the company is on firm ground. An improvement in the economy will boost its prospects.