ABB back on growth track

Shrugging off profit declines witnessed over eight consecutive quarters ending December 2010, ABB kick-started the first quarter of 2011 with a nine-fold jump in net profit compared with numbers a year ago. The earnings jump though, comes from a very low base. Revenue for the quarter ending March expanded a healthy 22 per cent.

The marked improvement appears to suggest that ABB may be done with the several quarters of provisioning it made on account of exit costs in its rural electrification (RE) business. Significant traction in the power systems division's revenue aided overall performance for the quarter.

Segment contribution

A sound 50 per cent year-on-year revenue growth in its power systems division, which also houses the Rs 506-crore Bangalore Metro Rail project, was the key driver of revenue and profits. This division, in fact, witnessed segment losses a year ago, owing to exit costs from the low-margin RE business as well as cost overruns.

The power products division, which sells products such as transformers and switchgears, saw a more sedate 2 per cent growth in revenues in the March quarter over that a year ago; segment profits for this division though declined by 40 per cent, suggesting that realisations continue to be a matter of concern for the products division, coming as they do from aggressive pricing to keep up with competition.

One of ABB's relatively new divisions — discrete automation and motion, which offers products and services aimed at energy efficiency and also caters to the renewable energy sector, saw a five-fold jump in segment profits and emerged as the most profitable segment (with 12 per cent operating profit margins) among the larger divisions such as power systems and power products.

However, for the company as a whole, EBITDA margins of 5.7 per cent in the March quarter are a long way off from the 12-13 per cent margins the company enjoyed a couple of years ago.

Prolonged woes

ABB had witnessed a sharp fall in profits for almost two years up to December 2010 as a result of its decision to exit the high-volume rural electrification business midway. A drop in new orders on account of severe competition, especially from the Chinese and Korean players, also played spoil sport. Going forward, ABB's indigenisation of its 765 KV transformers and circuit breakers (which are currently imported), expected in the current year, may help face the stiff Chinese competition in this segment to some extent. Nevertheless, an aggressive pricing policy, which may be inevitable, would mean that ABB has little room to expand on profit margins.

Order intake for the latest ended quarter at Rs 1,695 crore remained flat compared with a year ago, given the lack of large orders. Bids that are pending procedural clearances could make way for improved order flows. The company's stock closed 3 per cent higher on Wednesday.

Published on May 11, 2011

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