Capital goods major ABB India announced its results for the September quarter on Friday. The announcement was followed by an earnings call.

The company’s Q3 FY22 revenue grew by 19 per cent year-on-year to ₹2,119.74 crore which was in line with the Bloomberg consensus estimate. The company’s EBITDA grew stronger by around 31 per cent on a y-o-y basis driven by revenue growth and operating leverage. It should be noted that the company reports earnings on a calendar year basis.

Segment-wise performance

The company derives its revenue from four segments—electrification (40 per cent), motion (40 per cent), process automation (16 per cent) and robotics and discrete automation (3 per cent).

Electrification and motion stood as the major contributors as they grew nearly 25 per cent each backed by strong backlog execution and better penetration to tier-2 and tier-3 cities as per management. The revenue from process automation and robotics remained flat mainly on account of supply chain disruptions.

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On the EBITDA front, the company has seen margin expansion from 9.4 per cent to around 12 per cent y-o-y mainly aided by electrification segment.

Despite fluctuations in commodity prices and forex volatility to the tune of ₹30 crore (net), the management mentioned in the conference call that the company is well placed to pass them to customers. Net profit margin (adjusted for exceptional gains) has also seen a consequent increase from around 6.7 per cent to 8 per cent y-o-y.

Outlook

The company has an order backlog of about ₹ 6,519 crore, while it received orders worth ₹2,634 crore during Q3 FY22 which can provide a good revenue visibility to the company as per the management.

Process automation is the major contributor (39 per cent) to the overall orderbook with orders coming mainly from steel, cement, oil and gas majors, while motion business has an orderbook worth ₹2,273 crore.

According to the management, the order backlog of motion segment consists of orders of system drives and the traction converters, which have longer duration of deliverability and ultimately takes time for converting orders into revenues.

Hence, we might see lumpy trend in sales in this segment. Electrification and robotics have orders worth ₹1,386 crore and ₹165 crore, respectively.

Valuation

In the last five years, ABB India’s revenue growth has been around 7 per cent on a CAGR basis, while its net profit has been around 24 per cent.

The growth in earnings has been driven by net margin expansion from around 3.6 per cent five years back to to 7.5 per cent now.

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The management has guided PBT margin of around 10 per cent going forward, which implies that there is not much scope for any significant margin expansion from current levels of 7.5 per cent (on post tax basis).

With less room for further upside in margin, the stock price at around 76 times its calendar year 2023 earnings seem to be quite expensive. Hence, investors should approach the stock cautiously. Future interest rate hikes may also pose speed bumps in growth for capital goods stocks.

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