The S&P BSE Capital Goods Index has gained 138 per cent since the March 2020 market low. Closely on the heels of this, engineering and capital goods company, ABB India has seen its stock rise 106 per cent since March 2020 and 135 per cent since its low of ₹726 in May 2020.

There has been a sharp recovery in the financial performance of ABB India from the start of 2021. The closure of business activity and the economic slowdown post the Covid-19 outbreak had dented ABB India’s revenue and profitability in first half of CY 2020.

At ₹1,708 per share, the ABB India stock trades at a trailing twelve-month price to earnings (TTM P/E) multiple of 103 times. MNC peers listed in India such as Siemens and GE T&D India are trading at TTM P/E multiples of 82 and 58 times respectively.

The pick-up in overall economic activity and strong demand from high-growth segments such as data centers, renewable energy, electronics and food and beverage among others should drive ABB India’s growth in the coming years. Demand from segments such as power distribution, railways and metro and water and waste management will be backed by government initiatives in these areas.

While ABB India may be well-placed to ride the cyclical recovery wave, its pricey stock valuations call for caution. Investors can, therefore, consider booking profit in the stock. While the company’s existing order backlog of ₹4,583 crore as of June-end 2021 offers some revenue visibility, it is not substantially higher from that in the past. While this along with higher price realisations in certain segments may drive future revenue growth, a rise in commodity prices may impose some pressure on operating profit margins.

With the stock price having run up sharply, unless the earnings grow at an accelerated pace for the next few years, scope for futher stock upside appears limited. Between 2017 and 2019, ABB India’s revenue from continued operations rose at a CAGR of 7.9 per cent to ₹7,315 crore and operating profit fell 6.8 per cent to ₹441 crore. Aided by lower fixed costs, the net profit (including the one-time impact of exceptional cost of ₹70 crore) rose 16 per cent (CAGR) to ₹302 crore during this period. The EBITDA margins came down from 9.7 per cent in 2017 to 7.3 per cent in 2019. The performance in 2020 was hurt by Covid-induced lockdowns.

Business

ABB India is a 75 per cent subsidiary of Swedish-Swiss multi-national company, ABB. Its business comprises products and system solutions relating to electrification (39 per cent of revenue), motion (36 per cent), process automation (21 per cent), and robotics and discrete automation (4 per cent). generating revenue of ₹3,045 crore in the Jan – Jun 2021 period. ABB reports its financials on a calendar year basis. In terms of profitability, these segments contributed 36 per cent, 46 per cent, 14 per cent and 4 per cent of the company’s PBIT (profit before interest and tax) of ₹224 crore during the same period.

ABB India’s electrification segment provides power protection products, switchgears, wiring accessories and cabling. The motion segment provides motors, generators and drives for automatic applications. The process automation (erstwhile industrial automation) products which include control systems find use in industrial processes in sectors including oil and gas, power, chemicals and pharmaceuticals.

ABB India’s robotic solutions find applications in electronics, automotive, food and beverage and FMCG industries. The company set up a new robotics facility in Bengaluru in 2020. Given their low penetration, robotics and artificial intelligence will be high-growth areas for the company in terms of revenue and profitability.

Financials

In 2020, the Covid-induced lockdowns resulting in factory closures, logistical challenges and a tepid demand hurt revenue which declined 20.4 per cent to₹5,821 crore compared to year ago. This, despite the fall in operating expenses, dented operating profit, and along with exceptional one-off items impacted the net profit. ABB India reported a y-o-y 65 per cent fall in operating profit to ₹155 crore and 54 per cent fall in net profit to ₹172 crore (adjusted for one-off exceptional items) in 2020.

ABB India registered a strong performance in the latest June 2021 quarter – 45 per cent year-on-year increase in revenue to ₹1,425 crore, operating profit of ₹66 crore against loss of under ₹1 crore a year ago and 306 per cent jump in net profit to ₹68 crore. This was driven by strong revenue growth across business segments helped by a strong execution of backlog orders, cost optimisation efforts and better capacity utilisation. The low base of last year too helped. Only continuing business operation numbers have been considered.

ABB India has a strong balance sheet. The company had zero debt and cash balance of ₹2,364 crore (₹1,498 crore last year ) as of June-end 2021.

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