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ABB India’s clean-up act takes a toll on its December quarter margins


ABB India Ltd’s stock, which had a volatile trajectory in 2019, is now close to its 52-week low with investors seemingly tired waiting for the fruits of restructuring.

It is more than a year since the capital goods company’s Swiss-Swedish parent exited the low-margin and low-growth power grids business at the global level. On home ground, the power grids business was beleaguered with weak ordering, weak profit margins and huge working capital needs, all of which took a toll on its profitability. In July, the parent firm even exited the solar business.

Yet, ABB India continues to spring unpleasant surprises. After it raised hopes of improvement in profitability in the last three consecutive quarters, the December quarter (Q4 CY19) performance came as a bolt from the blue. Revenue growth was flat year-on-year (y-o-y) and Ebitda (earnings before interest, tax, depreciation and amortization) sank by 36%. Subdued revenue and weak operating leverage took a toll on profitability. As a result, Ebitda margin contracted by about 400 basis points to 7.1%.

Graphic by Santosh Sharma/Mint
Graphic by Santosh Sharma/Mint

What went wrong? This time, the clean-up act was in the industrial automation segment. A 20% y-o-y drop in the segment’s revenue dragged Ebit margin down from 14.1% to 0.2%. Margins were adversely affected because of losses and provisions made on legacy projects.

“For the full year 2019, the segment’s Ebit margin dipped to 6.2% versus 10.5-12.3% over the past four years, on costs related to legacy orders,” said a Motilal Oswal Financial Services Ltd report.

The management did not quantify provisions made on orders in the segment, but it did say that potential losses on projects have been covered. “While this is unlikely to be repeated in CY20, we have treated it as a business loss and not considered it a one-off for CY20,” said a report by Jefferies India Pvt. Ltd.

The other segments such as discrete automation, robotics and motion, and electrification products, put up a decent show.

Also, ABB India’s business is closely linked to capital expenditure and is thus bearing the brunt of the slowdown. Order flow was down 15% in the quarter, while the overall order book of 4,123 crore is barely 0.6 time its annual revenue.

Solace comes from the fact that the Indian entity is being nurtured as an export hub by its parent. Hence, global recovery should be a strong tailwind for revenue traction even for ABB India. The stock trades at rich valuations of 50 times one-year forward estimated earnings. However, investors would be displeased if the clean-up act by way of write-offs and provisions continues to play spoilsport with the earnings trajectory.

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