BUMPY RIDE AHEAD

There are no immediate growth prospects for ABB, considering the continued cost pressure and rising input prices. Investors can reduce their stake in it and wait for a few quarters

ABB has reported an average decline of 34.5% in profits for the past four quarters ended December 2009. The performance has taken a further sharp blow in the March 2010 quarter, with profits falling by 92%. Despite the below par financial performance, the stock has continued to move up and is still trading close to its 52-week high. Further, its price-earnings ratio has moved up from about 20 times in April 2009 to about 65 times now, based on results till March 2010, making it an expensive proposition. While the company may manage to arrest the decline in its profits in the coming quarters, it will still take some time for it to move up to the growth rate implicit in the existing PE. The company will also be among the most affected due to the rising interest rate and hardening commodity prices as it may impact its corporate investments, which has still not seen a clear revival. Investors may reduce their stake in the stock and consider re-entering only if the company managed to improve its financial performance in the next 2-3 quarters. 

BUSINESS & FINANCIALS: 
ABB India is a subsidiary of ABB, which is one of the leading engineering companies in the world. In India, its product portfolio is somewhat limited and is structured around four major segments, such as power products, power systems, automation products and process automation. The first two provide products, such as transformers, switchgears and so on and services including instrumentation for smooth operation for power transmission and distributions. The automation segments provide products and solutions for efficient operations of all major industries such as oil and gas, chemicals, pharma and so on. Products in the segment include motors, instrumentation, power electronics and robotics systems. 
    The company's financial performance has been disappointing mainly due to its exit from a key business segment, delays in some of the projects and fluctuation in input prices. The company posted a marginal sales growth of 4.5% for the quarter ended March 2010 and profits decline of as much as 93%. The performance is worse than that for the previous four quarters, when sales and profits declined by 9% and 33%, respectively. Profits decline is much sharper due to a 10% increase in raw material cost. Profitability was also affected with loss of Rs 82 core, more than double the previous year, due to foreign exchange variation. The company, which has a significant integration with the global market, importing nearly 40% of its raw material, is susceptible to foreign currency fluctuation unless it follows an active hedging policy. 
OUTLOOK: It is still uncertain times for the company, even though the capital goods sector has witnessing a sufficient traction. The company can consider itself unlucky that its exit from rural electrification business preceded the global meltdown and sharp decline in corporate investment. The company's order intake, a critical indicator for the prospects of a capital goods company,continues to be lower than the order intake before its exit from rural business. It will have to surpass that level to signal better prospects. On the positive side, its orders are more easily executable, and with its own expertise, the company may manage to accelerate the growth in sales, as soon as the investment demand in the economy gains momentum. However, considering the continued cost pressure with rising commodity prices, things still appear tough for the company and there may not be any immediate prospects for the company. Investors can reduce their stake and wait for a few quarters, before considering the stock again. 
    ashish agrawal@timesgroup.com