High-growth segments, Tier-II, -III cities to drive long-term gains for ABB

ABB reported a weak quarter.

Revenue was at Rs 2,910 crore, up only 5 per cent year-on-year (Y-o-Y), with operating profit at Rs 540 crore, up 23 per cent and net profit at Rs 440 crore.

Photograph: ABenoit Tessier/Reuters

Order inflow was at Rs 3,340 crore, up 11 per cent Y-o-Y but down 3 per cent quarter-on-quarter (Q-o-Q), taking the order book to Rs 10,000 crore.

Gross margin was 43.4 per cent, up 670 basis points (bps) Y-o-Y.

The operating profit margin was 18.6 per cent, up 271 bps and down 61 bps Q-o-Q, around the level of expectation.

Some large orders were post­poned and gover­nment capex has seen delays.

The robotics and motion business revenue stood at Rs 1,080 crore (up 10 per cent Y-o-Y, below expec­tations).

The electrification products business was at Rs 1,150 crore (up 11 per cent Y-o-Y, marginally below expe­ctations and process automation was at Rs 600 crore (down 12 per cent Y-o-Y).

For the nine months of CY24, ABB reported revenue growth of 15 per cent Y-o-Y with an operating profit growth of 54 per cent and net profit growth of 49 per cent.

Near-term revenue may see moderation.

ABB is expanding its reach to Tier II and smaller towns where there’s unfulfilled demand.

Demand from segments like industrial, data centres, railways & metros, renewables, waste & wastewater, automotive, power distribution, warehouse & logistics, and building and infra remain strong.

Cost of materials decreased 670 bps Y-o-Y on account of improved revenue mix, better margin orders, and price revisions.

Services and export-based revenue also helped margin improvement.

The lower-than-expected order inflows were a concern.

The order mix is changing towards a higher share of long-gestation, large-sized orders.

Margin performance remained strong Y-o-Y, with improved pricing and lower raw material cost.

Order inflow was hit by decision delays from the private sector and by high bases.

ABB’s order mix has changed over the past few quarters, with more large order inflows (over Rs 500 crore) coming from high-gro­wth segments.

Larger orders are longer gestation. Hence, slowdown in revenue growth is somewhat attrib­utable to change in mix.

ABB caters to diverse clients across 23 market segments.

High-growth segments, such as data centres, railways, and electronics, are growing at over 20 per cent.

Moderate growth of 10-12 per cent is seen in water, power transmission and distribution (T&D), renewable, automobiles, and buildings/infra.

There’s lower growth across base industries, where ABB has a large exposure with 45-50 per cent of business.

The motion segment’s order inflows were hit by pricing pressure in low tension (LT) motors and muted demand from cement and steel.

But price erosion in this segment may have bottomed out. The process automation segment saw inflow and revenue declines.

ABB expects to gain from the expansion of city gas distrib­ution, blending projects, debott­lenecking of existing refineries, pharma sector expansion, and paint segment expansion.

But inflows rema­ined weak from the core sector.

The man­agement claims that ABB can expand its capacity to meet demand without incurring heavy capex.

But geopolitical uncertainty may affect business in the near term.

Eventually, order inflows are expected to move up beyond Rs 3,500 crore run-rate each quarter.

ABB is expanding its instrumentation portfolio to cater to the international market where the parent has a presence.

ABB is already catering to the Indian and Southeast Asian markets and looks to expand to West Asia and Africa.

ABB is highly valued at 70 times price-to-earn­ings ratio for CY25.

The weak results and near-term flattening are disappoin­tm­ents.

But it could benefit from its diver­sified clientele and the momentum in high-growth client segments and deeper penetration into Tier-II and -III cities.

Hence, many analysts continue to have buy recommendations.

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