A leading player in the heavy electrical equipment industry, ABB India’s verticals include electrification, motion, process automation and robotic automation. The company once again delivered a stellar performance in Q2CY22, with strong order inflow and committed execution with the demand pick-up across verticals. But the verdict from analysts has been mixed.

Quick Takes

• Revenue in Q2CY22 grew 44% YoY to Rs 2,077.8 crore, with higher price realization and strong execution in short-cycle orders
• Net profit increased 115% YoY to Rs 147 crore in Q2CY22, with higher contribution from exports and services
• Revenue growth was supported by growth across verticals namely motion (+66% YoY), electrification (+45% YoY) and industrial automation (+39% YoY)
• The company received fresh orders worth Rs 2,767 crore in Q2CY22, a growth of 64% over Q2CY21.
• The cumulative order book of ABB India stands at Rs 5,995 crore at the close of Q2CY22
• Most analysts across brokerage houses hold the view that stock is currently overvalued and reached its peak price

Diversification into user industries drives performance

ABB India’s diversification into various user industries has made the business less prone to cyclicality. The management expects both greenfield capex and opex to pick up pace in core sectors like steel, cement and chemicals. Demand pickup for robotics and automation is expected from F&B, logistics, electronics, electrification and automotive sectors.

Speaking on the results, the Managing Director, Sanjeev Sharma said “We are well positioned to work with customers and partners for the digitalization and decarbonization of Indian industries. After a successful start to the first half, we expect to continue leveraging our local and global strengths for growth in the second half of 2022.”

Revenues grew 44% YoY to Rs 2,077.8 crore, led by double-digit growth across business verticals except for robotics, which was impacted due to shortage of semiconductors. Gross margins rose to 39% in Q2CY22 from 36.1% in Q2CY21, driven by higher contributions from exports and services, and price hikes across product categories. This led to EBITDA margin expansion to 9.7% as EBITDA grew 110% YoY to Rs 190 crore.

Net profits grew 115% YoY to Rs 140.3 crore. Net profit margin improved to 9.5% during Q2CY22 as against 6.3% in Q2CY21 mainly due to high revenue growth over the covid-impacted quarter of Q2CY21,  improved sales mix and tight control over material costs.

Some factors that negatively impacted results were the 63% YoY growth in expenses due to higher freight costs. Forex and commodity impact of Rs 63 crore, primarily in the electrification (Rs 18 crore) and mobility (Rs 45 crore) verticals also were unfavourable factors in this quarter.

Order inflow in Q2CY22 was up 64% YoY supported by short-cycle orders, leading to order book value of around Rs 6,000 crore. Two verticals namely electrification and motion generated about 80% of revenues.

The Electrification vertical includes products from substations to many of the electrical components in power generation and distribution, both on the HT (high tension) and LT (low tension) side. The motion vertical includes a range of electrical motors, generators, drives and services, as well as mechanical power transmission products.

In the motion segment, revenues grew 66% YoY on account of higher growth in HV (high voltage) motors business and significant jump in exports. Penetration into new geographies in exports and in tier-1 and tier-2 cities aided growth of this vertical. Order intake grew 42% YoY as ABB bagged large traction convertor orders and package orders for motors & drives from Indian Railways.

Revenues in industrial automation grew 39% YoY to Rs 370.4 crore, of which 28% was from the service segment. Order intake grew 98% YoY to Rs 720 crore due to orders from steel, paint and cement sectors. Segment margins expanded to 10.8% due to better sales mix and higher capacity utilization.

Unavailability of semiconductors caused revenues in the robotic automation vertical to decline 46% YoY. Order intake grew by 8% YoY to Rs 700 crore led by paint and automotive industries and higher service orders. Higher proportion of services revenue led segmental margin to expand to 12.5%.

Order inflow for Q2CY22 grew 64% YoY to Rs 2,760 crore, led by growth of 98% YoY in industrial automation, 68% YoY in electrification and 42% YoY in motion business verticals. Exports and services orders grew 45% and 14% YoY, respectively. Order inflow has been strong from both base and large orders, due to the company’s focus on multiple market segments, increased penetration in tier 3-5 cities, increased product portfolio and improved channel partner network.

Indian Railways and Metro Rail Corporations are among the largest clients of ABB. Within the electrification vertical, it supplies rolling stock components and electrification products like mid voltage switchgear to the sector. Within motion, it supplies traction convertors, battery chargers, traction motors, etc.

The management identified commodity price inflation and tightening of monetary policy globally and in India, as key risks to its business. As various economic factors impact the forex situation, especially with USD strengthening over INR, the company hedges all of its export and import forex exposures when booked.

In a bid to ramp up exports, the group mandates India to be used as a permanent base to cater to the Middle East and Americas. Supporting this will be ongoing new capacity addition across all of ABB’s four plants in India, which are expected to be completed and inaugurated in H2CY22.

ABB’s cash position continues to remain strong at Rs 2,787 crore at the end of Q2CY22 and can be utilised to expand capacities. There are opportunities to grow organically as well as inorganically. The board of directors of the company, at its meeting held in August, had approved the sale of investment in equity shares of its wholly owned subsidiary, Turbocharging Industries and Services India Private Limited to Turbo Systems Switzerland Limited for a consideration of Rs 355 crores. This transaction is expected to be completed by September upon execution of necessary agreements, a company statement said.

ABB india lags peers in Q2CY22 performance

Despite a good performance from most verticals, ABB lags peers in this quarter. This quarter saw many of the heavy electrical equipment players report good numbers due to pick up in economic activity as the pandemic waned and Q2CY22 was the first quarter of complete normal operations across industries.

Surprisingly it was the state owned BHEL which registered the highest YoY growth in revenues this quarter followed by CG Power and Thermax. On YoY growth in profit, CG Power takes the pole position followed by Siemens and ABB India. With the push on infrastructure and higher capex spends across heavy industries, this sector has delivered above average returns to investors and is likely to continue for the next few quarters. Whether ABB India improves its performance among peers is something to watch for in the next quarter.

ABB India is expected to be one of the major beneficiaries of increasing investments in automation, digitisation, productivity and efficiency. The Centre’s strong capex push in the areas of renewables, water & wastewater, manufacturing, infrastructure, warehouse & logistics, electrical vehicles, transport infrastructure etc., augurs well for ABB due to its highly diversified product portfolio in these industries.

Given its strong network, wide product range and access to its parent’s technology, it would obtain a reasonable number of orders from the industries it caters to. It is a strong player in digitisation and automation. As core industries like steel, cement and automobile plan higher capex spends, long-cycle orders inflow will gather pace. It has strengthened its short-cycle portfolio via deeper and wider penetration in key market areas and a cost-efficient supply chain.

While profitability improved across verticals, continued fluctuating commodity prices and currency volatility remain key areas of concern. Another matter of concern raised by analysts is the larger share of base or short cycle orders as compared to large orders, which could impact profitability going forward.