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ABB Equity Research

HomeCompanyABB Equity Research

Date of Research – 12 January, 2016

Price – Rs. 1,030.00

About the Company

ABB Limited (“ABB” or the “Company”) was incorporated as The Hindustan Electric Company Limited in 1949 and changed its name to ABB in 2003. The Company operates in power and automation technology industry and enables utility companies and other industry customers to improve performance while lowering environmental impact. The ABB Group of companies operates in around 100 countries and employs about 130,000 people. ABB operations in India include 12 manufacturing facilities with over 10,355 employees. The Company serves it customers through an extensive countrywide presence with more than 23 marketing offices, 8 service centers, 3 logistics warehouses, 2 power & automation engineering centers and a network of over 550 channel partners.

*The Company financial year is January – December

Key Financial Figures

Standalone (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015  FY 2016
Total Income from Operations 7,610.48 7,721.99 7,733.27 8,140.27  8,648.37 
Expenses 7,268.90 7,252.07 7,177.58 7,427.77  7,901.72  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 341.58 469.92 555.69 712.50   746.65  
Depreciation 94.17 103.31 112.81       159.79   150.95  
Finance Costs 43.24 101.13 104.95          91.16   84.92  
Other income 7.26 6.99 17.28          13.04   65.27
PBT 211.43 272.47 355.21 474.59   576.05  
Tax 70.49 95.58 126.70 174.71   199.80  
Extraordinary items (2.42) –  – 
PAT (before Minority Interest and share of Associates) 140.94 179.31 228.51       299.88   376.25  

Profitability Analysis

Standalone (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Operating Profit Margin Ratio 4.49 6.09 7.19 8.75  8.63 
Net Profit Margin Ratio 1.85 2.32 2.95 3.68 4.35 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 42.38 42.38 42.38 42.38 42.38 
Preference shares issued by subsidiary – 
Reserves & Surplus 2,559.26 2,635.18 2,769.60 2,966.17 3,240.40 
Net worth (shareholders funds) 2,601.64 2,677.56 2,811.98 3,008.55 3,282.78 
Long Term Borrowings 600.00 600.00 
Current liabilities 3,893.17 4,362.09 3,967.72 3,748.06 3,790.14 
Other long term liabilities and provisions 9.60 9.88 41.95 52.22 55.99 
Total Liabilities 6,504.41 7,049.53 6,821.65 7,408.83 7,728.91 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 1,350.80 1,439.00 1,431.47 1,342.70 1,322.69 
Noncurrent Investments 16.56 16.47 16.39 16.31 16.23
Current assets 4,881.84 5,206.94 4,949.55 5,571.97 5,923.80
Long term advances and other noncurrent assets 240.22 359.19 409.01 428.89                              387.83
Deferred Tax Assets 14.99 27.93 15.23 48.96 78.36
Total assets 6,504.41 7,049.53 6,821.65 7,408.83 7,728.91 

Efficiency Analysis

  (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 13.47 17.55 19.76 19.74 19.23 
ROE / RONW 5.56 6.70 8.13 9.97 11.46 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Standalone
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Total Income from Operations (Rs. Cr.) 7,610.48 7,721.99 7,733.27 8,140.27 8,648.37 
Growth (%) 2.13 % 1.47 % 0.15 % 5.26 % 6.24 % 
PAT (Rs. Cr.) 140.90 179.31 228.51 299.88 376.25  
Growth (%) (23.72 %) 27.22 % 27.44 % 31.23 % 25.47 % 
Earnings Per Share – Basic (Rs. ) 6.65 8.46 10.78 14.15 17.76 
Earning Per Share – Diluted (Rs. ) 6.65 8.46 10.78 14.15 17.76 
Price to Earnings 105.32 95.77 127.48 88.83 84.29 

Dividend History

The Company has maintained an average dividend yield of 0.44 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. ABB’s average current ratio over the last 4 financial years has been 0.85 times.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

ABB’s average long term debt to equity ratio over the last 4 financial years has been 0.00 times as the Company operates with zero level of debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

ABB’s average interest coverage ratio over the last 4 financial years has been 17.44 times which indicates that the Company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, ABB reported a promoter holding of 75.00 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 17.09 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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