ABB India Ltd’s September quarter earnings were better than expected on several counts. Thanks to a more favorable product and revenue mix, improved utilization levels and price realization, and better priced older orders, operating margin expanded 580 basis points (bps) year over year (joy) to a multi-quarter high of 15.8% , while gross margin was up 190 bps at 36.7%. The company follows a January to December financial year.
However, investors are worried whether ABB will be able to sustain such marginal returns. This concern surfaced after the company said in its earnings call that it benefited from executing orders secured earlier at higher prices; however, these benefits will diminish as conditions stabilize. This hinted at possibly weaker dirty edges ahead. With this in mind, Nuvama Institutional Equities believes that current gross margin levels are unsustainable and may remain under pressure.
Having said that, lower costs through localization, improved supplier network, better service mix and favorable commodity prices could help offset potential moderation in margin. According to Amit Anwani, analyst at Prabhudas Lilladher, ABB has maintained its gross margin exceptionally well in the last two quarters. He added that gross margin will be sustainable for the rest of the year, due to the company’s emphasis on high-growth sectors and expansion into tier 2 and 3 cities, which are margin accretive.
Overall, last quarter, ABB India saw a 31% increase in revenue at ₹2,769 crore, led by higher sales in motion and process automation segments. Meanwhile, helped by margin expansion, profit after tax grew at a faster rate from 79% to ₹362 crores.
In the long term, spending on domestic infrastructure along with a pick-up in exports is seen benefiting ABB. In general, investors believe that growth in the medium to long term will be driven by robust demand in key sectors such as cement, metal and mining, as well as a focus on high-growth areas such as food and beverage, electronics, warehouse, pharmaceutical, automotive. and water. In addition, new initiatives in data centers, railways and renewables are expected to support this growth. ABB’s shares are up 58% in 2023 year to date, reflecting this optimism, although some have warned about valuations. Based on Prabhudas Lilladher’s CY25 earnings estimates, the stock is now trading at 55.9 times.
Investors will closely track the momentum in public and private capital spending in both key and high-growth sectors, commodity costs, increased efforts in localization and any potential slowdown in process automation mandates.
(tagsTo Translate)ABB