ABB Ltd

Investors can consider exiting the stock of power equipment player ABB India. Premium valuations, longer execution cycles and continuing cost overruns with fixed contracts are factors that diminish the earnings visibility over the next one-two years. At the current price of Rs 823, the stock trades at 49 times its 2009 earnings; the PE for CY-10 too is a steep premium (29 times) to peers such as Crompton Greaves or Siemens.

ABB India's fourth-quarter sales and revenues declined 13 per cent and 42 per cent, respectively. For the full year too, revenue and profits declined, for the first time in at least five years. Operating profit margins for the quarter slid to 8.8 per cent, from 14.4 per cent a year ago. Severe pricing pressure and operating level losses in the power system segment led to this erosion. Cost overruns in fixed contracts and early exit from rural electrification contracts led to higher costs. Its reluctance to cut product prices and cost-related issues have been eroding this technologically-strong company's market share.

ABB's orders, at Rs 8,700 crore in end-2009, were 8 per cent higher than the previous year's. Although the latest-ended quarter saw strong inflows, a low base in the previous year (order inflows declined in the December 2008 quarter) was a key reason for the robust growth number.

via BL