rs 539.01 underperformer initiating coverage asea brown ... coverage on abb ltd.pdf · 1...

I N V E N T U R E .

I N S T I T U T I O N A L R E S E A R C H

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UnderperformerINITIATING COVERAGE

Amlan Datta MajumderChief Financial OfficerABB Ltd(O) 080-2294227

Stock metricsBloomberg code ABB IN

Reuters code ABB.BO

BSE Group A

BSE Code 500002

NSE Code ABB

Face Value Rs 2

Market Cap (Rs cr) 16112

52WeekHigh/Low 834/344

Sensex 17155

Nifty 5096

Average volume 69782

Shareholding pattern (%)

Promoters 52

FIIs 12

MFs 3

Institutions 20

Public &Others 13

Research [email protected]

Manoj [email protected]

Nov 23TH, 2009

Current PriceRs.772

Target PriceRs 539.01

Downside30.18%

Time Frame12 Months

Asea Brown Boveri Ltd. (ABB Ltd)ABB India was incorporated in 1949 as Hindustan Electric Company.The company entered into collaboration with Switzerland based BrownBoveri in 1962 consequent to which its name was changed to HindustanBrown Boveri in 1965. The company reported a dismal performance in3rd quarter results with lower than expected results with sales degrew by -4.3% and net profit falling by 20.7%..Corporate capex yet to take off, project business to dragAlthough the power segment is poised to grow at a fast rate, the industrialsegment will see the continuation of slowdown in the current year. Thekey differentiator is the availability of funding. We do not expect anyrevival in industrial capex as the access to capital is still constrained. Thecapital that is raised at the currently prevailing high cost will be utilisedonly to secure funding for the ongoing projects. We believe the impact ofincreasing cost of capital on IRR will keep away private sector frominvesting in new projects as they become unviable.Ground realities not looking so good and valuation a bitexpensive, we intatite our coverage on ABB with a sell with atarget price of 539.We have valued the company using P/E methodology; the stock istrading at P/E of 33.00 x FY09 earnings and 28.65 x FY10 earnings. Thecurrent stock price is 772. We have arrived at the target price of Rs.539which is 30.18% down from the current levels considering time frame of12 months. We rate the stock as a underperformer

Year Ended March F Y 07 F Y 08 F Y09E FY10E

Net Sales (Rs. Crs) 5930.31 6837.03 6500.00 7525.00

Growth (%) 38.75 15.29 -4.93 15.77

EBIDTA (Rs. Crs) 810.79 919.30 825.00 974.00

Growth (%) 44.84 13.38 -10.26 18.06

PBIT (Rs. Crs) 778.38 882.62 780.00 924.00

Growth (%) 45.96% 13.39% -11.63% 18.46%

PAT (Rs. Crs) 491.69 542.83 483.60 571.35

Growth (%) 44.68 10.40 -10.91 18.15

EBIDTA Margins (%) 13.67 13.45 12.69 12.94

Net Profit Margins (%) 8.29 7.94 7.44 7.59

EPS 23.19 25.61 22.81 26.95

ROE (%) 30.23 25.62 18.92 18.55

EV/EBIDTA (x) 19.65 17.33 19.31 16.36

PE 33.29 30.15 33.84 28.65Source: IGSL Research

Industry Capital Goods

Market Data

Shareholding Pattern :

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ABB’s order to sales ratio is 0.9x,indicating revenue visibility of only9-12 months

Investment Rationale

Crompton a major competitor to ABB.The domestic T&D capex story is well documented, with Indiaplanning to add 75GW of interregional capacity at the end of theXII Five-Year Plan. With the increasing size of generation projects,T&D systems are also moving towards the higher rating system.Crompton has already made its presence felt in the 765kV segment.With Powergrid increasing domestic manufactured

Revenue growth fallen to single digit with respect todouble digitABB’s business mix constitutes of the power segment (~60%) andthe automation segment (~40%). The power segment primarilydepends on investment in the power sector and the fortunes of theautomation segment are linked to industrial capex in the country.Given the current power deficit scenario, there is hugeGovernment of India (GOI) thrust on the power sector.Investments worth INR3.5 trillion and INR4.7 trillion are expectedfor the power sector during the eleventh and twelfth five-yearplans, respectively. Thus, we expect revenue to increase at a 15%CAGR over CY09-11.

Order book to sales ratio less than its peersABB’s order to sales ratio is 0.9x, indicating revenue visibility ofonly 9-12 months. The automation products segment’s order tosales ratio of 0.3x indicates revenue visibility of just 4 months.Peers such as Siemens and Areva T&D have better revenuevisibility with their order to sales ratio more than 1x. Given thecurrent macroeconomic conditions and the slowdown in industrialcapex,

Pressure seen in maintaing margins:ABB is having a tough time maintaining profitability in the projectsbusiness; it is doing alright in the product business, which has notfallen as sharply. The product-automation business has been amixed bag with a sharp increase in EBIT margins in the Septemberquarter. The multinational transmission and distribution (T&D)players are seeing pricing pressure in the T&D market, a key marketfor ABB. Similarly, the process automation segment has also seen asharp decline in margins over the past four quarters.

.

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Execution cycles IncreasingExecution cycles for ABB have extended sharply over the past twoyears led by an increasing mix of the systems business andaccentuated by slower product business growth. While we see lessroom for further declines in execution cycles, an improvement canbe expected only much later in CY10 when product orders maystart witnessing a rebound in growth.

Lagging Order FlowAfter two weak years of order inflows, we expect a rebound inorder inflow growth starting 2H CY11; however, the order inflowCAGR at 12% (CY08-11E) is sharply lower than the 30% growthachieved over the past three years suggesting that overall growthfor ABB may be much slower than that in the past.

Higher than expected order wins from Power grid;ABB, the leading power and automation technology group has wona Rs 1283 million order from Power Grid Corporation of India(PGCIL) for a 400-kV (kilovolt) gas insulated switchgear (GIS)substation to strengthen the power transmission network in thecountry western grid. The substation will be located in Navsari inthe western Indian state of Gujarat. PGCIL is India’s central powertransmission utility, and is presently implementing an ambitiousprogram of grid expansion and modernization aimed at integratingan additional 37,000 MW (megawatts) of power to facilitate inter-regional transmission of electricity across the country.

Healty competition:Companies such as Siemens and Areva T&D are leading playersglobally in the power T&D space. Similar to ABB, these companieshave a strong foothold in the Indian market, which has made thedomestic market highly competitive. Moreover, with manydomestic players expanding, competition is heating up, especially inthe transformers segment.

Regulatory Pressure to intensify competitionCEA’s two new proposals for supercritical units: 1) maximum heatrate of 1,850kcal/hWh and higher steam temperatures at turbineinlet; and 2) future UMPPs requiring to source from domestic cos.could benefit BHEL and L&T. PGCIL could introduce a rulereserving 50% of its HV transformer needs for domesticcompanies. If it materialises, the clear beneficiary will beCrompton.

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Rich Premium not justifiedThe stock has historically traded at a 60% premium to the BSECapital Goods Index. Given its low growth profile, this premiumwill shrink, if not go away, as the company has one of the lowestCAGRs of the past five years. At 29x 2010F earnings, the stock istrading at about 21% premium to its historical five-year average of

24x.

Capex PlansThe company plans to spend Rs.700-800m during 2009. Thecompany has reduced its planned spending from Rs.1,400-1,500mdue to slowdown in the global economy.

ABB enters deal with Fincantieri to provideelectricity to vesselsABB and Fincantieri have signed an agreement to collaborate onthe construction, marketing and supply of high voltage shoreconnection systems to provide electricity to vessels in port. HVSCsystems enable ships to draw electricity from onshore power gridswhile in port to operate onboard equipment as refrigeration units,lighting, cooling and heating systems, instead of burning fuel oil torun electrical generators.

ABB signs deal for Abu Dhabi crude pipelineABB, the leading power and automation technology group, hassigned a $21 million (Dh77.23 million) order with EPC contractorChina Petroleum Engineering & Construction Corporation(CPECC) to design and supply a state-of-the-art integratedelectrical system for the billion-dollar Abu Dhabi Crude OilPipeline project. With a length of 400 kilometres and a diameter of48 inches, the pipeline from Habshan in Abu Dhabi, which links tothe Abu Dhabi Company for Onshore Oil Operation (Adco)facility, will transport an estimated 1.5 million barrels of crude oilper day to the main terminal in Fujairah in the northern emirates

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ABB India was incorporated in 1949as Hindustan Electric Company.The company entered intocollaboration with Switzerland basedBrown Boveri in 1962 consequent towhich its name was changed toHindustan Brown Boveri in 1965.

ABB primarily has two mainsegments, power technologies andautomation technologies. However,its business is divided into fourdivisions: power systems, powerproducts, process automation andautomation products.

Company Background

ABB India was incorporated in 1949 as Hindustan ElectricCompany. The company entered into collaboration withSwitzerland based Brown Boveri in 1962 consequent to which itsname was changed to Hindustan Brown Boveri in 1965. Thecompany merged with Asea Electric in 1989 and the name of thecompany changed to Asea Brown Boveri Ltd. In 1999, thecompany demerged its power division into a separate entity,Alstom Power Co and in 2003 sold its metering business to ElsterMetering.

ABB primarily has two main segments, power technologies andautomation technologies. However, its business is divided into fourdivisions: power systems, power products, process automation andautomation products. Power-related segments continue to be majorrevenue drivers for ABB, accounting for around 58% of its totalrevenue, while automation segments contribute around 41%.

ABB has over 5,500 employees and 14 manufacturing facilitiesacross India. We serve customers through an extensive countrywidepresence of around 30 marketing offices, 8 service centers, 3logistics warehouses and a network of over 775 channel partners.The ABB Group is increasingly leveraging the Indian operationsfor projects, products, services, engineering and R&D. Also, as partof ABB’s new regional approach, India has been designated as thehub for the South Asia region.

Power SystemsOur Power Systems division is a market leader in the engineering ofgrid systems, power generation systems, network managementsolutions and substations. Power Systems deliverables includenetwork management, utility communication, transmission anddistribution substations, Flexible Alternating Current TransmissionSystems (FACTS), High-Voltage Direct Current (HVDC) systemsand automation and electrical solutions for power plants.

Power ProductsOur Power Products division is a leading supplier of powertransmission and distribution products and services, servingelectric, gas and water utilities, as well as industrial and commercialcustomers, with a broad range of products and services across thepower value chain.

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Automation ProductsThe Automation Products division offers a wide range of productsand services including low-voltage switchgear, breakers, switches,control products, DIN rail components, enclosures, line protectiondevices, wiring accessories, instrumentation, drives, motors,generators and power electronics systems.

RoboticsOur Robotics division offers robots, services and modularmanufacturing solutions for use in assembly, finishing and machinetending. Key markets include the automotive and manufacturingindustries, in addition to applications in foundry, packaging andmaterial handling.

Professional ManagementThe company is professionally managed and day to day management.

Name Designation

Gary Steel Chairman

Ravi Uppal Chairman

Bipal Majumder Vice Chairman/ ManagingDirector

K.RajaGopal Whole Time Director

N.S.Raghavan Director

Nasser Munjee Director

D E Udwadia Director

Bernhard Jucker Director

A K Dasgupta Director

Peter Leupp Director

Source: Company

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Segment Wise Revenue

Segment wise revenue(%)

0 20 40 60 80 100 120

FY05

FY06

FY07

FY08

FY09E

FY10E

% Industrial Segment % Power Segment

Source: Company

Order Book

Order Book

0%

20%

40%

60%

80%

100%

FY05 FY06 FY07 FY08 FY09E FY10E

Industrial Segment Power Segment

Source: Company

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Business Mix

Source: Company

Business Segments

Power System Power Products Process Automation Automation Product

32%

Primarily depends onGovernmentinvestments. Majorclients includeOriginal equipmentmanufactures (OEM)in utilites.

Depends upon the Powertransmission anddistribution Sector.The Government istargeting a capacityaddition of 78577 MW inthe Elevent plan .

This section dependson the majorinvestment done inindustrial capex .whichhas shown of risingstrength in IIP Nos.

Power segment mainlydepends byGovernment butindustrial it is theprivate players fundingdone to boost theircapex plans.

27% 18% 23%

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The division manufactures and sells a broadrange of power products, such as high- andmedium-voltage switchgear and apparatus,circuit breakers for various current and voltagelevels and power and distribution transformers

Power Systems deliverables include networkmanagement, utility communication,transmission and distribution substations,Flexible Alternating Current TransmissionSystems (FACTS), High Voltage Direct Current(HVDC)

Power ProductsThe division manufactures and sells a broad range ofpower products, such as high- and medium-voltageswitchgear and apparatus, circuit breakers for variouscurrent and voltage levels and power and distributiontransformers. The division’s primary customers areutilities, distributors, wholesalers, installers andoriginal equipment manufacturers (OEMs) in theutilities. The power products division accounts for27% of ABB Revenue. The segment registered a32.8%revenueCAGR over FY05-08.

Power Products

0

500

1000

1500

2000

2500

2006 2007 2008

10.5

11

11.5

12

12.5

13

13.5

Revenue EBIT margins

Power SystemsPower Systems deliverables include networkmanagement, utility communication, transmission anddistribution substations, Flexible Alternating CurrentTransmission Systems (FACTS), High Voltage DirectCurrent (HVDC) systems and automation andelectrical solutions for power plants. The division alsooffers automation, control and protection systemsand related services for power transmission anddistribution networks, power plants and waterpumping stations. It contributes 32% to ABBtopline.The segment registered 29.4% revenue forFY05-08.

Power Systems

0

500

1000

1500

2000

2500

2006 2007 2008

8

8.5

9

9.5

10

10.5

11


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Process Automation division designs products,systems and services that provide our customerswith control-system and plant-optimizationsolutions and feature industry-specificapplication knowledge

The Automation Products division offers a widerange of products and services including low-voltage switchgear, breakers, switches, controlproducts, DIN-rail components, and enclosures,wiring accessories, instrumentation, drives,motors, generators and power electronics systems

Process AutomationProcess Automation division designs products,systems and services that provide our customers withcontrol-system and plant-optimization solutions andfeature industry-specific application knowledge. Thedivision delivers industry-specific solutions for plantautomation and electrification, energy management,process and asset optimization, analyticalMeasurement and telecommunication. The Segmentregistered revenue CAGR of 33.9% over FY05-08.Itcontributes 18% to top line.

Pocess Automation

0200400600800

100012001400

2006 2007 2008

10

11

12

13

14

15


Automation ProductsAutomation Products division manufactures productsthat are designed to improve plant and buildingperformance. The Automation Products divisionoffers a wide range of products and services includinglow-voltage switchgear, breakers, switches, controlproducts, DIN-rail components, and enclosures,wiring accessories, instrumentation, drives, motors,generators and power electronics systems. All of theseProducts are designed to help customers improveproductivity, save energy and increase safety. Thesegment registered a 39.8% revenue CAGR overFY05-08.It contributes 23%.to revenue.

Automation Products

0

500

1000

1500

2000

2006 2007 2008

12

12.5

13

13.5


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SWOT ANALYSIS

Strengths Weaknesses

Well balanced and diversified Order book

Negligible debt capital in the business

Pioneered many power and automationtechnologies

Stress on the working capital

Opportunities Threats

Total planned outlay for Transmission Rs.1400bn– 11th five year plan.

Electrification of all rural households, outlayRs.160 bn by 2012 Rajiv Gandhi GrameenVidhyootikaran Yojana.

Tenders to be floated for about Rs.550bn p.a. inthe 11th Five Year Plan – Power Grid Corporationof India

Many new players are emerging in the marketand they have adopted the aggressive pricingstrategy to acquire market share, which may keepthe margins under pressure for some time

The growth of the T&D industry is linked tosensitive political and environmental issues, whichcan stunt the growth for the industry

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Supply of power has always laggedbehind….

0

20000

40000

60000

80000

100000

120000

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

MW

Supply Demand

Source: IGSL Research.

Industry OverviewPower Industry

Ambitious plans for the Indian power sectorThe power sector is a priority for the Indian government. Indiasuffers from chronic power shortages with a peak power deficit ashigh as 14%. Per-capita consumption is only 660 units compared toa worldwide average of 2,400 units and 14,000 units in the US. TheIndian government has embarked upon an ambitious target of‘Power for All’ by 2012. We believe this has led to a spurt in activityin the sector with huge investments planned in the near future. Thegovernment envisions an addition of approximately 78,000MW inthe Eleventh Five-Year Plan. We expect this to be supplemented bysimilar investments in power T&D of Power data, in 2001, India'sper capita electricity consumption was 408 units per year and isprojected to increase to 932 unites per year by fiscal 2012. The totalpower generation capacity of India as of July 08 is 145,588 MW.

Power capacity addition targets (Eleventh Plan) (in MW)

Source: Economic Survey 2007-2008

Sector Hydro Thermal Nuclear Total %share

Central 9685 26800 3380 39865 50.7

State 3605 24347 0 27952 35.5

Private `3263 7497 0 10760 13.8

Total 16533 58644 3380 78577

%Share 21.1 74.6 4.4 100

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A US$50 bn market for powergeneration equipment and a US$45bn market for power T&Dequipment over FY08E-FY12E.Companies set to benefit from theseinvestments include generationequipment makers such as BharatHeavy Electrical Ltd,), and T&Dequipment makers such as ABBIndia

A total of 78 GW new generationcapacity is envisaged to come on-stream in the Eleventh Plan, ofwhich, ~15 comprises hydro projects.Except for the hydro projects, whichhave been delayed (54% of thewhich, ~15 comprises hydro projects

The XI five year plans to add ~78GW of power generation capacitytaking the total generation capacityto ~210 GW by the end of FY12

We estimate a huge market for power equipmentWe expect a US$50 bn market for power generation equipment anda US$45 bn market for power T&D equipment over FY08E-FY12E. Companies set to benefit from these investments includegeneration equipment makers such as Bharat Heavy ElectricalLtd,), and T&D equipment makers such as ABB India ,CromptonGreaves and Areva T&D India).Planned investments in the powersector in the Eleventh plan are a four-fold increase on the10th five-year plan. Hence, high growth rates demonstrated by companiesover the past three to four years should be sustainable.

Ultra-mega power projectsBesides the projects planned under the Eleventh Plan, thegovernment has also initiated the concept of ultra mega powerprojects (UMPPs). These projects are estimated to be very largeprojects of 4,000MW each to be awarded on a tariff-based biddingprocess. Two projects — Sasan UMPP and Mundra UMPP —have already been awarded to developers. Tariffs quoted in thebidding of these two projects were extraordinarily low and thesuccess of these projects could open up doors to a large amount ofprivate participation in the sector, in our view. The government hasplanned an additional five projects, and their benefits would onlybe realized in the Twelfth Plan.A total of 78 GW new generation capacity is envisaged to come on-stream in the Eleventh Plan, of which, ~15 comprises hydroprojects. Except for the hydro projects, which have been delayed(54% of the which, ~15 comprises hydro projects. Except for thehydro projects, which have been delayed (54% of the total hydropower projects), engineering, procurement and construction (EPC)contracts for almost all the other projects have

Generation� The XI five year plans to add ~78 GW of power generationcapacity taking the total generation capacity to ~210 GW by theend of FY12.

� The private sector participation is expected to increase from~20% in XI five year plan to ~63% in the XII five year plan whichalso highlights the importance of private sector in meeting the plantargets.The capacity addition plan in XI five year translates in aninvestment potential in generation sector of ~Rs 3.8 trillion withCentral Govt.’s contribution at ~Rs 1.8 trillion, State Govt.’s at~Rs 1.25 trillion and Private sector’s contribution at ~ Rs 730billion.

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India is amongst the top fivemarkets in the world with AT&Closses at 32%. The government bythe end of XI five year plan targets toreduce the AT&C losses to 15%through Revised–Accelerated PowerDevelopment and ReformProgramme (R-APDRP).

Transmission� Annual rate of growth of the transformer network (for 220 kVand above voltages) during the past decade has been ~6- 7%. Withdesperate need to augment power generation the government hasset a target of 14% p.a. growth in transmission capacity addition inthe XI five year plan to supplement the generation capacity.

� PGCIL’s mandate to develop the national grid for evacuation ofpower from surplus region to the deficit region of the country hasresulted in increase of inter-regional transmission capacity to 19800MW by the end of March 2009 as compared to 16200 MW a yearearlier and this capacity is expected to increase further to 37700MW by 2011-12 and further to 58700 MW by 2014-15.

Distribution� The distribution segment - India’s distribution infrastructureincludes more than 6.76mn ckms of lines and 282000 MVA ofdistribution transformer capacity as of March 2008 which isgrowing at an average rate of 3% and 7.5% respectively.� India is amongst the top five markets in the world with AT&Closses at 32%. The government by the end of XI five year plantargets to reduce the AT&C losses to 15% through Revised–Accelerated Power Development and Reform Programme (R-APDRP).

R-APDRP programme is a larger face of the APDRP programmewith an outlay of Rs 515 billion. As of Feb 2009 ~Rs 20 billion hadbeen sanctioned by PFC to 25 discoms covering 598 towns. Thescheme has now turned its focus on achievement orientedincentives with a particular emphasis on creation of baseline databy the utilities. The thrust of the scheme is the reduction of AT&Closses to 15% by the end of the XI five year plan.

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IIP Graph for capital good sector.

Source: Bloomberg

IIP, GDP & Manufacture Index

Source: Bloomberg

Divergence in WPI and CPI Index

Source: Bloomberg

Industry capex set to take offAlthough the power segment is poised to grow at the faster ratethan industrial segment, but this segment has also stated to seeuptrend.

The Key difference between the power segment & industrialsegment is the availability of funding. In power sector majority ofinvestments is undertaken by the government through budgetaryallocations. However industrial segment needs spending fromprivate sector firms through their capital expenditure planswhich has showed down considerably in the present economicscenario.This has resulted in slowdown of orders and fall in margins for companies focused on project verticals like ABB.

Strong growth in IIP Nos

The Index of industrial production (IIP) has grown ~4.6% Y-o-Yduring the first four months (April-July) of FY10. The data on IIPgrowth for August 2009 will be released on October 12. We believethe Y-o-Y IIP growth will be in double-digits for August 2009 –which is after a span of 21 months. Several lead indicators to IIP,which started showing strength since early FY10, have firmed upfurther in the past two quarters.

GDP, IIP and the manufacturing index showed a significantupward trend over CY02-07, driven by buoyant economic growthand capital investments. During this period, players in the capitalgoods space saw huge order inflows and sales growth in excess of30%. However, the sub-prime crisis in the US from late-2007 led toa slowdown in global economies and liquidity crunch, andinvestments started to be deferred. But as the economy startedrecovering after the downfall with huge investment done by thegovernment in all sectors we can clearly see assign of revival incoming period with a stable growth prospectus.

The inflation and WPI which remain negative during June –August2009 turned positive in September 2009. WPI inflation was 1.21percent on Oct 10, 2009 as compared with 11.30 per cent at end –March 2009.

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Financial Outlook

EBIDT/EBDT/PAT(%)

13.67 13.4512.69 12.9413.30 12.72

12.14 12.35

8.29 7.94 7.44 7.59

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

FY07 FY08 FY09 FY10E

EBIDT/EBDT

13.6713.45

12.6912.94

13.30

12.72

12.1412.35

11.00

11.50

12.00

12.50

13.00

13.50

14.00


Net Sales

Net Sales

0.005000.00

10000.00

FY06 FY07 FY08 FY09E FY10E

Source: IGSL Research

EBIDTA Margins (%)

EBIDTA Margin(%)

12.00

12.50

13.00

13.50

14.00


Series1

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3rd Quarter Results Crs

3QFY08 3QFY09 YOY(%) 9MFY08 9MFY09 YOY(%)

Net Revenue 1519.10 1453.80 -4.30 4670.7 4352.00 -6.82

EBITDA 134.80 122.30 -9.27 497.7 377.60 -24.13

EBIDTA Margin 8.87 8.41 -0.46 10.66 8.7 -1.96

Other Income 39.90 15.90 -60.15 79.8 51.00 -28.80

Interest 6.70 4.40 -34.33 10.3 22.80 12.50

Depreciation 9.20 12.70 38.04 26.4 36.00 36.36

PBT 158.80 121.20 -23.68 540.8 369.80 -31.62

Tax 54.00 38.10 -29.44 186.3 124.80 -33.01

Pat 104.80 83.10 -20.71 354.3 245.00 -30.85

Pat Margin (%) 6.90 5.72 7.59 5.63

EPS 4.90 3.90 -20.41 16.7 11.60 -30.54Source: IGSL Research

Segmental Results Crs3QFY08 3QFY09 YOY(%) 9MFY08 9MFY09 YOY(%)

Segmental Revenue

Power System 510.9 381.3 -25.37 1551.7 1292.74 -16.69

Power Producers 492.05 473.3 -3.81 1431.2 1400.94 -2.11

Automation Products 416.91 447.82 7.41 1207.2 1236.51 2.43

Process automation 247.3 240.1 -2.91 827 767.93 -7.14

Others 21.75 10.32 -52.55 60.35 44.18 -26.79

Segmental EBIT

Power System 51.66 4.6 -91.10 136.45 45.92 -66.35

Power Producers 45.45 56.5 24.31 163.5 178.48 9.16

Automation Products 30.4 60.3 98.36 128.6 110.87 -13.79

Process automation 30.2 16.86 -44.17 103.8 77.43 -25.40

Others 1.12 0.24 -78.57 3.9 1.72 -55.90

EBIT (%) bps YOY bps YOY

Power System 10.11157 1.206399 -890.52 8.793581 3.552145 -524.14

Power Producers 9.236866 11.93746 270.06 11.42398 12.74002 131.60

Automation Products 7.291742 13.46523 617.35 10.65275 8.966365 -168.64

Process automation 12.21189 7.022074 -518.98 12.55139 10.08295 -246.84

Others 5.149425 2.325581 -282.38 6.462303 3.893164 -256.91Source: IGSL Research

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3rd Quarter Result Review:

Sales Dragging :Sales of the company for the second quarter ended Sep 2009 was lower by 6% to Rs 1468.93crore with its core power systems and power products business fail to power growth andregister de-growth for the quarter ended Sep 2009.

Margins under Pressure:With margins under pressure on account of change in demand and supply dynamics ofT&D equipment market as well as project mix, the segment margin as well as profit ofpower systems as well as process automation was lower.

Revenue of power systems badly hit:Segment revenue of power systems was down 25% (to Rs 381.31 crore) and that of powerproducts was lower by 4% (to Rs 473.37 crore). Similarly the segment revenue of Processautomation too was lower by 3% (to Rs 240.20 crore). However the segment revenue ofautomation products was up by 7% (to Rs 447.80 crore), but that is not good enough to fullycushion the fall in revenue of other core businesses and power the sales.

The segment profit of process automation was lower by 44% to Rs 16.87 crore as strainedby lower segment sales as well as pressure at segment margin (down 520 bps to 7%).

The operating profit for the quarter stood lower by 20% to Rs 137.46 crore as the operatingmargin for the quarter contract by 170 bps (to 9.4%) over and above the lower sales. Otherincome was lower by 73% to Rs 0.75 crore

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Income Statement Crs

Particulars FY06 FY07 FY08 FY09E FY10E

Net Sales 4274.01 5930.31 6837.03 6500.00 7525.00

Raw materials 1265.50 1577.08 2083.50 1900.00 2200.00

% Sales 29.61 26.59 30.47 29.23 29.24

Power and fuel cost 19.01 22.33 27.43 26.00 31.00

% Sales 0.44 0.38 0.40 0.40 0.41

Employees Expenses 238.53 303.56 400.40 380.00 420.00

% Sales 5.58 5.12 5.86 5.85 5.58

TOTAL EXPENDITURE 3845.69 5242.65 6121.93 5835.00 6751.00

% Sales 89.98 88.40 89.54 89.77 89.71

PBIDT 559.77 810.79 919.30 825.00 974.00

% Growth 44.84 13.38 -10.26 18.06

PBT After Extra Ordinary Items 523.21 756.46 833.24 744.00 879.00

Total Tax 182.90 264.78 285.83 260.40 307.65

% PBT 34.96 35.00 34.30 35.00 35.00

Reported Profit After Tax 340.31 491.68 547.41 483.60 571.35

Net Profit after Minority Interest 339.84 491.69 542.83 483.60 571.35

% Growth 44.68 -10.40 -10.91 18.15Source: IGSL Research ltd.

I N V E N T U R E .


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Balance Sheet Crs


Sources of Funds

Share Capital 42.38 42.38 42.38 42.38 42.38

Reserves & Surplus 1153.46 1583.96 2076.66 2513.64 3038.37

Total Shareholders Fund 1195.84 1626.34 2119.04 2556.02 3080.75

Total Debt 1.54 0.56 0.02 0.10 0.10

Total Liabilities 1197.38 1626.90 2119.06 2556.12 3080.85

Net Block 307.17 351.93 545.50 650.50 700.50

Capital WIP 24.62 105.94 137.94 180.00 240.00

Investments 77.35 70.45 61.12 75.00 90.00

Deferred income tax 0.00 0.00 0.00 0.00

Inventories 354.70 488.71 642.60 650.00 752.50

Sundry Debtors 1570.27 2423.56 2975.89 3000.00 3500.00

Cash & Bank Balance 546.44 642.86 348.23 359.86 628.50

Other Current Assets 0.00 0.00 0.00 0.00 0.00

Loans & Advances 325.26 555.56 733.06 800.00 720.00

Total Current Assets 2796.67 4110.69 4699.78 4809.86 5601.00

Less: Current Liabilities & Provisions 1991.90 2999.31 3321.53 3160.00 3550.65

Net Current Assets 804.77 1111.38 1378.25 1649.86 2050.35

Total Assets 1197.38 1626.90 2119.01 2555.36 3080.85

Source: IGSL Research

I N V E N T U R E .


21

Cash Flow Crs


Profit before Tax & Extraordinary Items 523.21 756.46 833.24 744 879

Cash Flow From Operating Activities 332.92 272.48 19.32 244.53 460.26

Cash Used in Investing Activities -66.83 -113.89 -224.66 -150.00 -100.00

Net Cash Used in Financing Activities 119.57 -62.16 -89.65 -82.54 -91.62

Net Inc/(Dec) in Cash and Cash Equivalent 385.66 96.43 -294.99 11.99 268.64

Cash and Cash Equivalents at Beginning of the year 107.49 546.44 642.86 347.87 359.86

Cash and Cash Equivalents at End of the year 493.15 642.87 347.87 359.86 628.50

Cash & Bank Balance - 642.87 347.87 359.86 628.50Source: IGSL Research

Peer Group Analysis

ABB Ltd Areva T&D Crompton Greaves

Total Shareholders Funds 2118.95 725.01 1241.89

Total Debt 0.02 469.22 53.37

Total Liabilities 2118.97 1194.23 1295.65

Capital Work in Progress 137.52 449.97 12.95

ROE(%) 29.46 35.6 37.05

PBIDT/Sales (%) 12.7 17.1 13.1

PAT/PBIDT (%) 35.21 46.94 39.85

Price Earning (P/E) 17.81 22.34 11.73

EV/EBIDTA 10.07 12.55 5.95

Market Cap/Sales 1.3 1.73 0.91Source: IGSL Research

I N V E N T U R E .


22

Ratio Analysis Crs

Turnover Ratios FY07 FY08 FY09E FY10E

Net sales to total assets 3.65 3.23 2.54 2.44

Net sales to Fixed assets 12.95 10.00 7.83 8.00

Net sales to net working capital 4.64 4.45 3.59 3.36

Liquidity ratios

Current ratio 1.45 1.49 1.60 1.67

Inventory Days 30.08 34.31 36.50 36.50

Valuation Ratios (x)

PE 32.77 29.68 33.32 28.20

EPS 23.20 25.62 22.82 26.96

P/BV 9.91 7.60 6.30 5.23

EV/EBIDTA 19.34 17.05 19.00 16.10

EV/SALES 2.64 2.29 2.41 2.08

Market Cap/Sales 2.72 2.36 2.48 2.14

Return Ratios (%)

ROCE 47.84 41.65 30.52 29.99

ROE 30.23 25.62 18.92 18.55

Margins (%)

EBIDTA 13.67 13.45 12.69 12.94

EBIT 13.13 12.91 12.00 12.28

PAT 8.29 7.94 7.44 7.59

Growth (%)

Sales 38.75 15.29 -4.93 15.77

EBIDTA 44.84 13.38 -10.26 18.06

EBIT 45.96 13.39 -11.63 18.46

PAT 44.68 -10.40 -10.91 18.15Source: IGSL Research

I N V E N T U R E .


23

For any queries please feel free to contact our

Institutional Research Team

Names Designation E-Mail Id. Contact NumberNagji Rita CMD - -

SALES

Ravinder Kasliwal Head Institutional Sales [email protected] 40751565/66

Dealing

Vinit Rita Institutional Dealer [email protected] 40751565/66

Research

Ashish Pandey Research Analyst [email protected] 40751515*582

Manoj Jethva Research Analyst [email protected] 40751515*579

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Ashok Patel Technical Analyst [email protected] 022 22723797

Madhu Patel Technical Analyst [email protected] 022 22723797

Disclaimer

This Document has been prepared by Inventure Growth & Securities Ltd. The information, analysis and estimates contained herein are based onInventure’s assessment and have been obtained from sources believed to be reliable. Neither Inventure Growth & Securities Ltd nor any of itsemployees or associates accepts any liability whatsoever direct or indirect that may arise from the use of information herein and shall not beresponsible for its completeness and accuracy. It is not an offer to sell or a solicitation to buy securities. This document is for circulation only

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