ABB turnaround looks far-away as Q1 results disappoint caution about these stocks

ABB belied hopes of a turnaround in its fortune as it posted a sharp decline, as much as 93%, in its net profit for the quarter ended March 2010. This was the fifth consecutive quarter when profits have declined, with an average decline of 30% in the previous four quarters.

While sales recorded a marginal growth of 4.5% in contrast with the average decline of 9% over the past four quarters, the outlook on the topline front is also uncertain because of the high share of long gestation projects in its existing stock of orders and delays in some projects.

A closer look at the cost break-up shows a combination of externalities as well as inability to control cost. The result was severely impacted because of a rise in commodity prices, leading to a more than 4 percentage point increase in the raw material/sales ratio, which shaved off half of its profits.

The remaining damage was done because of a Rs 82-crore loss because of exchange rate variation, compared to a loss of Rs 24 crore in the corresponding quarter of the previous year.

The forex loss indicates a serious lack of forex management as the economy has been witnessing exchange rate volatility for 6-8 quarters, and any active risk management system would have helped hedge this risk. Employee cost also rose by nearly a third, which should have been handled more carefully, considering the fact that the company continues to underperform.

In terms of segmental performance, while four out of the five segments recorded sales growth, all the segments except ‘process automation’ have recorded a significant decline in profits. Two of the segments recorded losses, with ‘power system’ recording a loss of Rs 48 crore, against a profit of Rs 28 crore in the previous year.

The outlook for the company has become bleaker with the recent results. The task of a turnaround looks more difficult as commodity prices, which accounts for nearly three-fourth of sales, are still going on an upward path.

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The company can expect to get a grip on managing this cost, only when about half of the current backlog gets cleared, which would take at least next two quarters. The rupee appreciation should have helped ABB as it is an import-intensive company, but it seems to have messed up its forex management.

Short term investors/traders looking to generate profits in next 4 to 6 months should avoid this stock buying at current levels. Current trading price on 3 rd may is Rs 761.