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ABB India - Next Gen Technologies Power-packed

Hello friends,

ABB India is a commercial subsidiary of ABB Ltd, Swedish-Swiss based top industrial company. ABB India operates in various industrial segments like Power, Infrastructure, Transportation, Automation. ABB is going through a restructuring to focus on new-age businesses and get rid of old technology businesses. Please note that ABB India follows Calendar Year for results instead of Financial Year.

Main divisions in the company include:

  1. Electrification Products
  2. Industrial Automation
  3. Robotics and Motion
  4. Power Grids

The parent company has announced that it would sell Power Grids business (across all global locations) to Hitachi for $11 billion. Indian business Power Grids business will also be sold to Hitachi consequently. However, I’m not sure how much cash is India business is going to receive. This deal will be closed by mid-2020.

We can dive deeper into each of the above mentioned divisions now.

Electrification Products - EP:

The products here include Solar Inverters, EV turbo-charging, Data Center management, Smart Power Distribution, Digital Power Monitoring Technology. All the three businesses have good tailwinds for the next decade once they gain momentum.

Electrification Products 2018 2017
Orders 2754 2481
Order Backlog 1337 1170
Revenue 2616 2439
Results 250 281
Margins 0.09556574924 0.1152111521

Solar Inverters:

These convert DC (generated from Solar plants) to AC (needed by grid) and it also controls and monitors the entire PV system. Currently these are used in solar power plants being constructed in India. ABB India’s product is a premium product and has a market share of 45-50% in Solar Inverters. Solar Inverter market is a competitive one, however, Solar plants are long gestation plants with expected life cycle of 25 years and hence the customers are incentivised to go for premium products like ABB’s Solar Inverters. Going forward, if (and hopefully) we see solar adoption on top of residential and commercial complexes, then scope of expansion for this business is huge. We already see the adoption of Solar Inverters in factories, railway stations and such places.

Unfortunately couldn’t find much about the pricing of Solar Inverters online. Some resource says 6 Rs per Watt but that implies 6000 crore market assuming 10 GW of Solar power is installed in the country. But that sounds too much as ABB India’s (whose market share is 50%) total Electrification Products revenue is about 2500 crores.

EV Turbo-charging:

ABB has the fastest EV charging technology in the world. They can charge an EV for range of 200 km within 8 mins. ABB has both the connecting solutions: CCS and ChaDeMo.

Good to see more and more Automobile brands in the country launching EVs. We already have couple of 2W startups, Mahindra Reva, Hyundai Kona. New upcoming EVs in the country include Bajaj Chetak, MG EVZs, Tata E-Tigor, Tata E-Tiago, Maruti Suzuki E-WagonR…

Yet to understand how the pricing works for EV charging stations. I believe this forms a very miniscule portion of the company given the number of electric cars currently being used in the country.


Data Center Management:

Everyone in the world now acknowledges the power of data. More and more data centers are being opened up in the country. The Govt’s Data Protection Law is going to help this business grow. ABB is working with one of the biggest name to supply the power system as well as automation system for their first and largest data center that is being setup in the country. The management didn’t name this customer but my guess is it should one of FAANG. Unfortunately, I don’t have numbers to break up this further. Request experts in this area to share their thoughts.

Some additional applications in the EP business include Digital Monitoring Technology - MyRemoteCare, Power Distribution Products, Smart Power Distribution systems in Sports Stadiums. One example is Delhi Airport deployed ABB India’s technology to achieve 30% superior efficiency in energy consumption.

Industrial Automation - IA:

More and more factories in the world are focussing on automating their processes. This will bring in more efficiency and transparency to businesses. Such practices have also started in India.

Digital monitoring of machines helps the factory owner detect issues in their motors and machines early hand can get an engineer ready to fix them / replace them and reduce downtime. Automation will also help reduce reliance on employees. There are many such incentives for industries in the country to leverage digitalization in automation.

Industrial Automation 2018 2017
Orders 1701 1525
Order Backlog 1336 1155
Revenue 1540 1409
Results 190 170
Margins 0.1233766234 0.1206529454

Some year-wise customers of ABB India’s IA division include:
2014 - JSPL, Reliance Industries, Indian Railways, Cairn India, SAIL, EIL
2015 - Abul Khair Steel Mills Bangladesh, Diesel Locomotive Works, Swiber Offshore Construction PTE Ltd, Asian Paints Ltd, Orient Cements, Hongsa Mines, BSRM, Ultratech Cement, Steel Authority of India Ltd
2016 - Petronet LNG, Ultratech Cement, Uganda Govt, Africa Oil Major, Pernod Ricard, Reliance Industries, Britannia Industries, Berger Paints, Adani Green Energy, Karnataka Govt, JSW, Indian Oil, Asian Paints
2017 - Leading cement manufacturer, LPG GoI, Thermal Power Plant GoI, F&B sector, Leading paint manufacturer, Mining and steel major, Cement major, Leading mining company, Paper making firm, Oil import terminal in Africa
2018 - Cement Plant in Central Africa, Oil & Gas sector, Steel Plants in Europe and Asia

In most of industries, we see only the strong players participating in Industrial Automation and Digitalization here. As the next players see the benefits of these early adopters, they will start to leverage these technologies and expand the market for ABB India. Another interesting observation is the company stopped providing the names of their customers from 2017 and started saying in conf calls that they don’t want to name them. Probably, the competitors of customers have started approaching. Management also says that lots of CXO level leaders in the country are enquiring a lot about ABB’s automation and digitalization solutions.

Some quantitative statements by management include that the cement major (UItratech?) is seeing 20% to 30% improvement in efficiencies as they digitalize their plants.

Projects in IA can either be of OPEX nature or CAPEX nature. What we see in current revenues is mostly OPEX nature. We will get to taste the real juice from this division once the core CAPEX in the country is picked up. Until then we need to wait patiently for this business to pick up steam. Management also says that digitalization is currently being applied only in low-hanging fruits process industries in the country (as lots of energy is consumed there) and a base is being created in the current years and we might see good exponential acceleration going forward.

Robotics and Motion - RM:

The three businesses in this segment include drives, motors & generators and robotics.

Robotics and Motion 2018 2017
Orders 2637 2008
Order Backlog 1860 1723
Revenue 2502 1936
Results 221 163
Margins 0.08832933653 0.08419421488

Electric drives control the motion of electrical machines. This is widely used in large number of industrial and domestic applications like factories, transportation systems, textile mills, fans, pumps, motors, robots etc. Please feel free to watch below video, very crisp and concise explanation of drives.

Railways and Metro in India is expanding a lot as Indian cities and transportation infrastructure need them. This is driving the business for ABB’s traction motors. You can watch below video about traction motors:

Robotics is the usage of machines to manufacture products in factories. Most of the business here comes from Automotive industries for ABB and F&B industries too. Given the current slump in Automobile sales in the country, this is going through headwinds in CY19 but the company is expanding this business to other end industries.

Power Grids - PG (to be sold discontinued):

This division offers products, systems, software, automation and service across the power value chain. Various products include traction transformers, substations, HVDCs, Switch-gears and many other related products.

Power Grids 2018 2017
Orders 3386 3706
Order Backlog 5884 7699
Revenue 4222 3129
Results 422 308
Margins 0.09995262909 0.09843400447

The division discontinued the EPC substation business, which is where it is less of value add and less of not much of tech involved, and where the market space is more commoditized. So we said that we will sort of focus in the core of tech, that is what Sanjeev is mentioning in other areas which you saw before. So this is not a major revenue stream for us.

The transaction with Hitachi is expected to close in Q2CY20.

Few comments on exports and localization:

ABB India is very focussed on localization and exports. Management says that growth may not come only from India market but also from exports to other ABB companies worldwide. Exports already contribute 15% of sales across divisions. Quoting Sanjeev Sharma’s words from Q1CY19 conf call:

“I remember that 3.25 years back when I came here, I think there was a perception outside India about the products manufactured in India. So first you have to do is to prove yourself in small steps to ensure that the customers will receive deliveries out of India, whether it’s an engineering export or it is the manufacturing export that they are extremely satisfied. They are as satisfied as they need for deliveries coming out of Italy, China, Spain or wherever. We did a simple trick. We said, okay, if you want to compete, our motors should be as good or better than what is produced in China or Spain or Italy. And we imported motors from these locations, our own factories. We have put them right in the middle of our manufacturing plant and then we had a challenge to our whole team, listen, our products should have a better performance and they should look better aesthetically than what we produce. Because there was a perception difference and also we could see. And let me tell you our team did an extremely good job in six months time. And once we reached that level, then our global business managers start opening up new markets for us, and that’s where then you start competing, then you start offering. And what we have seen is that we cannot compete from European factories into certain markets wherein they’ve become very competitive, we’re able to easily compete on behalf of ABB in those markets. And that has again increased the calibration of ABB global into those markets, supply coming out of India. And once you have that base, the confidence level of our global leaders to give the allocations of the markets that is on the rise. Now we can see as ABB transformed this to the next level, we are getting mandate to connect to more and more markets. And I think that’s the reason where our comment comes from that we are at the starting curve of this journey, not in the middle, not in the upper curve. And of course, we will take very measured steps as we grow this business.”

So believe ABB India’s growth may come from exports and not just India’s markets.

Financials & Valuation:

As can be seen, 35% to 40% of ABB India is just the PG business which they are selling. The company is going to have a huge amount of cash post that.

Financials upto 2017 including the PG business:

Year 2017 2016 2015 2014 2013
Revenues (cr) 9208.29 8713.64 8153.31 7750.55 7728.98
Profits 419.95 376.25 299.88 228.51 179.31
EBITDA Margins 0.093 0.094 0.089 0.074 0.062
PAT Margins 0.045 0.043 0.037 0.029 0.023
Revenue Growth 0.057 0.069 0.052 0.003

Financials from 2017 excluding the PG business:

Year 2018 2017
Revenues (cr) 6774.13 6365.22
Profits 254.19 225.48
EBITDA Margins 0.080 0.077
PAT Margins 0.038 0.035
Revenue Growth 0.064

The margins in the new businesses are a bit lower but the management is confident that they will improve as these business keep scaling up. This is already observed in 9MCY19 as the revenues of new ABB are up by 18%, EBITDA is up by 44%, PBT is up by 87%, PAT is up by 90%. Its been a while since the company’s top-line has grown by double digits and at the same time, a huge improvement in margins.

Coming to valuations, Market Cap is 30000 crores.
TTM PAT including PG business is 579 crores => TTM P/E of 52.
TTM PAT excluding PG business is 366 crores => TTM P/E of 82 + Cash from sale of PG division.
But this may change drastically post Q4CY19 results as historically Q4 is the biggest for ABB.

Competitors involved in these businesses include Siemens and Honeywell which trade at a P/E of 49 and 61 respectively.

Risks / Questions:

  1. How much cash is ABB India going to receive due to sale of Power Grids business? How is the company going to use this cash? Is it going to give out dividend or retain in its balance sheet?
  2. Though we have divisional breakup of revenues, how do we obtain product level breakup of business to deepen our understanding?
  3. Related Party Transactions with other subsidiaries.
  4. Business diverted to unlisted subsidiary. But the management said during conf call that only the listed subsidiary is the commercial entity. The unlisted subsidiary is for global operations efficiency.
  5. High receivable days of four months

Disclosures: No holdings. Not a buy / sell recommendation. Not a SEBI Registered Advisor. All information above is public and available in the internet. This post is only for educational purposes but reserve the right to take a position in ABB India in the future.

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More interesting videos on ABB.




Lot more available on YouTube but putting up the interesting ones here.

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Original thesis was on the new initiatives taken by the company and de-merging power grids business into a separate company and give control to Hitachi.

Good to see that the power grids business is pro-active, when still under ABB management as it just signed an MoU with Ashok Leyland to supply Flash charging technology to its buses. FYI, Ashok Leyland is the fourth largest bus manufacturer in the world (and the largest in India).

Discl: Entered ABB on de-merger record date aka 23rd Dec 2019, so holding both the entities. Also own a good amount of Ashok Leyland. Pleasure to see both my shareholding companies collaborate with each other to create business value and sustainable future. This is not a buy / sell recommendation. Please do your own research or consult your financial advisor before buying or selling any of mentioned companies.

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Let me give quick update on ABB India.

  1. De-merger record date was fixed to 23rd December but interesting to see there is no correction in price after that date. Does this mean that market was valuing the Power Grids business to 0?
  2. Solar business is being sold to an Italian company at parent level. So Indian company is also selling the same and the listed subsidiary will receive cash for the same.
  3. Exports of the Indian subsidiary is growing rapidly. I hope this is repeating the story of Honeywell Automation. Lots of Honeywell’s revenue growth has come through exports to its related parties and this has created a lot of wealth to its investors. Similar story may repeat here.
  4. Government is strongly pushing for full electrification of railways in next few years. Hopefully this gets materialized.
  5. EV charging business may take time to take off

Putting my conference call notes here.

Q2CY19:

  1. If we compare Q2CY19 and Q2CY18 numbers, our orders are up by 23%, revenues are up 4%, PBT is up 61% and PAT is up 57% and if we compare H1CY19 and H1CY18 our orders are up 14%, revenue 11%, PBT 80% and PAT 76%.
  2. We had other segments for example we supply drives and smart sensors for food chains, that also shows the diversity of the market segments we operate in. We had the solution supply for robotics palletization for edible oil company.
  3. We have been rapidly diversifying ourselves into the non-automotive sector so that we ensure that the robotics business continues to stay on the growth path or sustains itself. We are seeing some very good traction in non-automotive sector in terms of absorption of robotics.
  4. For the electrification division, it was a strong execution and growth orientation in Q2, orders grew 19%, revenues 14% and PBIT was up 24%.
  5. For motion division. the orders were up 14%, revenues are up 9% and PBIT up 10%, we continue to see a very strong movement in this particular business.
  6. On the robotics division, orders were down 16% relative to quarter two of the previous year. Because of the automotive sector, it certainly took a nosedive.
  7. At the same time, our pipeline is healthy and we are diversifying into other segments like food and beverage, pharma segments wherein we are testing out certain applications for those segments. We find the uptake of robotics across these sectors is quite high and the interest is very, very high. And it is not only with the large players, we see that Tier-II, Tier-III customers are also showing very high interest in using robotics in their lines, as we go forward.
  8. On the industrial automation side, we did see orders going up 15%, revenues were flat and PBIT was down. We are seeing the initial shoots of recovery in energy orders and metals, but still I think it is taking time for them to recover.
  9. Our higher tax expense was more due to non-deductible on the MSME interest, which is as per law, we can do nothing but will really run out over year end. This is overall comments on the quarterly financial summary.
  10. On solar, I think the board has accorded its in-principle approval for the sale. The subsequent actions are in progress at this point of time, so the income statements, we have provided includes solar, and other things, whereas we have held assets and liabilities of the solar, as asset held for sale.
  11. Products form almost 75% of revenues, projects form just 10% to 12% and then the services form 15%.
  12. Electrification products form almost 40% of our orders and revenues, and motion forms 25% to 30% of our reveneus and profitability as such. The contribution of IA has been constant that 20%, 21% and robotics form 4%.
  13. What I would like to mention here, the higher the revenues and orders of electrification and motion, so I think that drives the profitability, because it’s more product based and naturally the capacity advantage is driving when they move moreover the breakeven.
  14. We registered more than 30% of exports growth. This was more driven by PG. So on a half year basis, on the non-PG side we were 20% up and PG side we were more than 50% up.
  15. PG has got a dedicated fleet of factory for its businesses; and Bangladesh and Sri Lanka provide adequate opportunity for the system orders. So I feel that PG will continue its growth strategy on the export side of it.
  16. We will have our divisions like motion, industrial automation gearing up to provide more into the newer markets, would like to have a more share of exports in which they have improved quite drastically from the previous years.
  17. Well, it is true that the solar segment per se is quite large. And now as we see in the market place, you are getting more concentrated players who are becoming active in that market. So in the case of solar, we are transferring this business to a company which is dedicated to solar business, which is Fimer of Italy.
  18. And they will get all our assets in terms of the capabilities that we have built as a feeder factory in India, both people as well as the capabilities to continue to produce the equipment and the technology that we have. So we will transfer it all.
  19. So it means in terms of serving the market that capacity will remain, and hopefully they will expand it going forward. But as far as ABB is concerned, we have decided to step out of solar inverter manufacturing business.
  20. I have been always saying that solar revenues are around 7% to 9% of our total revenues (of continuing business) in the order mix and the margin is not so great, because we have challenges in the market as what we see, and that decision goes forward to the ultimate diversified.

Q3CY19:

  1. What we see is that the govt is trying to make investments through PSUs and have pledged a capex of Rs 50000 crores through the PSUs. The govt has also relaxed the norms so that manufacturing expands in the country. So we will see how transmission of those policies take place over a period of time.
  2. ABB has given a mandate that the Bangladesh market, which is almost $300 billion plus market, will be connected to ABB India. So we conducted some customer connect program in Dhaka and Chittagong in Bangladesh in the previous months.
  3. Just to give you an example, if we have a big drive running a steel mill in the east part of the country, in a remote location, if anything happens to that equipment, typically the plant will invite our service specialists engineer to visit them. It takes one to one and a half days to get there to repair it. But now what we have is all these devices are getting connected online with us and we are sitting here in Bangalore and we are able to continuously monitor the behaviour as well as the health of those drivers. Not only that, if there is some kind of a trip or fault, our engineer is able to download or upload the diagnostic data immediately and is able to find the fault and sometimes within 15 minutes or half an hour we are able to guide the operator to bring the equipment back. So, it is a big productivity, reliability and availability boost for our customers.
  4. We are seeing very good traction and application of robotics in non-automobile sector. Come next year, we will have some new investments being made in the robotics area, I think that will come to fruition. So this is a long-term view we have taken, we will keep on investing in this business and take a very solid and long-term, kind of a high level, position in this particular area.
  5. We still run within cash position of Rs 1350 crores at the balance sheet level as of date.
  6. I think it’s needless to say that Electrification and Motion will be the major divisions going forward with PG going away. They will form almost 65% to 68% of our orders or revenues, followed by IA and Robotics and Discrete Automation. So IA would be roughly around about 20% so that’s what is going to be the share of the business going forward.
  7. So why 30% and why not 26% tax rate could be some of the questions, what you could be wondering because the govt has already reduced tax. We need to understand that ABB carries deferred tax assets, the deferred tax assets is assumed to give 35% of benefit going forward as to the earlier tax rate. But now going forward, it will only give collection of 26%, so it’s an impact of reevaluating the assets, which is a prudent accounting practice and that will be done over two quarters upto the financial year ending 2019 December. So that’s something because of which you could see a higher tax rate compared to the calculated tax rate, and that’s also visible in the consensus estimates as you walk forward in the slide.
  8. As far as Robotics is concerned, I think the way we should understand this business is that the value is not in the hardware, the value is in the application and the domain expertise that we deliver to the customer.
  9. From the electrification point of view, you would see most of the growth from segments like data centers, building, power distributions and metro. These are the sectors where we see a lot of investment happening and where we are putting our products.
  10. As far as exports are concerned, I think if you have heard me in previous calls, I think its a journey which has just begun. And our competitive and very competent supply base is being recognized by our global business leaders. They are opening more and more markets.
  11. But it is good from the global side as well as for us that we gradually open those markets. But it is good from the global side as well as for us that we gradually open those markets, one is to get used to supplying it to the external standards from India, and plus also get used to be able to service those customers.
  12. With respect to margin realization, I believe that in the current market state Electrification and Motion are doing well, their growth rate is good. When their growth rate is good then their plant capacities are better utilized. When the plant capacities are better utilized, you have a better margin and a better realization of profits. In the Industrial Automation, it is a very value added business which is very export based business, so is the case with robotics. When you have the volumes slightly low, then naturally the utilization of the expert manpower and manhour is relatively low, you will see the effect of it. The moment the utilisation goes up, you will see the effect of those also into the profitability.
  13. Margins should improve in IA once the exports part of it improves. The Indian market is very competitive in this space and hence margins are a bit lower in domestic side of the business and also due to lower utilizations.
  14. For FDI to take place, I believe, this particular information goes through the global corporate houses, I’m sure. But it takes certain time for them to absorb and they don’t switch on the investment the next day the moment the taxes go down. I believe as the budgeting process takes place among the global organizations, this will be factored in. Also, how far they want to move away from this trade situation we have currently between US and China, whether India would be a strategic location, because India is a location where both high demand is possible and there is a possibility of a good supply of manpower and white collar, as well as the tax rates are good. So I think that combination should prompt many corporates to consider FDIs into the country.
  15. As far as we are concerned, we are a very well established company. Definitely this case will also be considered by ABB in terms of what we want to expand for the domestic consumption as well as for the exports. But at this point in time, I think India poses a challenge on the demand side. I think if more FDI has to come to manufacture only for the demand side of the country, the demand must pick up in the country. I think that’s the precondition, because that will give the confidence for more investments to come. But whether India would be used as a supply side for the rest of the world, I think it will take few quarters before corporations would have taken a call on it.
  16. Railways and transportation is not only served by Motion, it is also served by EL. It’s also an important segment for them. Also some part of it flows in Industrial Automation. Given these various channels into this particular sector, I think Railways is definitely an important segment for the total business profile of ABB. They contribute to more than 7% to 8% of our order or revenue.

Discl: Bought small position on record date of demerger. Not a buy / sell recommendation. Please consult your Investment Advisor before buying / selling this stock.

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