ABB — earnings call

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Prepared remarks

PROCESS INDUSTRIES · MR. SANJEEV ARORA – PRESIDENT, ROBOTICS AND

MR. SANJEEV ARORA – PRESIDENT, ROBOTICS AND

MOTION · MR. C.P. VYAS – PRESIDENT, ELECTRICAL PRODUCTS

MR. C.P.

VYAS – PRESIDENT, ELECTRICAL PRODUCTS

DIVISION · MR. SUBRATA KARMAKAR – PRESIDENT, ROBOTICS

MR. SUBRATA KARMAKAR – PRESIDENT, ROBOTICS

AND AUTOMATION · Management

ABB India Limited November 13, 2019

Moderator · Conference Operator

Good day, ladies and gentlemen.

A very warm welcome to the ABB India Limited Q3 CY19

Questions and answers

Bengaluru - 560 055 · Research Analyst

www.abb.com/in

Moderator · Conference Operator

Thank you very much.

Ladies and gentlemen, we will now begin the question and answer session.

The first question is from the line of Abhishek Puri from Axis Capital.

Please go ahead.

Abhishek Puri

My two questions on Robotics capex that you mentioned, I understand that thousand numbers that we sell at this point in time is largely imported from China.

So, what are the kinds of capex ABB India Limited November 13, 2019 and scale that we are looking to build?

And number two on Electrification business, which are the segments in the economy that are contributing to this strong growth?

Sanjeev Sharma

So, 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.

So as far as our robotics equipment and the hardware is concerned, we continue to manufacture them into the best in class in our centralized factories and we will do the value engineering for customers in India.

T.K. Sridhar

The second question is about the electrification market, can you repeat the question once again, if you don't mind please?

Abhishek Puri

Sir, the Electrification part, which are the segment of the economy that are contributing to this strong growth?

T.K. Sridhar

Okay.

So, I think this also has solar, solar has some export, so if you remove solar, I think the clarity on the balance part, I would request CP Vyas who leads the Electrification business can probably throw more light on it.

CP, over to you.

Thank you, Sridhar.

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.

These are the sectors that are actually helping us.

Abhishek Puri

Thanks a lot.

If I can ask one more, there's a slowdown in the Automation and Robotics segment, these were largely opex related investments as was discussed earlier in the calls and not capex related.

So, is there a change in thought process here or is it largely led by auto where the entire decline has happened?

Sanjeev Sharma

There are two different distinct segments, when we talk about Robotics.

Robotics had a higher exposure to automobiles, so you see a direct correlated impact on it.

But at the same time, team is doing an extremely good job in diversifying into the new market segments which are opening up.

I think the pick up in those industries are very good.

So we are very positive about it, because once you open a new segment and new industry, you give few quarters and few years to it, then you get a very good gain on those segments.

That will also help us in the future cycles of automobiles.

When it comes to Process Automation, it is the projects business entirely.

Especially the projects business is cyclic in nature.

Right now, greenfield projects are bit muted, but at the same time, our Process Industries, Industrial Automation has a very strong portfolio of services, as well as the opex cycle oriented investments that we have.

So it's cyclic in nature, at this point of time it is muted, but we have seen the cycles before, so we are not too worried about it.

ABB India Limited November 13, 2019

Moderator · Conference Operator

Thank you.

The next question is from the line of Kirti Jain from Sundaram Mutual Fund.

Please go ahead.

Kirti Jain

Sir, first is on the order book which is a little lower compared to last year.

So, in the medium- term do we expect revenue momentum to slow from the current levels of 18% percentage which we have delivered this quarter?

Sanjeev Sharma

You are talking of order book as the order backlog, if I am not wrong?

Kirti Jain

The order backlog being little compared to 50.7 billion it is 43.5 billion, it's a little lower.

So, how do we see the business in the medium-term?

T.K. Sridhar

So, if you had correlated these numbers with the division wise numbers, which I gave you, which I threw some light on, I think the major impact comes from the Industrial Automation division.

And that goes more by projects and systems model, where it takes longer gestation time given the situation we are in.

Whereas, what I would say is that the major businesses of Electrification and Motion have strong order backlog visibility and I don't find any challenge about it.

So going forward I think when the market picks up, industrial automation also will pick up with orders what is required to build up the order backlog.

Kirti Jain

Apart from that, any new product lines being added in exports or will be added in the coming one or two quarters?

Sanjeev Sharma

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.

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.

So typically, we never do it in a rush, we do it in a very gradual and a very structured way.

Wherever we have established ourselves, there the growth is very good, our expansion is very good.

Yes, there are indeed new product lines which are increasingly getting opened up for the export market.

Moderator · Conference Operator

Thank you.

The next question is from the line of Inderjeet Singh Bhatia from Macquarie.

Please go ahead.

Inderjeet Singh Bhatia

First is on the environment, especially in the last quarter we saw a very significant slowdown from consumption type of company sectors.

Have you started to see any kind of improvement there in this current quarter?

Or the kind of slow trend sustains right now?

Any particular segments where you are starting to see early signs of improvement from quarter three onwards?

Sanjeev Sharma

Well, I think the best way to describe the market is, it is absolutely a mixed market.

At this point of time, very difficult to draw the trends, because if you really pay credence to the macros, the ABB India Limited November 13, 2019 macros speak for themselves and those macros also play through the different market segments.

But yes, given the kind of portfolio we have, we do see certain market segments which are still very resilient for us, and there are certain market segments which have really gone down.

So, best case is to explain the automobile, I think nobody can deny the impact of it.

But at the same time, you have some resilient segments, which even if the market is going down, these are the segment they keep on investing, so they continue to cash the next cycle of consumption growth in a good way.

So, we see that there are segments which are down, but the companies in those segments are investing the cash they have in their balance sheet to be preparing themselves for the cycle pickup.

Inderjeet Singh Bhatia

Second question is slightly on longer term.

If I look at your Electrification and Automation and others, Motion and Robotics, typically look at the margin profile in your segments like Motion or Robotics Automation or even I would say Industrial Automation where you think that is more software kind of a content, that actually is lower than electrification which is your old kind of a business where there are we assume more competition.

How do you think about longer term margin profile in these kind of sectors?

And what is keeping us at kind of high single digits and why should these not be double-digit margins, given that there would not be too much competition here?

Sanjeev Sharma

Well, I think there is no business we have that we call old, though we are a 130-year-old company we keep on refreshing our portfolio and our propositions for the customers.

So, any customer who buys our products and solution they really buy the latest and the cutting-edge solutions from ABB.

So, yes, electrification business you may classify it as a business which is dealing with the market segments which are well established, but then the products under it and the technology in it is really cutting-edge and that's the edge of ABB and the preference of ABB in the minds of the customer.

All portfolio that we have with Electrification, Motion, Industrial Automation, and Robotics and Automation, all of them deploy cutting edge technology if you really pick up some layers around it and compare with our competition.

So that’s number one.

Number two, 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 a 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 utilization rate goes up, you will see the effect of those also into the profitability.

So that's how the simple equation works.

Since these businesses are built on experts, we are always very patient with the market cycles, we see through those market cycles and in the meantime, we consolidate ourselves in the new value-added applications with those experts.

Then when the market comes around, we take benefit of it.

Even during these downtimes, we always give some medium size, value added packages for the industry who are running very large industries, be it in the steel industry, ABB India Limited November 13, 2019 aluminium industry, cement plants, pulp and paper plant and whatnot, because they are hungry for technology which can increase their productivity with their existing plants.

So it's a matter of creating those proposition and make a very high use of the utilization of the expert base we have, and that's where the profits come.

So as I explained earlier, yes, these cycles come and go, and we have seen many of them because we are operating in this country for last 60 years, and also 130 years globally.

So, we are not that concerned about this short period variations.

Moderator · Conference Operator

Thank you.

The next question is from the line of Jonas Bhutta from PhillipCapital.

Please go ahead.

Just following up on a question asked by the previous participant, if you see on the Motion side, across all the three or four segments that we have compared to the parent, the gap in margins is the highest in Motion to the tune of almost 700 to 800 basis points.

Given in context that we in India are one of the largest, by market share, in motors, we also are a leader in traction motors.

If you put it in context, if you can help us understand, why is there this big gap between what the parent reported about 17%, while we are at 9% and what are the steps that can help us bridge this gap in that sense?

Sanjeev Sharma

Well, on the lighter side, if you can make us realize the same price levels as we get globally in Indian market, which is brutally competitive, I think we will be very happy to report 17%.

I think it's a credit to our team that they run operations in a very, very effective way wherein this particular category of the products are very, very competitive in the market.

If you compare on the reverse way, our competitors in that segment, their margin levels, you will get the real picture on how well ABB runs this business in the country.

I would say we are exposed to a market which is extremely competitive.

Most of that business right now on the larger side is domestic, as our export profile increases and we participate into the price points which are available at the global market, the moment that mix changes that gap will automatically start bridging as we go forward.

Great.

If Mr. Sridhar can just repeat the segmental order inflow and order backlog numbers along with those for exports, that'll be helpful.

I know we have already got the order backlog for exports, just the order inflow will also help.

T.K. Sridhar

Order backlog for exports is not what I have told.

I think I have given order backlog by each division and order book by each division.

Sir, it is mentioned in the presentation, the order backlog for exports.

T.K. Sridhar

Order book for exports is there.

ABB India Limited November 13, 2019

Yes.

So, if you can just repeat the order inflow and the order book numbers by segments, that would be helpful.

T.K. Sridhar

Orders booked in the sense, orders that we have received during the quarter is Rs.

635 crores for Electrification, Motion is Rs.

603 crores, Robotics is Rs.

47 crores, Industrial Automation at Rs.

344 crores, so net of internal adjustments you are Rs.

1,600 crores, excluding PG.

So on the order backlog which is nothing but the orders which will be converted to future revenues, so by division; Electrification is Rs.

1,440 crores, Motion is Rs.

1,677 crores, Robotics is Rs.

165 crores, Industrial Automation is Rs.

1,307 crores.

So combined, excluding internals, we would be around about Rs.

4,372 crores.

So, around Rs.

4,400 crores is the number.

On the PG we have Rs.

5,500 crores roughly the order backlog, which is the future revenue conversion.

Moderator · Conference Operator

Thank you.

The next question is from the line of Ashvini Kumar from Reliance Nippon Mutual Fund.

Please go ahead.

Mr. Sharma, sir this decline in tax rates which have been brought down to 15% or 17%, if the capacity is initiated till the 31st March 2020, and the project comes in by 2023.

Do you expect the FDI in manufacturing to increase?

Is it a very strong precondition?

Will it help manufacturing footprint in India to go up?

Sanjeev Sharma

Well, I think it definitely puts India in the world map, being one of the competitive locations for the tax purposes.

For FDI to take place, I believe, this particular information goes through the global corporate houses, I am 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 a 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.

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 the 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.

And sir, for a company like yours, you have been saying that this is just the beginning of exports.

What will require, let's say, for the quantum jump in exports from India for ABB India Limited.

ABB India Limited November 13, 2019 What is required basically, in what areas do you expect over a period of time this export volumes to go up?

Sanjeev Sharma

So, two things should happen.

Number one, the market globally should expand.

So, typically that’s the best case scenario that the market is expanding so much that our collective supply situation globally requires expansion.

So, then what happens is a location like India would get its share of participating in that expansion.

But typically, if the markets are not expanding globally, and right now there are fears of not expanding markets in the global side, so it means if it is same or contracting, naturally you can put capacity in another country by closing another one down.

So those are the preconditions one organization has to revisit and find new location to be more attractive for the capex over a long run relative to the other.

And those are the typical things one considers when making those decisions.

And sir, the service part of the business, basically, where you have been growing very well, the population of product or installed base of the products, what is the scope here essentially?

Because it is very difficult to quantify this aspect, but how much have you covered basically out of your installed base?

Sanjeev Sharma

That's a good question.

I think couple of years back we were at an install base penetration rate of 23% which has expanded now, I think above 30%, 32%.

So, there's a long way to go and these are the real critical assets were in the customers sometime try to do servicing themselves.

But given that the outsourcing and the expert sourcing is more prevalent, we see a very rapid rise on this.

So we have a long way ahead of us.

Best in class countries globally within ABB, they are at 65% to 70% install base penetration rates.

Moderator · Conference Operator

Thank you.

The next question is from the line of Hansani Kartik from Business Standard.

Please go ahead.

Hansani Kartik

Overall, good set of numbers.

But my question is regarding your order backlog.

If I were to remove the large orders, the big ticket orders, I see that the backlog has fallen by about 13% on a Y-o-Y basis.

First of all, do we expect for a shrinkage like this to happen given that the operating environment isn't completely favorable?

And two, should we see improvement on ground?

Where do we believe that much of the order inflow in the coming quarters is going to come from?

T.K. Sridhar

Okay.

Hansani, thanks for the question.

So, I repeat my answer as what I told earlier.

If you look at the order backlog numbers what we have already given to you by division, we definitely see Electrification and Motion at this point of time have a decent order backlog to cater to the future revenues.

Where we have a challenge is basically in the Industrial Automation, where, as I've repeatedly been saying, it is basically driven by the current market trends where investment is not happening in the core sector, and that's impacted.

And that's where the existing order backlog what was there previous year is getting converted to revenues in this particular quarter.

So, going ABB India Limited November 13, 2019 forward, given the sort of economic reforms what has been announced and hopefully the credit flow to the end market improves in the next few quarters to come, I think we should be able to bridge that gap.

But it will be a slow and steady bridging the gap.

But overall, I think with respect to other divisions we will try to balance it going forward.

Hansani Kartik

Okay.

And my second question on profitability, sir you did mention that the Robotics and the Automation division profitability is slightly muted because of utilization rates not being too high.

When do we see this sort of reversing?

Or this is also something which is going to be a function of how orders briskly flow in?

T.K. Sridhar

Yes, it is a combination of two, three factors.

One, definitely the macro environment improving and when we get a better order inflow, that's basic, it is very important.

The next is about the mix of the orders what we have between projects, products and services.

And of course, export compliment taken on top of it.

So, if these things see a trigger on the right side of it, I think this would definitely improve.

Moderator · Conference Operator

Thank you.

The next question is from the line of Ajinkya Bhatt from Macquarie.

Please go ahead.

Ajinkya Bhatt

Sir, my question is, is that in the presentation and in your comments you have highlighted transportation as one of the growth drivers.

So could you just throw some light on how transportation has evolved over the last couple of years in terms of revenue or orderbook mix, as well as its contribution to segmental margins?

Secondly on the same transportation business, are you seeing any shift in terms of the kind of value addition that you can do on the Railway side, for example, moving from conventional railway more towards the metro?

And the effect it might have on the competitive intensity, whether the intensity is going down?

Sanjeev Sharma

Thanks for the question.

So I will give this line to my colleague, Sanjeev Arora, who's the president for Motion division.

Sanjeev, would you like to answer those.

Sanjeev Arora

Yes.

Thanks, Sanjeev.

Thanks for the question.

So, as you rightly pointed out, yes, transportation is in the right mode of traction, I would say for us.

Definitely over the years, the transportation business has really picked up.

When we see from the development point of view, you can see very well the order input increase, the revenue increase, as well as the profit margin has also relatively become better.

Now, when we talk about the diversification, I would say, not only the Indian railways is the core business, but then of course, the product that we manufacture here in India are very suitable for metros.

As the government policies expand and get under implementation phase in the metros, the faster they get, the faster we will have the growth in this transportation sector, and we are ready for it.

I hope I have answered your question.

Ajinkya Bhatt

Yes sir.

Is it possible to quantify what is the percentage of transportation in order book today?

ABB India Limited November 13, 2019

T.K. Sridhar

So, just to add to what Sanjeev was saying, let me tell you, railways and transportation is not only served by Motion, it is also served equally 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.

So if you get a larger order, which is system based order, this definitely increases.

But at this point of time, it's more of product orders.

So it has 7% to 8% of profile from the railways.

But mind it, this was nothing three years before.

With so much of focus that we have put on this particular sector, the initiatives that have gone into this for developing this particular customer has yielded this result.

This goes back to our theory how do we mitigate the risk in the market, given the situation that we have a slowdown in the core sector.

This is one of those actions reaping the benefit at this point of time.

Ajinkya Bhatt

Okay.

Understood.

Just one small data point if you could just provide, what is the outstanding order book in Power Grids business?

T.K. Sridhar

Power Grid business is Rs.

5,500 crores.

Moderator · Conference Operator

Thank you.

The next question is from the line of Vikrant Gupta from IIFL.

Please go ahead.

Vikrant Gupta

Just one question from my side.

The unallocable expenses have seen a sharp spike in this quarter, it was around Rs.

30 crores in the past two quarters.

So any particular reason?

T.K. Sridhar

I think if you look at the unallocated numbers, which is basically the numbers I think we had Rs.

72 crores last year and this quarter we have Rs.

29 crores.

So it has reduced, it has not increased.

And as I said, that is a component of the write downs or the provisions what we had taken for the exiting EBOP businesses what we had done last year.

I don't think there is an increase.

Moderator · Conference Operator

Thank you.

That was the last question.

Sir, over to Mr. T.K.

Sridhar for closing comments.

T.K. Sridhar

Thank you very much everyone, and the support which you extended for ABB.

So, it's a great quarter, again, I would say given the circumstances.

Thank you for joining this particular call.

If you still have unanswered questions, please feel free to get back to Sohini or myself, and we would be more than happy to address them as applicable.

Thank you very much.

And also to the management who was here on this particular call.

Thank you very much.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, on behalf of ABB India Limited, that concludes this conference call for today.

Thank you for joining us.

And you may now disconnect your lines.