How ABB India became a stock market darling

Some examples of FMIGs in ABB’s portfolio include industrial staples like switches, miniature circuit breakers, flowmeters, soft starters, drives and motors, lighting solutions, isolators and relays.

The new strategy began with some tough decisions, taken by the ABB Group in Zurich. The group sold one of its biggest units—power grids—to Hitachi in 2020. The same year, it also sold its solar inverter business to the Italian company FIMER SpA.

While the divestment allowed the company’s management to focus on industrial products, it took a toll on its top line. The company’s revenue in India declined from ₹8,210 crore in 2019 to ₹5,821 crore in 2020. The top line had hit a peak of ₹10,862 crore in 2018. Profit slid to ₹219 crore in 2020 from ₹303 crore in 2019.

“Power Grid was almost 32% of our books; we let that go. Solar inverter segment was about 8% of our books; we let that go. Because we didn’t see that to be core to our activities going forward,” said Sanjeev Sharma, the managing director of ABB India Ltd.

The company subsequently also spun off its turbochargers business into a separate entity, to flesh out a business focused on fast-moving industrial products.

“We continued to clean it and now we have a portfolio which is purely focused on electrification and automation,” Sharma said.

How did the clean up impact the company’s performance? Read on.

Less to more

Globally, ABB’s history dates back 140 years. In India, it has been present for more than a century. The company started operations in India as ASEA (Swedish) and Brown Boveri (Swiss). The two entities eventually merged.

Today, ABB India operates factories in five manufacturing locations—in Bengaluru, Nelamangala, Nashik, Vadodara and Faridabad. Like we mentioned earlier, the company expanded in India but shrunk because of divestitures. Its new strategy was finalized in 2020 and since then, the company has tried to expand the industrial goods business to regain its top line.

This expansion involves the company’s product portfolio as well as client base. ABB India went from around eight product lines in 2016, when Sharma joined the company, to 23 segments today.

Secondly, the company went beyond top-tier companies and tier-1 cities in search of new customers. This not only helped the company expand its business, but also decouple itself to an extent from the capital expenditure cycle of large companies.

The company’s new strategy was finalized in 2020 and since then, it has tried to expand the industrial goods business to regain its top line.

“With our new avatar, we needed to make sure that we were going deeper into the market and into tier-2 and tier-3 cities as well,” Sharma said. “Earlier, it was mostly restricted to large corporations who are placing orders out of Mumbai, Delhi, Chennai, Bengaluru or Kolkata, but that’s totally gone. We have gone deep into the market and that’s where the growth is coming from,” he added.

For instance, when Raipur-based Real Ispat and Power Ltd wanted to enhance its business processes and performance, ABB supplied the company with 185 of its IE3 motors. Electric motors convert electrical energy into mechanical energy. Similarly, when Shree Shanti Oil Mills in Bharatpur, Rajasthan, wanted to automate its oil extraction process, the company purchased ABB’s ACS560 general purpose drives. Such drives help in controlling and automating machinery.

These companies were not the typical customers ABB sold to even a few years ago. The company’s industrial products division was focused on large companies and turn-key projects rather than FMIGs. Today, about 37% of ABB India’s customers come from tier-3 cities.

We have gone deep into the market and that’s where the growth is coming from.
—Sanjeev Sharma

The company also diversified its offerings to a wider bouquet of sectors to further expand business.

“We were by default focused on the core sectors, which is metals, mining, pulp and paper,” said T.K. Sridhar, the chief financial officer at ABB India.

The company started looking for customers in other industries such as food and beverage manufacturing, logistics, warehousing, renewables and data centres. “We decided to play here because technology could be a larger differentiator in these sectors than in the core industries,” Sridhar said.

The evolution

Meanwhile, there was yet another trigger for ABB’s growth. Its customers were evolving.

Earlier, many of them imported completely-built machines. But with growing confidence in local capabilities, entrepreneurs are gradually transitioning to importing just the technology or even developing their own designs. This has led to growing demand for components that are both energy efficient and of premium quality. In turn, the trend is now bringing customers to ABB’s doorstep, Sharma said.

Even the company’s traditional large corporate customers are becoming bolder in terms of technological investments.

“A very large base of customers are willing to try new technologies. We are used to seeing this in Germany, Sweden, Switzerland, where people know that in order to gain productivity, you have to participate in new technologies. That attitude is coming to India,” he said.

To drive the point home, Sharma gave the anecdote of an Indian carmaker looking to invest in ABB’s new PixelPaint spray technology that has only recently been piloted with an American carmaker. This technology speeds up the process of achieving dual-tone paint on cars as it doesn’t require covering and uncovering painted areas to prevent the cross-contamination of two colours. While the technology was developed for the US and European markets, Sharma was pleasantly surprised to find an early customer in India.

Finally, the fruit

ABB India clocked revenue of ₹10,447 crore in 2023, nearly rescaling the pre-divestment peak of 2018, when it had a top line of ₹10,862 crore.

The wider customer and product base also meant that the company’s new orders have surpassed the 2018 levels. The company received ₹12,319 crore worth of orders in 2023 compared to ₹10,115 crore in 2018.

ABB’s 2023 profit of ₹1,242 crore was more than double the 2018 profit of ₹511 crore. Earnings per share went up from ₹24 to ₹59 during this period. We compared the numbers to 2018 as the company’s performance dipped in 2019 before restructuring and the covid-19 pandemic impacted performance in 2020.

ABB is flush with cash that is sufficient to handle its present and future capital expenditure needs, analysts have noted. The company is investing in organic growth across its operations; the new Nashik factory being one example. At the same time, it is scouting for acquisition opportunities.

“We have informed all our divisions that cash is held by the corporate. You find the targets for us. Micro, small, medium or large–we will fund it for you as long as it makes sense for our customers and adds more value to the portfolio,” Sharma said.

ABB, meanwhile, has distributed a part of the higher earnings to shareholders as dividends. Its dividends went up from ₹4.8 per share in 2019 to ₹11 per share in 2023, including a special dividend of ₹5.5 per share. In February this year, the company declared a special dividend of ₹23.8 per share, the highest-ever in its history.

Investors have appreciated the turnaround and the dividends, with the ABB India stock becoming a favourite on the bourses. The stock has gained nearly 450% in the last five years to close at ₹7,184 on Wednesday. It has gained over 50% since the beginning of 2024.

To be sure, a growing middle India and buoyant stock markets have also helped the company’s business and stock price. Its peer, Siemens India, which is into several businesses that ABB India is in, has seen an identical stock market performance over the last five years, gaining over 460% during this period. Meanwhile, the stocks of CG Power and Havells India, who also compete with ABB, have given returns in excess of 1,400% and 100%, respectively, over the same period.

Mixed feelings

“We remain positive on ABB given increasing traction for energy efficient products, changing customer preference towards premium quality products, diversified business model, focus on high growth segments such as data centres, electronics, rail and metro, renewables, etc., and strong domestic order pipeline,” analysts at Prabhudas Lilladher noted in February.

However, analysts at ICICI Securities hold a more muted outlook on the prospects of the stock. In a note released in April, the ICICI Securities analysts noted that while the company’s order inflows in 2023 grew at a healthy clip of 29%, the share of long lead time orders has increased to 15% of the total order book compared to 7% a year ago. “Thus, assuming 15% long lead order inflow in CY24, adjusted order inflow has grown at 8% year-on-year to ₹108 billion vs headline growth of 29%,” the analysts noted.

Some analysts remain guarded about ABB’s prospects. The uncertainty due to the ongoing elections could impact order inflow in the first half of 2024.

Coupled with uncertainty due to the ongoing general elections, the analysts expect order inflow in the first half of 2024 to remain subdued on the high base of last year. “Thus, we expect revenue growth to remain muted in CY24E,” the ICICI Securities noted.

“Moreover, we believe operating margin may have peaked as most gains pertaining to easing raw material cost have been realized,” they added.

Sharma’s rumination

Sharma agrees that while the company has increased its focus on the high-growth market of smaller companies ordering its FMIG products, 40-45% of the company’s business still comes from the low-growth segment of large companies. These orders typically have a longer lead time, although the specifics vary from order to order.

But he remains bullish. “The high growth segments are the ones which give us accelerated volumes. And in the low growth segments, the moment there is a turnaround, they come up with a very large project. As this capex comes in, it will add to our growth story, going forward,” he said.

Back in Nashik, the relaxed pace of activity at the company’s Satpur plant belies the company’s frantic pace of business expansion. The plant works a single shift and production is anything but rushed. The plant has been set up keeping in mind the demand anticipated in the coming 10 years.

Sitting at the company’s first plant at Nashik, a 44-year-old unit not far from the company’s new plant, Sharma ruminated on the company’s performance over the last four years.

What keeps him up at night is not how to bring in more business, but how to train the next tier of leadership; how to maintain the company’s culture with its expanding roster.

“As we expand our workforce, integrity is the most important element. We have zero tolerance to bribing and influencing anybody to get business,” he said, adding that it was his top priority to imbibe this culture in the company’s 10,000-strong workforce in India.

In December 2022, the ABB group reached a settlement with the National Director of Public Prosecution in South Africa, the US department of justice, the US Securities and Exchange Commission, and the Office of the Attorney General of Switzerland, over its role in a corruption scheme in South Africa. The settlements totalled $327 million.

Sharma’s cultural tutoring could help ABB India stay clean.