ABB reported results in-line with expectations. Margin surprise of 60 bps was offset by lower revenue. Q1 investments in infrastructure for future cost savings has been negligible in Q2, with Q3 also not expected to have much impact. Revenue recovery continues with 9% year-on-year (y-o-y) growth in Q2CY16. As savings continue on other expenses and gross level, we believe margin improvement will be sharp in H2. Management highlighted that focus continues on internal cost savings till the macro environment recovers. Other expenses were lower by 60 bps y-o-y. Spend on the Global Business Services (GBS) facility, which came in Q1, has not come in Q2 materially.
Margin uptick even with 9% revenue growth indicates potential for operating leverage when execution picks up. ABB’s exports are currently 14-16% of order flow and sales. Bangladesh and Sri Lanka, traditionally stronger markets for ABB, have good visibility. Brexit impact has been limited. Capex at R20 crore in H1CY16 is expected to be at a similar level in H2 too vs R67 crore in CY15.