ABB India Limited (500002) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to ABB India Limited Q2 April to June Quarter CY 2023 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded, and any unauthorized recording of this call is strictly prohibited. The recording will be made available on the company's and SEBI's website subsequently. I now hand the conference over to Mr. T.K. Sridhar, Chief Financial Officer of ABB India Limited. Thank you, and over to you, sir.

Thank you. Thank you very much. A very warm welcome. Good evening to all of you for the Q2 analyst call, and we will -- where we will take you through the performance of Q2 of ABB India Limited. So together with me is Mr. Sanjeev Sharma, Country Manager and Director; Sanjeev Arora, who represents Motion; and Kiran Dutt and Ganesh Kothawade, who are from here. And we don't have Balaji. Balaji is traveling from PA, but we have Subrata Karmakar from Robotics. So over to you, Sanjeev, so that we start off, and then we can go to the financials.

Thank you, Sridhar. Good evening, everyone. Thanks for joining this call so late on a Friday. So we can understand that we should start this call on time and end on time so that all of you can go back to your well-deserved long weekend. You know that ABB, as a company, is around for more than 130 years. We continue to keep our leading position with our leading technologies in electrification and automation. And in India, we have been present for last -- manufacturing for last 70 years-plus. And our presence here is over 100 years. Our 4 verticals or business areas, electrification, motion, process automation, robotics and discrete automation. They operate in India with 5 manufacturing locations. At this point in time, we have 25 plants, 21 sales office and 700-plus -- 750-plus partners who bring us to the -- deep inside the different market segments as well as the geographical spread of our country. Those of you who have been following ABB for a long period of time, you would have seen that ABB has grown its depth in terms of the market segments we cover. So if you see this chart on the right, which we call as SUSTAIN, these were the typical market segments ABB used to operate many years ago, which we, in other words, used to call it core segment, cement, metals, mining, buildings and infrastructure, power distribution, oil and gas, marine, and ports, rubbers and plastics. These were the typical market segment which used to give us bulk of our business. And they were very dependent on the CapEx cycle of large companies. But over a period of time, as India has grown and also new market segments and new market opportunities have come and also with our own concerted effort to expand ourselves into new market segments, we have gone into segments which are covered under ENHANCE. So that is making a significant contribution to our growth. And also the focus segments, which are the new generation market segment where, again, our growth rate and penetration is increasing, and our products are finding good favor with our customer. And the ones which you don't see on this chart, they are on anvil. There are new very large energy transition is taking place in the country. So we have identified some opportunities, a few opportunities wherein the customers are forming their CapEx as well as future investments. And you will see those market segments will also get expanded. So at the moment, we focus on 23 market segments, and this is our base for us to drive the growth in our 18 business divisions. Next one. So like every time we talk about a particular market segment every quarter just to give you more granularity of a segment, how we see it. So food and beverage is theme for this quarter, a deep dive. What we have in this particular market segment, we see about $535 billion of the formation of the business in this year. And it has grown quite rapidly from FY '22 at $290 billion and expected it to be $535 billion in FY '25. And you can see the market segmentation of it. And all these market segments, with the direct and indirect opportunities, play with our portfolio. Mostly is indirect through machinery suppliers, OEMs, as well as our channel partners, they bring a lot of business, and also the large companies, they buy equipment and technology directly from us in this segment. So fastest-growing segments, you can see the packaged food, dairy, meat and marine. And also, we see with the changing lifestyle and food habits there's a strong domestic demand for this particular segment. And the expansion of capacities is taking place. And more and more emphasis is being put by the government. 100% FDI for food processing, PLI schemes, all these are forming this market. And our portfolio in drive motors, automation, instrumentation, robots, switch gears and digital powertrain goes into it. Now coming to the business highlights. Our quarter 2 2023 or where we call it as a June quarter, I think many people, for many, reference point is quarter 1, but for us it is quarter 2. The orders were up 10%, despite a higher base, driven by emerging and traditional segments. Revenues are up 22%. And profit after tax, if you take year-on-year basis, it's 200 basis points higher, driven by operational efficiencies as well as good execution of the backlog. We have expanded manufacturing footprint of energy-efficient drive portfolio. That again, is playing into the sweet spot of the market, wherein more and more customers are kind of replacing or buying products which are more energy-saving. So energy-saving and energy-efficient is a sweet spot for ABB, and we see a lot of emerging demand in that particular area. And not only that -- not only that we are helping our customers to reduce their carbon footprint, we, ourselves, have a concerted effort within the ABB organization, and we have been able to reduce 85% GHG Scope 1 and Scope 2 emissions until quarter 2 2023 with a baseline in 2019 in all of our manufacturing locations. So it's a program that we run, and we are very proud that how our teams and our businesses have taken upon it and how we are able to making an impact in each and every other location. We are engaged with 3,000-plus customers across 13 Tier 1, 2 and Tier 3 markets, and substantial amount of business is coming from these markets for us. We are maintaining a good cash position in our balance sheet, and our free cash flow conversion is in line with profit after tax. And the Board has approved a special dividend. And I think that Sridhar will give you a bit more details there. And this is something which we think -- we thought that we will bring some value to our shareholders. Next one. So there's a positive market momentum across all the segments that we are focused on. All our businesses are growing. All of our businesses are having a profitability in the right direction. Our business tends to be now short cycle. Our services are growing at a healthy rate. We also have a good exposure to very strong markets -- emerging market segments, be it in the automotive traditional or also EV segments, which are emerging, electronics, which is expanding, and also [indiscernible] segments. And the investment by railways and metro, that also is quite favorable for our portfolio. And also process industries which has started making OpEx and CapEx investments, there again, we are finding good favor. So with that result, our order backlog has grown nearly 29% to INR 7,700 crores. So some of the examples here, like we're in -- we have the power and automation going into an aluminum miller. Then we have the motion solutions comprising of drives and synchronous reluctance motors going for heavy electrical major, then we have traction motors for railways, blending solution for Japanese engineering procurement company for the energy space, robotics solution for metals majors. It's a nonautomotive project. Power distribution and management for data centers, which again is a very strong emerging market segment. And robotics, paint in white in order for automotive majors. More and more Indian automotive majors are investing in the robotics, and we have quite a good favorable positioning there. And of course, our switch gears going into the ethanol production. Our teams have this recipe of really going and connecting with customers deep in the market and deep in the market segments with the new customers as well as existing customers. And we had a very strong engagement in last quarter across 13 Tier 2 and Tier 3 markets. And this is one of the reasons and the effort and the leadership of our businesses, which is really contributing to our growth. Next. As I mentioned that our GHG Scope 1 and 2 emissions are down 85% on the baseline in 2019. We recycle almost 96% of our waste. And 2 of our 5 plants are now water positive cumulative till quarter 2 2023, and we hope to have all our plants water positive. On the CSR perspective, we continue to make impact on helping and supporting surrounding as well as the targeted areas with the infrastructure projects, providing skills as well as education in multiple schools, having the kind of residential facility for women with special needs in Nashik. We have mid-day meal program supported through Akshaya Patra Foundation. In Faridabad, we run program which is an education scholarship for girls with IT skills, and health care for making special camps for communities who don't have access to those means. So with this, I will hand it over to T.K. Sridhar, our CFO, who will take you through our financial highlights. Thank you.

Thank you. Thank you, Sandeep. So I think it gives me immense pleasure to bring you the results, which is absolutely a solid performance in the quarter. So I think, first of all, I would like to tell you, we have improved based on the feedback what we got and also the global standards. We improved our press release, which has gone -- which would have 1 reached you all with more information, which we will do it on every half year and full year basis so that we have a better transparency and clarity on the data of the performance of the company. So going by that, I think we now have got a consistent track record. Orders are INR 3,044 crores, which has a 10 percentage here on Y-on-Y growth. Order backlog, we said we are at 7,729, 29 percentage up. Revenues, we now have reached INR 2,500 crores per quarter. So that's now consistently tracking at that level, so 22 percentage growth. And profit after tax and the profit before tax, I think, have grown exponentially with INR 393 crores and INR 296 crores for the quarter, which is more than 100 percentage of what we had delivered in the previous year, right? So we bring to you, apart from this, I think, a couple of more data points, how was the earnings per share improving for the last 8 to 10 quarters and also what has been our trajectory on converting the cash -- the profit into cash. So we are now quite efficient in converting the profits into cash. So we are trending at an average of 100 percentage of what we earn. So I think this is a key summary of how the Q2 looks like. If you go to the next slide. Just to get you more information about how we did for the half year. So half year, on the order level, we are trending at 22 percentage more than the half year of last year. So INR 6,169 crores as against INR 5,066 crores in orders. And the backlog, we said 29 percentage. So revenues are up 22 percentage. And profit before tax and before exceptional items is up by 83 percentage. And profit after tax is up by 5 percentage. The gap is more because in the first quarter of last year, we had one exceptional transaction impact of the turbochanger sale divestment, so which made out this quarter's INR 328 crores. And that's the one which is included in the profit after tax of the last year. So that has an impact. But otherwise, if you remove that, the profit before tax and profit after tax for the 6 months also will trend at the same levels as what we have seen. So cash balance, we are at INR 4,092 crores at this point of time. Next slide. Just to dwell a bit more about how is the structure of the P&L looking like. So we have an income of -- other income, as we explained the revenue portion of it. Other income consists mainly of interest income from the -- from the cash deposits of what we have made. The material costs holding on to 53, 63.5 percentage. This is probably because of 2 things. One is the mix of orders remaining consistent with good amount of services portion and also a bit of a softening of the metal prices, which has happened which has helped us. And our ability to command a better price in the market is something that has actually improved the order -- the material cost. So and this is basically -- these material costs is derived from the orders what we have booked in the previous quarters. So this is something what we need to keep in mind. Personnel expenses is at INR 162 crores [indiscernible] INR 68 crores compared to INR 145.7 crores last -- from last year same quarter. And that's representative of the increments what has been given to the employees on a year-to-year basis. We don't have any other events apart from that. Other expenses remain consistent. So only outlier is probably the exchange and commodity price variation. So in last quarter was INR 56.8 crores, and this quarter was INR 29.8 crores -- INR 30 million -- INR 30 crores swing. That's the only additional impact. But otherwise, the other elements remain pretty consistent with what we had in the previous quarters. So overall, I can -- we are very satisfied to deliver this particular result as there is profitability or profit after tax of 11.8 percentage and on a 6-month basis at 11 percentage. The next slide. So the gap, I think we just discussed about this waterfall. So other income includes 49, and majority of it is interest income, what we have. Operational EBITDA, quite interesting, I think this is something which all you have been tracking as to how ABB is performing. So we always -- we maintain the stability on the performance. So we always have been saying that we want to have the 10 percentage PBT first and then move into the next corridor of delivering better profitability PAT level. And that is reflective in this particular slide of EBITDA and PBT. And that's more because of the volume price and the capacity utilization, what we have. Just to give a bit more color on how each of the segments have performed. So electrification and motion, everyone continues to be on the same -- on the growth trajectory. So I would say that all the divisions in electrification posted a growth. So I think that's something which is quite visible in across all the divisions. Revenues. This is basically possible because we had a seamless supply chain supporting the fast growth of the EL division, so which also helped in delivering the revenues on time. Profit before tax and interest, I think it is more of a price utilization, capacity utilization and a mix, which gave a positive lift to the numbers. Motion. I think, again, a strong demand from the energy-efficient products. This is a theme which is more kind of the hallmark of Motion offerings. So that has actually driven the growth. And it's good to see that we are already at -- for the last 2 quarters, consistently at INR 1,100 crores in order bookings, and reaching up to INR 1,000 crores and almost INR 1,000 crores in revenue execution as well and a good development in profitability as well as also is evident. Q1 had onetime impact of a quality warranty what we have provided, and that's exactly what is there. And this was already informed to you in the last quarter's earnings call. Process Automation. So we got a large order from a metals major as what was told. I think that's helping us to get to INR 784 crores this particular quarter. Revenue is consistent with the order booking, what we had on hand of INR 510 crores, so profitability coming back to INR 11.1 crores. And I think on the last quarter, it was more -- in the Q4 '22, it was more contributed because of the highest ever revenue, which was there, an exceptionally higher service revenues, which pulled up the profitability to INR 17.6 crores. Robotics. Again, another quarter of solid performance. So the orders were slightly less than in this particular quarter compared to the run rate, and that's more about the timing of orders. This being the first quarter for quite a few companies so the decisions come up in the next quarter onwards to the financial year starting from April to -- April onwards. So -- but other is, I think, on the area of Robotics as a business is actually performing quite solid and quite consistently with what number we have. The last slide, this is about how do we see our channels, offering and geography. So products dominating the total offerings with 77 percentage, services with 13 percentage, and projects with 10 percentage. There has been a broad bifurcation. And again, the next is also geography. I mean, while it is good to see that we have 11 percentage of profits -- 11 percentage of exports, what has come out in this particular quarter. More important is that the domestic demand is growing faster than the export, while we see absolute value of exports also increasing, but the domestic demand is far exceeding the export demand, and that's exactly why the percentages seem low. So what is the focus for H2 '23? So definitely, we continue on the market penetration. We also make sure that we build on -- we have an order booking momentum going on. And the sustaining margin momentum is also key for us to be there in the corridor of what you see. And we'll make sure that capital, what is available is allotted for the right projects and the right processes. And not -- last but not the least is making sure that the sustainability target is also achieved. So while on this, I have something else which I thought I should offer to you because I know a lot of people reach out to the organization to set up meetings to call up for this thing. So in order to make sure that we have a more seamless experience on how we deal with analysts, the investors, so we thought that it is time for us to gear up to make it more digital and more -- make it more user friendly. So we have -- we will reach out to you with a link wherein you could register yourself and ask for meetings, and then the organization will make sure that it is set up at the right point of time. And this also helps us to share with any of the regulators at some subsequent point of time if it is asked for. So this way, I think we make it a bit more structured and more documented also well for you, and it also helps you to record yourself for the meetings or to have that with ABB. So with this, this is the end of our discussion, so we could open now for Q&A.

[Operator Instructions] We have our first question from the line of Renu Baid Pugalia from IIFL Securities.

Congratulations for the strong performance, sir. My first question, obviously, when we look at the numbers, margins, you have seen consistent improvement. While your comments have been very clear, but can you show some more inputs in terms of the gross margin's consistency of 36% for almost 3 quarters now. How sustainable is this? And what comfort do you derive from the order pipeline in terms of competitive intensity in the mix, which should help you sustain this profitability?

Thank you, Renu. Thanks for this question. So we have shown you our backlog numbers, which have grown up -- grown by 29%. So that gives us the forward revenue surety, and that's where the margins come from. So we have a fairly robust pipeline of revenue. So we feel that with the consistent execution each and every division that is carrying out, I think trajectory is in the positive direction for us.

Sure. And any input specifically on the mix of large orders that you have booked in the current quarter, probably in the process segment? And how has been the outlook from core sector awarding like steel, especially on the greenfield projects? Also, do you foresee any slowdown in orders towards the end of this calendar year or beginning next calendar due to slow down -- due to the elections?

Okay. So the second part, I'll answer. First part, you can go ahead about the orders being booked, the large orders, Sridhar?

Yes. I think the large order, what we have booked from a metals major, I think that happens in normally Process Automation, right? And also Renu, to answer to your question on the first question, which is consistency about how good will that 63.6% or 64% rate in the material cost, right? So if you look at the backlog, majority of it is projects, which I'll discuss. But all the product businesses, which is BM, which is motion and EL is all -- a lot of them are book-to-bill or short-cycle orders. So that's also governed by the current prices, which happens in the market. And so it's a matter of how we execute the existing backlog mix with the capacity utilization and the service conversion. That remains the key. So our endeavor has been to remain in that particular -- the material cost level. So what could basically upset that? That would basically be the volatility in the ForEx, anything which could happen on the economy with respect to the demand situation with respect to metals, right? So this is what we see. As far as the technology is concerned, we have more prudent offerings in that particular space, right? So this steel order will get executed over the next 18 to 20 months as what I was saying. Over to you.

So with respect to forward look, we respond to how we see the market developing close to our nose. So we engage, and if the market responds positively, we continue to engage and continue to create capacity to deliver on time for the customers. So we always take the -- even if the market is very robust, we always make sure that we make commitments in the market which we can deliver and honor on time, be it supply chain disturbances or any other disturbance which could be there in the marketplace. So I think that has been our trademark. Now looking forward, when I look into our distinct themes because ABB, of course, is one company, but then we have 18 companies within the -- within one company. As when I interact with each of the division leaders, they're really engaging very well with the market. And their targets are to expand from the base where we are. And they are quite positive. And they see the market responding in a positive way at this point of time and also with the forward pipeline. There are certain pockets which are in a multiple market segment and multiple product lines or product division portfolio. You will either have one line or the other wherein some hotspots develop, which are very natural. So there are -- only on the minority side, there are certain sluggishness there and there in the market segment or a product line, but not on the majority side of it, Renu. So that's what we see. Now with respect to election year, probably, I think we'll listen to your paper if you have done a better analysis so that we can learn from it. So there is something, I think, we learn from the market rather than have our own point of view on it.

Also, just want to comment and appreciate your efforts for being the first to automate the investor side of queries and requests.

Thank you.

We have our next question from the line of Deepak Krishnan from Macquarie.

I just wanted to understand, given that our cash position is substantially improving, you've indicated we could look at potential transactions. Where are we on that path? How near or how far is that event? And if not, then what do we do with such a healthy cash balance that we're sitting on?

So we have both organic and inorganic plans. So organic plan is very well laid out, in line with the demand that we are seeing in the market and the capacity utilizations we have reached. So those are very firm and very predictable as we go forward. And also, we have many of our global divisions coming to us using India as a base to serve global markets. So incrementally, different businesses have started showing interest in that area. So we are expanding -- or we should expand in that direction as well. So that's one way of utilizing it. Then what we have at this point of time is for every business area and every division, we have very clear targets what we are looking for, what kind of technologies, bolt-on technologies we are looking for each division. And this is something which is a search at a global level as well as at a local level. And both will happen. So some kind of acquisitions can take place at a global level with that targeted approach, and some will happen at a local level. So that's where it will get utilized. And in this particular space, both should be ready, buyers and sellers. So buyers should be ready to buy. We are ready. But then the sellers should be ready to also transact. So we do have a pipeline there, but then it takes over a period of time. And I think that's how we will see utilization of cash going forward.

Sure, sir. Maybe just a follow-up. Just indicating that you indicated the pipeline continues to remain strong. And last quarter, you sort of indicated a 12% to 15% is the order inflow growth that we were expecting for this year. But given that 1H we are already at 20% plus, do you see that we would be more at the upper end? Or do you see potential to that cadence for price higher than what we were recently thinking?

What Sridhar said is that this is -- the first quarter for generally for the industry, they are typically sluggish in this quarter. And then it picks up in the second quarter, third quarter and fourth quarter for the industry. So we don't see. I think when I -- when we meet large corporates and medium-sized corporate and kind of upcoming companies, actually, we don't see any sense of passivism as yet. So we will play by the market. It's difficult to predict how it is. But I think we keep on making a deeper penetration in the market segment and the geographies. And none of those, of course, are disappointing us at the moment.

We have our next question from the line of Sumit Kishore from Axis Capital.

My compliments in the quarter. We read your press release. It says that base order inflow growth was 4% year-on-year. Is there a risk of the base orderings sort of plateauing out after -- for a while. That's my first question.

Okay. Sumit, just to make you also be aware that we have set on a high base of last quarter same year, right? So that's basically what we meant, that when we see the 4 percentage, so last quarter, last year, the same quarter, was an abnormally -- or then fast track, again, which was a rebound after the COVID period and people started to place orders. So -- and that's exactly what we said, that it was on high base orders. And so in spite of that, we are able to grow.

Okay. And was there some pre-buying that you mentioned in the Robotics segment, is that -- just for that, actually based on in-flow growth, in other segments would have been better?

I'm afraid we're not able to hear the first part of the question.

So I was saying that you mentioned in a certain business segment in the base quarter, which might have also slowed down the base order in-flow growth in Q1?

Actually, Q1 in robotics, we had -- last year, we had an electronics segment, which gave us an order, which was a one-off order. And therefore, there were 2 large orders, which were booked in Q4 '22 and Q1 '23 of -- so that's exactly what we meant over there.

Got it. My second question is your gross margins have been stable. There are operating leverage benefits playing out, which are showing up in EBITDA margins. Now as the cycle matures, would you lower the threshold on gross margin? Because essentially, with the operating leverage benefit, you would still make the same EBITDA margin and the same profit margin. So in booking more orders, would you lower -- or market forces would make you lower the gross margin that you're making right now?

Well, I think it's a very, very good question and insight. But typically, as a company, you respond to the market forces as they present themselves. So what we have right now is we are playing as the market demand is there and the elasticity of the market to absorb the price points that are available in the market at large. So I think this is something you don't predict, but you adjust to as you face the market as it shows up.

Sure. Because when we look at the peak of the last CapEx cycle, we sort of see that your gross margins were a lot lower actually at that point versus what you are making right now. So...

Which year are you referring to?

I mean, towards 2007 and 2008, your gross margins...

I think all of us are very young at that time to -- but you have a point because that time, if you -- if you may have seen the ABB portfolio now is very different relative to what was in 2007 and others. We were very project heavy, very few market segment heavy. But now the portfolio is very, very different. The character of the company as well as the penetration and our exposure to market segments, geographies is very, very different. So I think on a like-to-like basis, it's not comparable.

But Sumit, thank you for this question. Also, until now, we have always asked questions, when will you reach or surpass that particular 2007 level? Today, we are talking that we have already surpassed that. So how are you going to maintain, right? So that's a good conversion as what we see, right?

Yes, yes. Now, near that point, your ROE levels were significantly higher. And you're closing that gap very fast now, but your ROEs were in excess of 30%. So that was at the peak of the last cycle, yes.

[Operator Instructions] We have our next question from the line of Amit Mahawar from UBS.

Sir, congratulations on good profitability. It keeps profile units comfortably. I have 2 specific questions. Firstly, on motion, the kind of demand we are seeing in propulsion systems, do you think capacity-wise we are ready? And do you think next 2 years, the run rate of motion, especially from propulsion, et cetera, that we can have is going to be significantly higher? That's my first question.

We could give this question to our Motion head, Sanjeev Arora. Sanjeev, did you get the question?

So if I got it right, it is upon the expansion and the investments relation, right?

Yes.

Do we see good investments, and how are we prepared for that? So exact, the question, so thank you very much, I think is very well pointed out, and that is exactly how we are playing in this field. We are expanding our portfolios, our production facilities. And you have seen in the past that we have also put up a traction motors plant in Vadodara last year. And also, we are expanding our converters production facilities as well. So we are getting up, and we'll be coming as close as the market demand.

Fair point. And second question is more on the electrification portfolio, and maybe Sandeep, you can help us here. We have a significant gap when we talk about low voltage products range. If you look at the M&C peers that you have in India and the kind of growth and run rate they are also seeing now, can I assume that most of the capital allocation of ABB will go in the EP segment and other CapEx? And can you help us compare the gaps in EP portfolio that you want to address?

So we have Kiran Dutt who leads our leading portfolio on the product side, the smart products -- smart products and smart building -- smart building product portfolio. So we will invite comments from him. And he's seeing quite a good growth. And we also have Ganesh Kothawade, who looks into the electrical distribution portfolio, which deals with the medium voltage. So first, I invite Kiran with respect to how you see growth in the ER side of your portfolio, and how relative to competition, that work, I think, in just the question.

Thank you, Amit. I think overall, if I look at it as a perspective, I could understand your question in terms of what are we trying to do, are we able to catch up with the competition? I think, yes, in terms of the portfolio, we have been trying to expand and not only the portfolio, how is that going to look like in India, but also trying to have some portfolios from -- getting it from Europe as well. So overall, in terms of the portfolio gap, whatever is there or is going to be there, it's being addressed, looking at the market requirements which is going to also come up in the future as well. So not only in terms of what needs to be done now with our existing portfolio and also what would be the requirements because the market segments are changing and we need to adapt ourselves to that particular segment. We are also trying to bring in more and more portfolios in electrification, specifically on the low-voltage side. On the medium voltage side, maybe Ganesh can take over.

So electrification is the largest business for us. Within electrification, we have the product and the ELDS, which is the distribution system. So actually, the real competition is between these 2 guys, wherein right now the ELDS is the largest business. So now if the question is that Kiran will be able to surpass that or not. So I think that's where they are focused on in terms of how to engage in the market. Inviting comments from Ganesh. How do you see ELDS portfolio as well as your position in the market?

Ganesh, are you there?

Hello, are you able to hear me?

Yes. Go ahead, please.

Yes. Thanks, Sanjeev. When it comes to the Distribution Solutions business, we all know that we are really leading in this business, and we have quite a matured portfolio because we are here in India since last 40 years, and we have almost all the products which are manufactured locally. And as Kiran has rightly said, because there are some segments which are now changing, so we are coming out with the solutions which are the segment-specific solutions because evolving segments like the data centers or food and beverage, so these are some of the segments that require a very specific solution, and we are coming out of those type of solutions. And also, there is some shift in the technology where the market is demanding for more greener products. And we already launched the ecofriendly jet last year and the next expansion of those range also will come to the market. So I don't see a major gap in terms of distribution solutions, what is required by the market and in our customers in India.

Thank you, Ganesh. And a very quick comment. The rate of growth of the portfolio, which Kiran is running between ELSP and SB, we are seeing a very healthy growth rate there. And also, I think the plans going forward are very, very encouraging, and the momentum is encouraging. And also, our factories, which are delivering those product portfolio, I think the productivity gains that we are getting there with the increased automation and also new techniques that we have developed, I think that is also adding to our bottom line in a very significant way. Both very, very strong businesses, ELDS and ELSP and ELSB. So we are very encouraged. And we -- all the allocations that are demanded by these businesses, they are being given to them.

[Operator Instructions] We'll take our next question from the line of Ankur from HDFC Life.

Congratulations. Great numbers once again. So I have 3 questions. One, going back to the base order growth, which was just about 4% this quarter, and I take your point that we are sitting off a large base last year and -- but just trying to understand, especially on the motor side, which is typically short cycle, small orders, 8% growth. Even on the PA side, including this metal order, that's a 10% growth. So is there some lack of momentum that you are seeing? Any slowdown we are seeing in terms of order? Or is it that we should kind of reset our expectations to a high single kind of order growth given the base we are on?

So on the motor side, I'd let -- Sanjeev Arora is very well connected with the market on the motor side of the business. Sanjeev, how would you answer that query?

Yes. I think a very good observation. So let's understand. We have also seen the, I would say, softening in the metal prices. So that piece is also catching up when you talk of the absolute numbers. So that is one thing which you have to consider. And the second part is, I would say that the short-cycle business, I cannot say that it is 100% right. But then we can see some kind of headwinds. It is not that it can be ruled out. But at this point of time, when we talk to our customers, be it the large international OEMs, end users, they all have a heavy investment plan. So -- but yes, it could be possible that we see some headwinds. But as of now, they are not very visible as I can say very confidently.

So that's my question. So basically, while growth may continue, we probably see a high single, low double-digit kind of -- that's the kind of growth because motor typically, our overall orders are growing at high 20s, right? So maybe now we need to reset our expectations to more like a high single, low double-digit kind of growth. Is that a fair assumption is what I meant.

So Ankur, nothing goes in the straight line up. And if you go back many quarters, the motors has been growing at a very, very healthy rate. So I think we have gained -- not only gained the market, but also we have gained a lot of market share. Now a time comes, then you will always have a certain adjustment of the market demand and also adjustment of the competition response also to the position you take in the marketplace. So in a portfolio wherein we have 18 divisions and we are 23 market segment, we will always see this cyclicality, which is built into our kind of portfolio. So we will not be able to confirm or deny your hypothesis. We will play it out as the market presents itself.

Fair point. And just a follow-up on the motor business again. Maybe Sanjeev, either of you can answer. Just on the upcoming competition, we are hearing players like WEG, NIDEC, some of these large MNCs looking to set up capacities in India. So anything you can help us on the incoming competition there?

Yes. That is true that Indian market is attractive, and it is attracting the players who are not present here in this country. And they will find their space, and they will rightfully also find their niches as well as the market space. But at the same time, we should know that the market is expanding at a good healthy rate, and that's where it is. And our ability to deliver, even during the stress situation like COVID, I think that keeps us at a very high speed in the eyes of our customer, and there's quite a bit of a loyalty built with the customers who want to stay with us. So that's something we continue to enjoy. But of course, when our competitors set up capacity, I think like anywhere in the world, that will have its own -- they will also create their own space, yes.

And just one last one on the rail side, especially on the propulsion. Clearly, what we're seeing is a lot of project orders that the rail is ordering out, [indiscernible], Vande Bharat, et cetera, tenders on the Vande Metro as well, too, driver players to participate. So how are we approaching that? Because clearly, then you have to tie up with some of these guys who made the entire [indiscernible], right, and then we supply the propulsion into that. So some help there, how are we looking to -- do we have our tires in place? Yes.

So we are participating in that market, and we'll get back to you. Soon we have a success in that engagement.

But these orders will all take time to decide, right? So because these are all mega orders, Ankur, so I think it -- causes of what we call -- on -- of verification in the placing of orders by agency.

But you're right, I think this particular market segment is positive for our portfolio. And our engagement is in the right place. And whenever such orders come, that will be quite an event, and we will announce it to you.

And the question I seem to have, the last one...

Ankur, I request you to join back the queue, sir, as the other participants waiting.

Yes. Okay. Sure.

Thank you. We have our next question from the line of Puneet Gulati from HSBC.

Congrats on great numbers. Can you talk also a bit about what is the situation in terms of supply chain for you and for the competition in general?

I can reply about ourselves, I have no clue about competition. Our supply chain has eased out in most of the areas. And as I said, even during the peak of supply chain trouble, our global supply chain managers really helped us out, that network help. And we could cater to the demand which we thought we can't cater to at that time. And we didn't disappoint any of our customers during that period. We were very forthright and clear. Right now, all those strains that we had in the supply chain, they are not visible. I think it's fairly even out for us at this point of time.

Understood. And secondly, can you also comment a bit on what are the further levers that you still have for your margin expansion? And how high can you go from these levels?

Sridhar, do you have a formula for that?

Puneet, I don't think -- I don't have a formula for that. If you clearly, I mean, understand, I think it's then the play of what we offer to the customers, right, and how we intelligently manage their capacities and the cost, right? So this is basically what it is. And that's exactly what we have been trying to do. Our first initiative was to make it more credible over the last 8 to 10 quarters, which we have done. And we are now slowly got into the double-digit PAT margin as what we see, right? So I think we would like to remain consistent and credible over there rather than just promising from here, it is what we will grow, right?

Understood. And just last one. Your share of direct sales this quarter has gone up. How should one read that? Is it more quarter sensitive? Or is there a change in strategy from that?

Direct sales in the sense?

End users.

In your channel mix, sir.

Large orders.

Third-party and [indiscernible]. It's basically about large orders and system orders, what we have got both. So that's, in fact, actually orders that sort of change the share for that quarter.

We have our next question from the line of Parikshit Kandpal from HDFC Securities.

Congratulations on a great quarter. My first question is on the expansion plans in India. So I think earlier in the call, you said that the global divisions are interested in sourcing more from India. So just wanted to understand the large part of expansion which is happening in India. So how will be the mix there in terms of your own global companies and in terms of Indian market? So -- and how will it impact our exports, which is 8.10%?

So my mandate as a Managing Director for ABB India Limited is to serve these domestic markets. That's the reason why we have a multinational arm present in India. Other places, our company is present and is catering to those markets outside India. Now as we cater to Indian market and our -- our production capacities have increased to a good scale, and also our sophistication and our productivity measures. It's not only the labor arbitrage India has, but also the productivity arbitrage we are able to create now with technology, robotics, automation. So our plants have become slowly global standards. Now we have certain global market demand, and we have that capacity available across the globe to cater to that demand. Now it is for the global divisions to adjust those capacity somewhere else before we can serve the given demand from India. So I think this will be a logical process over a period of time. And in many of the divisions, that's already taking place, and we have seen quite an upsurge of volume being supplied out of India into export markets. But in short term, I don't think the percentages needle will move too fast because the domestic market is growing much, much faster than the international market. And if we have a capacity adjustment at a global level and that gets moved lock, stock and barrel in India, then that's the only time we will see this needle move on the percentage side.

Okay. And sir, my second question is on the pricing bid. So post COVID, I suppose that the highest level of pricing was at X-hundred. So what could be the trend now, given there has been correction in commodity prices? I think earlier also, you said that motor, there has been some kind of slowdown because of the correction in commodity prices. So what levels of pricing would be from the peak levels right now?

So one thing we should know is when the inflation comes in, that inflation stays, right? That escalation of the price that takes place as an inflation, it stays into the system, and it stays into as an input cost. It doesn't go away. Now when the fluctuation of certain commodities by the actual price goes up and down, that gets adjusted as you play the market. And typically, the price in the market is based on demand and supply situation. It is not adjusted by the input cost basis. When the input cost is there, especially during inflationary periods, the customers are more sensitive because they understand that they have to pay the higher price. But when it comes to the normalization, then the prices get normalized in the marketplace. But that is something you don't force yourself to do it. It's a market adjustment picture. And Kiran and Sanjeev, they're very sensitive and very elastic to how the market plays out. So this is something you don't strategize. This is something you play how the market shows up, yes.

At the current level, are you seeing some pushback from the pricing? I mean, do you think there's still some scope? The demand still remains very strong that there's still some scope for improvement in pricing? Or do you think that now maybe we have peaked out and could see some correction?

Any insight to add, Sanjeev, on that?

No, I think, again, I can only repeat what Sanjeev is saying, that, see, again, the market price levels are dominated by demand and supply, one; and the second part is the material prices. So there could be a possibility that we can see some reduction in the material price if the price go down globally. So at this point of time, we can say that it has stabilized. But going forward, if global demand decreases and then it has an effect on the material prices, then again, the reset of the button can take place. So that's my take on it. But if you are looking for an absolute number, I will not be able to give that right now.

[Operator Instructions] We have our next question from the line of Jonas Bhutta from Birla Mutual Fund.

My question is around the Electrification Product segment. If you can comment on how -- what role has -- or any role played by the...

I'm sorry. Can you use your handset mode, please?

Yes, I'm on the handset.

Now it is clear, yes.

Yes. Sorry, I'll just repeat myself. So I just wanted to understand, has there been any positive impact of this government scheme called RDSS on our EP segment in terms of order flows? Does ABB going to have a role to play there? That's the first question within EP.

Can you repeat what government scheme you're referring to?

The RDSS.

RDSS. Okay. So maybe you know something more than we do? What exactly is RDSS?

The upgrade of the power distribution network.

How this is upgrade of power distribution network?

Yes, so it leads to a host of smart metering, et cetera.

Smart metering, okay. All right. Kiran, do you have a view on that?

On the smart metering side, we are not into exactly on the tariff meters and on the low-voltage side. So we are not into that product segment as well.

Revamped Distribution Sector Scheme.

Right.

So there's no pull-through in terms of positive pull-through because there's an upgrade of the entire metering network. So does that have any positive pull-through for our distribution product in the power distribution product lines?

I think Ganesh could be...

Ganesh, do you have any impact of this change that is happening on the changing of the metering on the RDSS part? Do you know of any impact on your business?

Sir, can you unmute your line, please?

Yes. Sanjeev, sure, are you able to hear me now?

Yes.

Yes, sure. There is quite a good opportunity in the distribution segment because when there is an upgradation in the distribution line, there is quite a good requirement which is coming for the medium voltage breaker side. And generally, these are jobs done by the EPC contractors, and we do get the business from EPC contractor and from these utilities. So there is definitely a scope, but not as much as potential like metering -- smart metering people is -- are there. But definitely, there is quite a good potential, which is available in the modernization of the distribution network, particularly on the 11 kV side and 33 kV side.

Yes.

Sure. And my second question on the EV segment was, sir, you alluded to this business has seen a massive improvement in its operating margin. And a part of that is the lag and lead time between prices, raw material prices increasing and decreasing, and our ability to hold on to pricing in those periods. Do you believe that with this quarter, a large part of that benefit of holding some bit of low cost -- or high cost pricing, but low cost inventory largely now into the margins of the segment?

Kiran, do you have a point of view? Is it the -- our performance on the bottom line on the product side, is that correlating with inventories that you bought at a lower cost and then you had a better price realization? Is that contributing? Or you think that's not correct?

I think that's more -- I would rather answer in a different way, Sanjeev, on this. It's not a question of what we have purchased at a particular price or something. It's more in terms of the demand for the market in terms of product mix, what's required. It's also related to the earlier question where you were talking about how exactly this distribution can actually support us in terms of volumes. It's an indirect one, what we could say. So it's a question of how exactly indirectly, whether there's a building coming up, whether there's a segment of an industry which is coming up in the market, which is actually supporting our growth. And when it comes to margin, what we are talking about is the volume, for sure, is playing a very big role in terms of getting us the margin as well as we also spoke about in terms of the commodity price going down or softening up, that's actually supporting us in terms of our margins.

Fair enough. I think the same way plays out for Ganesh's portfolio as well, right? Okay.

We have our next question from the line of Bhavin Vithlani from SBM Mutual Fund.

A couple of questions. Could you talk about competitive intensity because some of the capital group's company in compressors and abrasives have spoken about influx of Chinese and restarting of the unorganized players. And if you could also give some comment in the motors business. We understand CG Power, [ EMEIC ] and WEG going for mega expansion.

So we did answer about the players in the market, and they will find their own space. And with respect to customer behavior of buying the branded products or the nonbranded product, that's a customer behavior topic. But what we see in India is a marked shift in last few years, especially after COVID, wherein the reliability of a supplier and the reliability of the product has become a bigger criteria for decision making. And the market shift has taken place. Apart from demand growth, the market shift has taken place for the people who are the marginal buyers of anybody and everybody. They have shifted to more reliable and more established players in the market. And that's also part of our growth story in the marketplace. And in India market as diverse as we are, you will always have customer segments which will be very kind of very transactional at the bottom of it. And then there are people who are really appreciating reliability, availability, maintainability and serviceability of a company which serves them. So that's how the market gets formed. And we find that the top of the market is becoming larger than -- rather than shrinking, from our perspective.

A follow up on -- are we also looking at margins over growth, and consequently, we'll seeing some slowdown in the revenue growth? Or are we reading too much into it?

We should cross the bridge when we face it, but that's not the situation we are in at this point of time.

Great. Just last question. If you could talk about the exports growth because we share about slowdown in the global market. How should one think about the growth rates for the exports?

So we do 11% to 12% exports. And as I said, that story is in the early stages of development as far as India is concerned, because as the global team chooses -- whichever our business chooses to adjust their global footprint, it has an exponential impact on what we will export out of India. And that story has to play out as we go in future.

We have our next question from the line of Aditya Mongia from Kotak Securities.

I'll limit to a single question. The question relates to energy-efficient drive and your optimism on that front. It would be useful to get a sense from you what is the current penetration of this segment inside the country? And how has that been moving over time? I'm just trying to get a sense of how the customer is thinking through kind of coupling up a motor and drive more and more in the country?

I'll let Sanjeev Arora answer it. So just to let you know about drive. We have a very low-voltage motor drive as well as medium-voltage drive. And all of them go into critical applications. And Sanjeev, over to you.

Thanks, Sanjeev, and thanks for the question. I think this is a very good question, which is close to my heart. And this is picking up in the right direction. Let me first start with this statement. So earlier, we used to see that a very small segment of the end users, which are technically knowledgeable, are picking this as a case studies or a proof of concept. But today, I can tell you, this is growing exponentially. Now in India, yes, there is a scope to grow further. But the concept of motors plus drive, because straight away, you save 30% of energy. And with the corporate roles being very, very prominent when it comes to the carbon neutrality, sustainability and the initiatives on that, this energy efficiency movement, what we say, with motors and drives is a key enabler and a low-hanging fruit for all, I would say, segments and industries in which we operate. So this is picking up, and we see exponential growth in this piece going forward. And we -- I can also add to that, that when it comes to the energy-efficient motors, we enjoy a very large share of i3, i4 range in the market. So overall, it will be a game changer for the industries, and we are well prepared in this portfolio.

And Aditya, you can also help us along with your colleagues. So you must be attending a lot of such calls with other companies. So all the companies who use these motors and drives, you can ask them if they're using it because that can reduce them 30% of energy, and that will go in their bottom line. So I think maybe, if not, then you can, of course, mention this ABB drives and motors they should use because then they have a sure benefit. So you can also help us the other way.

So absolutely. The early movers should tend to benefit from that. And I look forward to hopefully a deep dive into energy efficiency as part of the presentation at some point of time.

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. T.K. Sridhar for closing comments. Over to you, sir.

Thank you very much. Thank you, once again, everyone, for attending this call, both from the analyst side as well as the management side. So it is a Friday evening. So we do not want you to hold you -- hold you back more in the office, and it's also a long weekend. So I think with all the discussions what we did, right, and I think we will continue to do our best, right? And so therefore, we will come back again to you in the next quarter to have another good call. So -- and before we sort of hang up, so I wish you all a very happy Independence Day from our side. So that's it. So the end.

Thank you.

Thank you.

On behalf of ABB India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.