Overvalued post the recent rally
T&D opportunities to drive growth
ABB India is suitably placed to tap into the opportunities in India’s
T&D equipment sector, with access to high-end technology, presence
across the value chain and superior execution. ABB India draws 45%-
plus of its revenues from the projects business, which new entrants
cannot break into easily.
However, near-term margin pressure to continue
Price competition has affected the sector mainly in the products
segment, due to the influx of Chinese and Korean players and
continued technology upgradation by selected domestic vendors.
Further, loss from the company’s entry into (and subsequent exit from)
the rural electrification business will likely continue until end-CY10.
Still waiting for cycle to pick up
Delays in project execution, funding issues and pick up in capex cycle
continue to impact recovery in both the automation and power
segments for ABB India. While we estimate a 14% share of the T&D
equipment market over FY08-17 for ABB India leading to 22%
revenue CAGR over CY10-16F, we note that near-term issues such
as execution and margins may prevail over CY10/11F earnings.
Downgrade to REDUCE; retain PT of Rs850
The stock has rallied substantially over the past 15 days without
supporting news flow on the company or the sector. We find this rally
unjustified since the stock is trading at 35x CY11F earnings, which is
close to its peak trading band (on expected earnings), despite a
deteriorating business profile. We retain our PT of Rs850, which is
based on 25x Sep-12F EPS. Given 10%+ downside, we downgrade to
REDUCE. We prefer to play the T&D story through Crompton
Greaves (18x FY12F EPS vs 35x CY11F for ABB India).
Valuation methodology
We value ABB India at 25x Sep-12F EPS, in line with the historical average (adjusted
for the difference between expected and actual earnings).
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