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ABB 3QCY10: Below estimates; Run of losses continues across divisions; Maintain Neutral
ABB India’s (ABB IN, Mkt Cap US$3.9b, CMP Rs823, Neutral) 3QCY10 revenue was down 7% YoY at Rs13.4b (est Rs15b, up 5% YoY). EBITDA margin was negative 1% vs our estimates of 5.5%. PAT was down 86% YoY at Rs115m (est Rs592m, down 6% YoY). For 9MCY10, revenues were down 2% to Rs42b, EBITDA margin down 800bp to 1% and PAT down 77% to Rs565m. Order backlog currently stands at Rs91b with BTB ratio of 1.5x TTM.
- Material costs jumped 180bp YoY to 75% indicative of higher product sales/bought out items during the quarter.
- Forex gains during 3QCY10 stood at Rs479m (loss of Rs444m for 9MCY10). As forex losses are due to commodity hedging (raw materials), they are not exceptionals.
We revise our earnings estimates downwards by 60% for CY10 and by 6% for CY11
- We remain cautious on ABB’s order intake trend which for 9MCY10 has declined 21% YoY, indicative of constant loss of market share to other Indian and foreign players in a T&D market which is on an expansionary mode. ABB’s current state of affairs is an outcome of its own set of issues in project management rather than any misplaced macro trends in the industry. We now expect ABB to end CY10 with an order backlog of Rs80b (down 8.4% YoY) while for CY11E we expect a growth of 15% YoY to Rs97b.
- In view of the continuing losses for ABB across divisions due to an adverse mix of RE Project orders taken up in the past, we have downgraded our estimates for ABB by 60% for CY10 to Rs5.7 and by 6% for CY11 to Rs24. Our revenue estimates have been revised downwards by 7% for CY10 and 8% for CY11.
- We maintain Neutral on the stock with a price target of Rs716 (30x CY11E).
EBITDA margins at negative 1%; fixed cost absorption remains poor
- Revenue growth during 9MCY10 was down 2% while operating expenses were up 6% in the same period. Hence EBITDA margin for 3QCY10 stood at negative 1% as against 8.4% a year ago.
- Material costs went up 180bp YoY to 75% while for 9MCY10 they were up 147bp indicative of a mix of legacy orders as well as short-cycle product orders which have pushed up the material prices thereby resulting in poor fixed cost absorption for ABB.
- ABB’s consistent order intake decline coupled with continued provisioning for losses in the rural electrification jobs taken up in the past have resulted in EBITDA level loss for ABB which we have never witnessed before.
Order intake at Rs20b (up 7.3% YoY and 65% QoQ)
- Order intake during 3QCY10 stood at Rs20b (up 7.3% YoY, and 65% QoQ). Current order backlog stands at Rs91b (up 14% YoY) with BTB of 1.5x TTM (up from 1.2x in 3QCY09). Considering that there were no orders announced publicly we understand that most of them would be short cycle orders falling on the product side of the business.
- The increased BTB ratio is largely due to order intake from long gestation power orders. Given the improved funding scenario for power projects, we expect improved execution and faster order awards for BTG/EPC/BoP for power projects.
- Considering 765KV substation addition to be around a third of the 51,000MVA to be added in the Eleventh Plan, we expect ABB to be a meaningful player in the EHV category tenders floated both by PGCIL and the SEBs. However, this segment has witnessed competition with entry of Chinese and Korean players, largely in PGCIL orders given mandatory import content requirement of ~50%.
EBIT Margins impacted due to project related cost escalations, exit costs and price erosion
- Power systems business (26% of segmental revenue) grew 3% YoY while Process Automation segment (16% of revenue) declined 16% YoY.
- In the products segment, Power products (28% of revenues) declined 15%. This pulled down overall revenues by 7% YoY. Low voltage products and Discreet automation segment reported revenue growth of 4.4% and -0.4%, respectively. Power systems continues to face issues relating to withdrawals from rural electrification projects.
- EBIT margin in the Power systems business was negative 0.7% vs 1.2% YoY. Even in the case of power products which are generally short cycle orders, EBIT margins were negative 0.7% vs 12% YoY. This is indicative of both weak volume growth and weakening cost-competitiveness of the company. In the Process segment, margins for process automation were again negative 2% as revenue decline was 16% YoY. Automation business continues to face weak demand from industries like metals, cement and chemicals where the capex cycle has not completely gained momentum. The two segments which reported positive EBIT margins were Discrete automation and Low voltage products.
Valuation and view: Downgrading estimates for CY10 and CY11; Maintain Neutral
- In view of the continued weakness in Power systems and the lack of any strong visible and sustained improvement in operating performance, we have downgraded our EPS estimates by 60% for CY10 and by 6% for CY11E. We also reduced our revenue estimates by 7% for CY10 and 8% for CY11 respectively. Our EPS estimates now stands at Rs5.7 for CY10 and Rs24 for CY11E.
- EBITDA margins have been reduced by 450bp in CY10 to 2.2% while for CY11 they stay at 10%. We anticipate much of the expansion in operating performance across segments to play out in CY11 when ABB gets completely out of its legacy orders and executes the orders received in CY10.
- We arrive at a revised price target of Rs716 (from Rs762 earlier) based on P/E of 30x CY11E EPS. We maintain our Neutral rating on the stock.
- Parent recently increased its stake in ABB India to 75% through an open offer (at Rs900 per share). We believe that but for expectation of another round of open offer (delisting), there can be substantial downside to stock price.
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