ABB- Another quarter of disappointment:: IIFL

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Another quarter of disappointment
• 3QCY10 was the seventh consecutive disappointing quarter for
ABB, with an 8.2% YoY decline in revenue. While the power
systems segment grew 2.8% YoY, power products and the
automation business witnessed large revenue declines. Short-cycle
businesses for ABB have not bottomed out in contrast to peers.



• Continued exit cost from rural electrification business, lower price
realisations as a result of intense competition, and negative
operating leverage resulted in 700bps decline in EBITDA margins.
EBITDA, as a result, declined 84% YoY. PAT declined 86% YoY.
• We cut our CY10 and CY11 estimates by 39% and 15%,
respectively. We build in a sharp improvement in CY11, with 28%
revenue growth and 9% EBITDA margin despite low visibility.
• At 34.5x CY11ii PER, the stock is the most expensive in our
coverage universe. Prospects of market share erosion to both
domestic and MNC peers could delay recovery. We reiterate SELL.
3QCY10 results indicate no improvement in business momentum
• As opposed to an improvement in revenue traction witnessed by peers,
ABB’s revenues declined 8.2% YoY on top of a 4.3% YoY decline in
3QCY09. The disappointing revenue trajectory is driven both by
increased execution cycle of long-gestation projects and insufficient
traction in short-cycle businesses.
• The power systems segment posted revenue growth of 2.8% YoY and
the low-voltage products segment grew 4.4% YoY. The power products
segment and the automation segment witnessed sharp declines YoY.
Continued pressure on margins; PAT declines 86% YoY
• EBITDA declined 84% YoY to Rs195m, as margins contracted 695bps
to 1.5%. This was despite an increase in forex gain from Rs91m in
3QCY09 to Rs479m in 3QCY11 included in other costs.
• The management indicates that EBITDA margins were impacted by
continued cost of exit from rural electrification business and negative
operating leverage. In addition, lower price realisations point towards
continued price pressure in the marketplace impacting margins.


• Order inflows grew 7% YoY to Rs20.3bn, driven by the automation
segment. Inflows declined for the power segment. Order inflows have
increased 65% QoQ, but 2QCY10 intake was almost 60% of the usual
quarterly run-rate.
• 9MCY10 order inflows have declined 21% YoY, after an anemic growth
in CY08 and CY09. Within our coverage universe, ABB India is taking
the longest to regain momentum.
• The company pointed towards a buoyant market for the power and
automation business and expects inflows to pick-up going forward.