ABB- back to basics; visit note; Hold ::Edelweiss

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n  Earnings to stabilize going ahead; margins to improve in CY11

The management expects improvement in performance of the power division post Q4CY10. ABB has been reporting subdued profitability in this division since past few quarters, primarily owing to foreclosure cost in rural electrification business and cost overruns in certain large value system orders. Margins are, however, expected to improve in CY11 on the back of improved quality of orders bagged in last 3-4 quarters.

n  Automation orders pick up; large value projects still not visible

After a weak CY09, which saw process automation orders declining 21% Y-o-Y, on the back of weak industrial activity and global liquidity crunch (which held up the overall industrial capex), traction has improved in ABB’s automation projects, particularly in the metals and cement space. Automation orders are likely to post decent growth in CY10, making up for the base orders, although large value deals are still missing.

n  Increased focus on products; parent to raise outsourcing from India

ABB has been expanding its product portfolio in both power and automation segments and has commissioned new plants for small power transformers, bushings and shunt reactors. Besides, it has set up new factories for wind generator at Vadodara, and for breakers, drives, LV system and power electronics in Nelamangala, Bangalore.

n  Outlook and valuations: Gradual business recovery; maintain ‘HOLD’

After its bitter experience in power systems business in the past few quarters, ABB has increased its focus on the products business and expects to see better traction in overall volumes in power and automation products, supported well by new plants. While we are optimistic on ABB’s overall business growth over the long term, given its strong product profile, client reference base, strong balance sheet and new management with global experience, we feel current valuations largely capture all major near term positives. We maintain ‘HOLD/Sector Underperformer’ recommendation on the stock.