ABB India: One more disappointing quarter; Visibility dwindle:: BofA ML

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ABB India
One more disappointing
quarter; Visibility dwindle


􀂄 Very Poor 3Q10 Rec Loss Rs204mn; Maintain Underperform
ABB had Rec Loss of Rs204mn in 3Q10 vs Rec PAT of Rs768mn on continued costs
on exit from rural electrification business, increasing price pressure in T&D space from
Siemens, Areva, CRG, Chinese and Korean players, slowdown in its most profitable
industrial automation domain, delayed power projects execution and depleting visibility
(backlog 1x sales). Order inflows at Rs20.3bn +7%YoY on delay in conclusion of a few
large orders slowing backlog at +14%YoY. We cut our CY10-12E EPS by ~10-43% on
weak 3Q10 with depleted backlog and extended backlog conversion cycle on long
gestation projects (chart 3 & 4). Maintain PO on roll forward to 1-year forward EPS.
Lack of visibility in earnings, rich valuations (37x CY11), 32% downside on our PO and
end of open-offer by promoter (artificial stock support), drive our Underperform rating.
Rec Loss Rs204mn on weak execution & -973bp margin
Weak execution - Sales -8%YoY and 973bp fall in margins on 256bp rise in material
cost led by copper cost pressures, staff cost +18%YoY and continued costs on exit
from rural electrification business led Rec Loss of Rs204mn vs Rs768mn Rec PAT.
While Rep PAT fell 86%YoY on Rs479mn of exchange gain and Rs17mn of prior
period tax in 3Q10 (vs Rs91mn of exchange gain in 3Q09). Sales fell on elongated
conversion cycle in projects business (42% of sales) -5%YoY - power systems
+4%YoY and process automation -16%YoY vs products business (58% of sales) -
8%YoY - power product -16%YoY and automation & low voltage products flat.
Cut earnings ~10-43% on weak execution 3QCY10
We cut BofAMLe EPS by ~10-43% across CY10-12E on losses in rural electrification
projects, slowed sales growth (chart 3 & 6) driven by depleted order backlog (chart 4),
higher proportion of longer gestation, extending its backlog conversion cycle. We are
15% below consensus for CY11E. We think that a period of consensus earnings cuts
ahead doesn’t augur too well for the stock up 7%YTD.
Slowed growth & rich valuation = Underperform
ABB had one of the worst 3QCY10 results among our E&C universe. Think that ABB’s
slowing growth is a de-rating trigger for the stock. At PE of 18x of 1-year forward EPS,
we derive 12-month fair value of Rs561 implying 32% downside. Hence, Underperform.