ABB INDIA: Still not out of woods; maintain cautious outlook:: Edelweiss

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ABB India’s (ABB) Q3CY10 results were strongly disappointing. While revenue
declined 8% Y-o-Y, EBIDTA declined a sharp 75% Y-o-Y due to continued adverse
impact of declining realizations and exit costs for RE business. Adjusted for forex gain
during the quarter, the company reported an EBIDTA loss of INR 135 mn versus
positive EBIDTA of INR 1.28 bn last year same quarter. Net profits dipped 86% Y-o-Y
for Q3CY10, while for 9MCY10 PAT declined 74% Y-o-Y, largely due to negative
contribution from the power systems division.
􀂃 Negative contribution from power division continues
The company reported negative EBIT contribution from power division and
process automation, which led to 69% Y-o-Y decline in total segmental EBIT for
Q3CY09. For 9MCY09, segmental EBIT declined 69% Y-o-Y, led by negative
contribution of INR 110 mn from the power division.
􀂃 9MCY10 new orders declined 22% Y-o-Y
While ABB reported a strong 65% Y-o-Y growth in Q3CY10 orders to INR 20.3bn,
it was a decline of 22% Y-o-Y for 9MCY10 period to INR 49.5 bn, largely due to
deferment of certain large value tickets in the power sector. The company
currently has an outstanding order book of INR 91.8 bn (+14% Y-o-Y), which
imparts sufficient revenue visibility till CY11. However, further impact on account
of exit costs on RE business remains to be unknown.
􀂃 Revising down CY10E bottom line 42%
Building in the Q3 disappointment in profits, we adjust our CY10E earnings by
revising down our EPS 42% to INR 8.1. Uncertainty regarding additional exit
costs on RE business and impact of decline in realizations continue, dampening
the company’s growth outlook.
􀂃 Outlook and valuations: Uncertainty continues; maintain ’HOLD’
We remain cautious regarding ABBs overall fundamental prospects in the near
term given strong uncertainty prevailing regarding further impact of exit cost
and declining realizations. While we remain optimistic about ABBs long term
growth potential given its overall business portfolio, strong balance sheet etc.,
we expect the top management to work towards optimizing the India business
model, which should augur well for the stock in the medium to long term. While
we maintain our absolute stock recommendation at ‘HOLD’, we downgrade its
rating relative to the sector from ‘Sector Performer’ to ‘Sector
Underperformer’. The stock currently trades at a PE of 34x on CY11E earnings.