ABB -Power Systems continues to drag :: Religare

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ABB Ltd
Power Systems continues to drag

ABB’ Q2FY11 results were significantly below our and streets estimates as
revenue growth and margins continued to be remain under pressure. Revenues/
EBITDA/ PAT were down 8.2%/ 74.9%/ 86.1% to Rs 13.5 bn/ 345mn/ 115mn
respectively during the quarter. However order inflows recovered in the
quarter to Rs 20.3 bn up 7.3% Y-o-Y. Given the persistent decline in margins
and growth profile we downgrade our CY10E/CY11E earnings estimates by
34.7%/ 10.8% respectively. At our revised estimates, the stock trades at a P/E
of 41.2x and 34.9x for CY11E and CY12E respectively. We believe that given
the contraction in its RoCE, ABB India is unlikely to trade close to its historical
multiples. Maintain Hold with a target price of Rs 750.
Power products and process automation lead de-growth: On a segmental basis
revenues for the power products segment de-grew 15.7% Y-o-Y, while for the
process automation it was down by 16.1% Y-o-Y. According to the management
high competition in the power products business, continued to impact
realizations resulting in de-growth in the power products segment.
Margins decline across segments: EBITDA margins were at 2.6%, down 680 bps
Y-o-Y. Margins were down as staff costs were high in the quarter (as a percentage
of sales), possibly reflecting lower capacity utilization in some of the business
segments. Other expenses also increased as a percentage of sales as exit costs
from rural electrification are booked under this head.
Margins down trend to be arrested in subsequent quarters: According to the
management margins are likely to improve in the subsequent quarters driven by
a) stabilisation in price realisations b) benefits flowing in from cost reduction
measures c) improvements in supply chain. We highlight that the company’s
EBITDA margins for 9MCY10 contracted 510bps Y-o-Y to 5.0%.
Investment view: While CY10 has been a challenging year for ABB, we believe
the company’s performance is likely to improve in CY11 as a) order backlog is
likely to end above ~Rs 90 bn, b) the management intends to close the orders
related to rural electrification by Q1CY11. At our revised estimates, the stock
trades at a P/E of 41.2x and 34.9x for CY11E and CY12E respectively. Even as the
worst of the business may be behind ABB, we believe that given the contraction
in its RoCE, ABB India is unlikely to trade close to its historical multiples.
Maintain Hold with a target price of Rs 750.