ABB: Weak results yet again.:: Kotak Sec

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ABB (ABB)
Industrials
Weak results yet again. ABB reported weak results at the revenue and margin levels
(revenue decline of 8% and EBITDA margins dip to 1.5%). Weak results were likely led
by one-off costs in the power systems segment and cost overruns in certain large
projects. Sharp decline in profitability of power products segment is likely a reflection of
pricing pressure in the power T&D market. Sedate 9M inflows (down 21% yoy) leads to
a decline in revenue visibility to about 12 months. Reiterate REDUCE.





Results remain well below expectations on revenue as well as margin levels; potentially on one-offs
􀁠 Revenues remain weak: ABB results remain well below expectations with revenues of Rs13.34
bn (down 8% yoy) and 21% below our expectation of Rs16.9 bn.
􀁠 Margins likely impacted by one-offs; however, includes large exchange gain: ABB
reported weak EBITDA margin of only 1.5% versus our expectation of 8.5%. The lower margins
were attributed to continued exit costs from rural electrification business and cost overruns in
certain large projects. We also note that the results also carry an exchange gain of Rs480 mn
excluding which the margins would have been even weaker.

Power systems remain weak; power products margin decline probably reflects market pressure
Power systems segment reported yet another quarter of sedate results with revenues of Rs3.9 bn
in 3QCY10 (up 2.8% yoy, 8% decline in 9MCY10) and negative EBIT margins -0.7%. Power
products segment recorded a revenue decline of 16% yoy and a sharp decline in profitability with
EBIT margin of -0.7% versus 12% in the previous year likely led by market pressure in the power
T&D equipment industry. Other segments (discrete automation, process automation, low voltage
products) also reported relatively weak results.

Order inflows decline substantially causing decline in visibility causing worry for CY2011 as well
For 9MCY10 ABB has reported inflows of Rs49.5 bn significantly (about 21%) lower than 9MFY10
inflows of Rs63 bn. The decline in inflows has led to lower visibility of future revenues - 9MCY10-
end backlog of R91.8 bn provides a revenue visibility of about one year versus about 15 months at
end-9MCY09. We believe this is reflective of weaker growth prospect for ABB causing worry for
CY2011E revenue growth and earnings.

Revise earnings estimates; retain REDUCE with a target price of Rs725/share
We have revised our estimates to Rs10.8 and Rs31.4 from Rs18.3 and Rs33.1 for CY2010E and
CY2011E based on weak performance in 9MCY10. Retain REDUCE (TP: Rs725) based on (1) rising
competition, (2) lower earnings growth scenario, and (3) execution issues in certain orders.