Visit http://indiaer.blogspot.com/ for complete details ABB: Improvement on cards, albeit gradually
Key takeaways from the analyst meet:
Rural electrification, cost overruns, dent Power Systems margins:
Power Systems division has witnessed margin erosion in the past few
quarters on account of costs related to early exit from the rural
electrification business coupled with cost overruns in one large project.
Notably, the company has ~Rs2bn of rural electrification orders still in the
books and is trying to clear this by 1QCY11 (timeline could stretch further).
Additionally, the cost overrun was due to a misunderstanding in the scope
of one large contract. Following a conservative approach ABB has already
provided for much of the increased cost and is negotiating with the client,
which if favorable, could provide some recovery in the ensuing quarters.
Expect margins to normalize by next year: Besides, the margins have
been under pressure across segments due to increased competition.
However management highlights that it expects margins to normalize to
an extent by next year, led by the stabilization of prices coupled with better
cost efficiencies in the value chain.
Order inflows to pick up during 2HCY10: Management cited delay in
closure of a few large projects that led to the 33.8% YoY decline in order
inflows in 1HCY10. Nonetheless, on a positive note, management
appeared confident of orders picking up pace in 2H of the year. Further, it
also expects orders from the Power Transmission Corridor to start flowing
in from 4QCY10. Management is also witnessing clear signs of a revival in
industrial capex led by the cement sector, followed by metals.
Life cycle cost an advantage: Management also focussed on
considering the entire life cycle cost of equipment rather than merely on
the initial cost, which it believes would position them well to counter
Chinese competition.
Valuation: Currently, the stock is trading at premium valuations of 41x
CY10 and 29x CY11 consensus EPS respectively (EPS CAGR of 24.7% over
CY09-11E). Notably, during the high growth period between CY03-08, the
stock traded at an average P/E of ~28x supported by 38% CAGR in net
profit. Overall, though we expect the things to improve gradually, we
believe that the current valuations factor in most of the same.
