ABB – 4QCY2010 Result Update Angel Broking

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ABB – 4QCY2010 Result Update

Angel Broking recommends a Reduce on ABB with a Target Price of Rs. 595.

ABB India (ABB) ended CY2010 on a disappointing note with losses in its rural

electrification (RE) projects and de-growth in order inflow. For the quarter ending

December 2010, revenues posted muted growth of 9% yoy to `2,072cr, while PAT

dipped by a substantial 94% yoy to `6.8cr largely owing to the exit from RE

projects and forex losses. We recommend a Reduce on the stock.

Profitability dented by RE projects: For 4QCY2010, revenues grew 9% yoy to

`2,072cr (`1,902cr) largely supported by the strong 49% yoy growth in the power

systems segment. Profitability for the quarter was adversely affected by the

provisions made for the RE projects and forex losses. As a result, EBIDTA margins

crashed by 723bp to 1.6% (8.8%) leading to a sharp 80% yoy dip in EBITDA to

`33cr (`168cr). Excluding the adjustments for forex losses, operating profit for

the quarter stood at `49cr vis-a-vis `163cr for the year-ago period.

Consequently, net profit dipped sharply by 94% yoy to `6.8cr (`110cr) for

4QCY2010. For the year ended CY2010, ABB reported flattish revenue growth

of1.1% to `6,359cr, while PAT declined by 82% to `63cr.

Outlook and valuation: ABB has been reporting disappointing performance over

the past several quarters amidst heightened competitive pressures and continuing

provisions made for the RE projects. We expect the company to completely exit

from the pending RE projects (~`70cr) over the next few quarters, after which the

provisioning for additional costs is likely to abate and cease. We believe the

pricing pressures in the T&D segment are likely to continue on account of

increased competition from the foreign joint ventures (JVs) and relaxation of

pre-qualification norms by PGCIL. At current levels, the stock trades at 227.9x

CY2010 EPS and 28.7x CY2011E EPS. We recommend a Reduce on the stock,

with a Target Price of `595.

RE Projects blunts profitability: During the quarter, the power systems segment

emerged a key revenue driver growing by 49% yoy to `635cr. Extending the

previous quarter’s performance, both the power products and process automation

segments reported 8.8% and 2.2% yoy de-growth in revenue for 4QCY2010. As

compared to the previous two quarters, the automation products segment reported

positive growth of 12.2% yoy.

On the operating front, power systems reported negative EBIT margin of 6.0%,

while the other segments reported positive margins. However, all the four major

segments, viz., power systems, power products, process automation and discrete

automation reported a yoy fall in EBIT. The dip in profitability of the power systems

segment came largely on account of the provisions created for the exit from

RE projects. During CY2010, the company had provided ~`100cr to cover the

losses likely to occur in RE projects.

Raw-material cost as a percentage of total income increased by 340bp to 80%,

while employee costs increased by 150bp to 6.1% for 4QCY2010 Numbers at the

operating level were further hit by increase by forex losses which increased by

210% to `37.5cr (`12.1cr).

Order book

The company’s order backlog at the end of 4QCY2010 stood at `8, 436cr (1.1x

CY2011E revenue) providing reduced revenue visibility of ~12months. Order

inflow fell by a sharp 41% yoy to `1,394cr. The order intake was adversely

impacted by the price erosion and increased competition mainly in the power

sector, while the automation businesses remained fairly stable. Management

informed that some pending orders were de-logged on account of being

indefinitely postponed at the customers’ end. However, going ahead, management

expects market conditions to improve on the back of increased investments

expected in the infrastructure and industry sectors.

Investment Arguments

Tapering top-line growth: During CY2003-07, ABB posted phenomenal top-line

CAGR of 41.8% mainly led by surging order inflow. However, since CY2008 the

company’s growth rate has declined. Moreover, in view of the current diverse set of

challenges, viz., tepid growth in order inflows and continuing losses in RE projects,

we expect the previous high-growth trajectory to get muted over the ensuing years.

Outlook and valuation

ABB has been reporting disappointing performance since the past several quarters

amidst heightened competitive pressures and continuing provisions made for the

RE projects. However, we expect the company to completely exit from the pending

RE projects (~`70cr) over the next few quarters, post which the provisioning for

additional costs is likely to abate and cease. We expect pricing pressures in the

T&D segment to persist on account of increased competition from the foreign JV’s

and relaxation of pre-qualification norms by PGCIL. At current levels, the stock

trades at 227.9x CY2010 EPS and 28.7x CY2011E EPS. We recommend a Reduce

on the stock, with a Target Price of `595.