ABB India- Disappointments galore:: Macquarie Research,

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ABB India
Disappointments galore
Event
 ABB declared its 4Q and CY10 results which were significantly below our and
the street’s estimates. Legacy projects of rural electrification continue to be a
major drag on the earnings.
 We revise lower our earnings for CY11 and CY12 by 5% and 24% following weak
order inflows in CY10. Our revised target price is Rs414 (v/s Rs492 earlier).

Impact
 Legacy rural electrification orders continue to hit earnings: Revenues in
4QCY10 increased 9%, however, adjusted earnings at Rs443mn were down
62%  YoY.  ABB provisioned Rs1bn in CY10 towards  loss-making  rural
electrification (RE) projects. Completion of Rs0.7bn RE orders in CY11 would
end the earnings disappointment over the last eight quarters.
 Revival in order inflow crucial for revenue growth in future years: CY10
order inflow at Rs63.5bn (-27% YoY) has led to a flat order book YoY.
Improvement in order inflow is required for ABB to deliver revenue growth in
CY12.  ABB is banking on  order inflows from renewables, power generation
and transmission in CY11.
 Our estimates  factor in modest revenue growth and margin
normalisation:  We have factored in modest revenue growth of 12% and  a
normalised EBITDA margin of 9.7% in our CY11 estimates.  Further
provisioning towards unexecuted RE orders and continued pricing pressure
may lead to downside to our margin forecasts.
Earnings and target price revision
 We have cut our CY11 and CY12 EPS estimates by 5 and 24%. Our revised
target price is Rs414 (from Rs492) – 20x average of CY11E and CY12E EPS.
Price catalyst
 12-month price target: Rs414.00 based on a PER methodology.
 Catalyst: lack of order inflow and continued erosion in margins
Action and recommendation
 Markets yet to reconcile to lower growth trajectory, cut target price to
Rs414: ABB’s earnings growth is unlikely to reach its historic highs of 40-50%
over the next 2-3 years. We expect revenue growth  will remained muted  on
the back of weak order inflow in CY10. We cut our target price to Rs414 (from
Rs492) to factor in our earnings cuts for CY11 and CY12.
 Expectations of corporate action keeps stock at unrealistic valuations: We
believe ABB is trading at  unrealistic multiples of 36x and  32x CY11E and
CY12E EPS. The market expects the parent to eventually de-list the company
and that is the only reason to keep stock at current elevated levels, in our view.
 Switch into CRG for superior growth at 50%  discount: Open offers by
ABB and Siemens also signify the confidence in the long-term potential in
India. We recommend switching to Crompton Greaves (CRG IN, Rs260, OP,
TP: Rs361), which has a better earnings profile and is available at 15x FY12E
EPS.