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ABB India (ABB) continued to report a bleeding bottom line with adjusted PAT
plummeting 64% Y-o-Y to INR 443 mn in Q4CY10. The company provided INR 1,000
mn for CY10 towards the rural electrification (RE) business, which coupled with
losses on certain infrastructure projects led to sharp fall in operating margin to 2.8%
versus 9.2% in CY09. While management expects power business to revive going
ahead, we are concerned about the profitability given huge competition and deferred
execution in T&D. Also, while base order pipeline in cement, metals and oil & gas is
healthy, the company could face problem of lack of large-value contracts in
automation in the times to come.
�� Pain of long-term execution persists; INR 1,000 mn provided for losses
The company reported a sharp pick up in power systems revenue, which grew
48% Y-o-Y; however, it posted EBIT loss of INR 380 mn owing to forex loss on
revaluation of derivative contracts, RE provisioning, and execution of lower
margin contracts. For CY10 power systems reported an EBIT loss of INR 1.1 bn.
�� Lack of large value awards leads to weaker order intake
ABB reported a sharp 41% Y-o-Y dip in order intake for Q3, while it declined
27% Y-o-Y for CY10. While the dip was largely led by overall slowdown in T&D
ordering, lack of large value turnkey infrastructure orders also hit the company.
�� Margins unlikely to sustain; revising down CY11 OPM estimates
Given the current scenario in T&D and industrial automation, we do not expect
ABB to achieve historical margins of 12-12.8%, given strong pricing pressure
across T&D verticals and lack of large value orders in the pipeline for turnkey
automation. We are revising down our revenue target 7% and margin estimate
from 10% earlier to 8.1% for CY11, implying 23% cut in our CY11E PAT.
�� Outlook and valuations: No bottom yet; downgrade to ‘REDUCE’
Despite the top management’s commitment to return to normal profitability, in
view of the current industry scenario of limited orders and intense competition
we believe ABB is unlikely to touch profitability anywhere closer to CY04-08
levels going ahead. We are also not sure about time line and quantum impact of
the RE exit cost despite management’s indication of it being likely to be over
soon. Hence, we are downgrading our recommendation on the stock from ‘HOLD’
to ‘REDUCE’ and expect the stock to de rate from the current level. On relative
return basis we rate the stock ‘Sector Underperformer’.
Company Description
ABB, incorporated in December 1949 as Hindustan Electric Company, operates in two
segments i.e. power technology and automation technology, and offers its services and
products to the power transmission as well as other industries. Its power technology
segment provides solutions for power transmission, power distribution, and control and
protection systems for power plants. Products include transformers, switchgears,
breakers, capacitors, power line carrier communication equipment, and relay control
panels. Under the automation technology segment, it offers products, systems, software,
and services for automation and optimization of discrete, process, and batch
manufacturing operations, and related services. These technologies include
measurement control, instrumentation, process analysis, drives and motors, power
electronics, robots, and low-voltage products.
Investment Theme
ABB is likely to be the beneficiary of the government’s focus on power capacity additions,
prospects from UMPP expand projects, and renewed thrust in improving transmission
and distribution infrastructure. New opportunities are also emerging in the field of 765
kV switchgear and transformer products as well as large-volume low-end products.
Further, significant capacity additions in industries (steel and cement) and the service
sector augur well for its automation segment.
Key Risks
Longer than expected execution in large gestation systems business coupled with a slow
down in the power sector orders could impact our revenue and PAT for ABB. Any slow
down in the industrial space could also hit our automation estimates for the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ABB India (ABB) continued to report a bleeding bottom line with adjusted PAT
plummeting 64% Y-o-Y to INR 443 mn in Q4CY10. The company provided INR 1,000
mn for CY10 towards the rural electrification (RE) business, which coupled with
losses on certain infrastructure projects led to sharp fall in operating margin to 2.8%
versus 9.2% in CY09. While management expects power business to revive going
ahead, we are concerned about the profitability given huge competition and deferred
execution in T&D. Also, while base order pipeline in cement, metals and oil & gas is
healthy, the company could face problem of lack of large-value contracts in
automation in the times to come.
�� Pain of long-term execution persists; INR 1,000 mn provided for losses
The company reported a sharp pick up in power systems revenue, which grew
48% Y-o-Y; however, it posted EBIT loss of INR 380 mn owing to forex loss on
revaluation of derivative contracts, RE provisioning, and execution of lower
margin contracts. For CY10 power systems reported an EBIT loss of INR 1.1 bn.
�� Lack of large value awards leads to weaker order intake
ABB reported a sharp 41% Y-o-Y dip in order intake for Q3, while it declined
27% Y-o-Y for CY10. While the dip was largely led by overall slowdown in T&D
ordering, lack of large value turnkey infrastructure orders also hit the company.
�� Margins unlikely to sustain; revising down CY11 OPM estimates
Given the current scenario in T&D and industrial automation, we do not expect
ABB to achieve historical margins of 12-12.8%, given strong pricing pressure
across T&D verticals and lack of large value orders in the pipeline for turnkey
automation. We are revising down our revenue target 7% and margin estimate
from 10% earlier to 8.1% for CY11, implying 23% cut in our CY11E PAT.
�� Outlook and valuations: No bottom yet; downgrade to ‘REDUCE’
Despite the top management’s commitment to return to normal profitability, in
view of the current industry scenario of limited orders and intense competition
we believe ABB is unlikely to touch profitability anywhere closer to CY04-08
levels going ahead. We are also not sure about time line and quantum impact of
the RE exit cost despite management’s indication of it being likely to be over
soon. Hence, we are downgrading our recommendation on the stock from ‘HOLD’
to ‘REDUCE’ and expect the stock to de rate from the current level. On relative
return basis we rate the stock ‘Sector Underperformer’.
Company Description
ABB, incorporated in December 1949 as Hindustan Electric Company, operates in two
segments i.e. power technology and automation technology, and offers its services and
products to the power transmission as well as other industries. Its power technology
segment provides solutions for power transmission, power distribution, and control and
protection systems for power plants. Products include transformers, switchgears,
breakers, capacitors, power line carrier communication equipment, and relay control
panels. Under the automation technology segment, it offers products, systems, software,
and services for automation and optimization of discrete, process, and batch
manufacturing operations, and related services. These technologies include
measurement control, instrumentation, process analysis, drives and motors, power
electronics, robots, and low-voltage products.
Investment Theme
ABB is likely to be the beneficiary of the government’s focus on power capacity additions,
prospects from UMPP expand projects, and renewed thrust in improving transmission
and distribution infrastructure. New opportunities are also emerging in the field of 765
kV switchgear and transformer products as well as large-volume low-end products.
Further, significant capacity additions in industries (steel and cement) and the service
sector augur well for its automation segment.
Key Risks
Longer than expected execution in large gestation systems business coupled with a slow
down in the power sector orders could impact our revenue and PAT for ABB. Any slow
down in the industrial space could also hit our automation estimates for the company.
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