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Growth returned to the power sector in 4Q and management has indicated that worst may be
over in terms of provisioning costs. However, the macro environment remains challenging in the
power and automation segments and valuations look expensive. We maintain our Sell rating on
the stock.
Disappointing results; but growth returns in power sector
ABB reported a disappointing set of results for 4Q10. Sales for 4Q10 came in at Rs20.7bn (up
9% yoy), ahead of our estimates of Rs19bn mainly due to growth in the power segment. The
EBIDTA margin adjusted for forex impact came in at 3.4% (down 540 bp yoy) due to higher
material costs, a lower pricing environment and exit-related write-off costs from its rural
electrification (RE) business. PAT adjusted for the forex impact came in at Rs368m, below our
expectations of Rs1.2bn. Order inflow was down 41% yoy at Rs13.9bn, while the order book was
flat yoy at Rs84.4bn but down 8% qoq.
Worst may be over for rural electrification exit costs as provisioning is near complete
Margins remained subdued during the year, but we expect them to improve going forward as
most of the provisioning for exit costs from the RE business has been done and orders pricing
should have bottomed. In addition, management stated that the power segment should see
growth (as seen in the 4Q result) as order execution is likely to pickup and it expects growth in
automation. The removal of orders facing indefinite delays from backlog, meant that inflows fell
during 4Q and CY10. However, we expect execution to pick up as PGCIL ordering revives in
FY11.
Valuation looks expensive: Sell maintained
Although the worst may be behind, margin risk remains due to: 1) the possibility of continued
minor losses in the RE business on the segment backlog of Rs700m, and 2) higher commodity
prices. In addition, the current macro environment could lead to a higher than anticipated
slowdown in inflows from the industry sector impacting revenue and profitability for FY11-12F.
The stock currently trades at a PE of 37x our FY11F and is expensive compared to peers on our
forecasts. We still prefer Crompton in this space with its product-focused business provides
relative margin stability. We introduce our FY13 numbers and roll forward our DCF, resulting in
TP increasing to Rs525 (from Rs502). Sell maintained.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Growth returned to the power sector in 4Q and management has indicated that worst may be
over in terms of provisioning costs. However, the macro environment remains challenging in the
power and automation segments and valuations look expensive. We maintain our Sell rating on
the stock.
Disappointing results; but growth returns in power sector
ABB reported a disappointing set of results for 4Q10. Sales for 4Q10 came in at Rs20.7bn (up
9% yoy), ahead of our estimates of Rs19bn mainly due to growth in the power segment. The
EBIDTA margin adjusted for forex impact came in at 3.4% (down 540 bp yoy) due to higher
material costs, a lower pricing environment and exit-related write-off costs from its rural
electrification (RE) business. PAT adjusted for the forex impact came in at Rs368m, below our
expectations of Rs1.2bn. Order inflow was down 41% yoy at Rs13.9bn, while the order book was
flat yoy at Rs84.4bn but down 8% qoq.
Worst may be over for rural electrification exit costs as provisioning is near complete
Margins remained subdued during the year, but we expect them to improve going forward as
most of the provisioning for exit costs from the RE business has been done and orders pricing
should have bottomed. In addition, management stated that the power segment should see
growth (as seen in the 4Q result) as order execution is likely to pickup and it expects growth in
automation. The removal of orders facing indefinite delays from backlog, meant that inflows fell
during 4Q and CY10. However, we expect execution to pick up as PGCIL ordering revives in
FY11.
Valuation looks expensive: Sell maintained
Although the worst may be behind, margin risk remains due to: 1) the possibility of continued
minor losses in the RE business on the segment backlog of Rs700m, and 2) higher commodity
prices. In addition, the current macro environment could lead to a higher than anticipated
slowdown in inflows from the industry sector impacting revenue and profitability for FY11-12F.
The stock currently trades at a PE of 37x our FY11F and is expensive compared to peers on our
forecasts. We still prefer Crompton in this space with its product-focused business provides
relative margin stability. We introduce our FY13 numbers and roll forward our DCF, resulting in
TP increasing to Rs525 (from Rs502). Sell maintained.
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