ABB Recovery still distant; downgrade to Sell : Anand Rathi

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ABB
Recovery still distant; downgrade to Sell
We expect ABB’s profitability to bottom out over the next 2-3
quarters as the transmission and distribution (T&D) market
stabilizes, operations consolidate and order book improves driven
by orders from PowerGrid as well as industrial capex. We
downgrade ABB to Sell from Hold on a weak business outlook and
distant recovery.

 CY10 sees worst profitability ever. Lower T&D market growth,
pricing pressure, keen competition from new entrants, and cost of
exiting the rural electrification segment led to ABB seeing the lowest
profitability ever.
 Systems business under stress. Margin of the power systems
business has been improving qoq; but we expect muted growth in
the segment, till T&D stabilizes. Automation business, which is
driven by industrial capex, would be the key growth catalyst.
 Order book, the only silver lining. Longer gestation projects and
relatively better orders in 2HCY09 and YTDCY10 improved
revenue visibility. Likely traction in orders from PowerGrid would
improve the order book (currently `92bn; 1.5x CY09 sales) ahead.
 Change in estimates. We slash net profit estimates by 31% for
CY11e on account of muted YTDCY10 performance and lower
operating margin assumptions.
 Valuation and risks. We lower our target price to `612 from `892,
based on 30x CY11e EPS. Key risk: early revival in T&D.