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ABB India
Disastrous 4Q on clean-up: PAT
down 74%YoY & Inflows -41%
„Whatever could, did go wrong in 4Q; Cut EPS & PO; UPF
ABB had a disastrous 4Q - PAT (pre-forex loss) Rs319mn -74%YoY on provisions for
exit from rural electrification (much of >Rs1bn in CY10 was in 4Q), increasing price
pressure in T&D space from Siemens, Areva, CRG, Chinese and Korean players, and
declining visibility (backlog 1.1x sales). Order inflows fell 41%YoY on removal of orders,
which were postponed indefinitely, increased competition, price erosion and the lack of
a domestic facility for 765kV transformer. We cut our CY11-12E EPS by ~15-17% on
the weak 4Q10, depleted backlog and extended conversion cycle on long-gestation
projects (Charts 3 & 4). We cut our PO to Rs545 to factor in the EPS cut and rollforward. Lack of visibility in earnings, rich valuations (26x CY12E), and 22% downside
potential to our PO drive our Underperform rating.
Muted execution sales +9%; Margin disappoint; Quality poor
Muted execution - sales +9%YoY and 606bps fall in margins on 646bps rise in material
cost led by copper cost pressures, staff cost +45%YoY and provision for early exit from
rural electrification business led PAT (ex-forex loss) -74%YoY. Rep PAT fell 94%YoY
on Rs375mn of exchange loss (vs. Rs121mn in 4Q09). While sales were up, led by
projects business (48% of sales) +22%YoY - power systems +49%YoY and process
automation -2%YoY vs. products business (52% of sales) +2%YoY - power product -
9%YoY and automation & low voltage products +13%YoY. Its high-margin Automation
business, margins collapsed on inexplicable reasons by 1069bps, indicating clean-up
and, consequently, poor bidding and project management at ABB.
Cut EPS ~15-17% on weak 4QCY10; Rich valuation = UPF
We cut our EPS by ~15-17% across CY11-12E on a weak backlog on removal of
slow-moving orders in 4Q10, losses in rural electrification projects, slowed sales
growth (chart 3 & 6), driven by depleted order backlog (chart 4), higher proportion
of longer gestation, extending its backlog conversion cycle. We are 13% below
consensus for CY11E. We think that a period of consensus earnings cuts ahead
doesn’t augur well for the stock, down 13%YTD vs. Sensex 11%. ABB had one of
the worst 4QCY10 results among our E&C universe. Think that ABB’s slowed growth
is a de-rating trigger for the stock. At a PE of 20x our 1-year forward EPS, we derive a
12-month fair value of Rs545 (Rs561), implying 22% downside. Hence, Underperform.
Price objective basis & risk
ABB (ABVFF)
Our PO of Rs545 is based on a PE of 20x our 1-year forward EPS. We have
valued ABB at a PEG of 0.7x to normalized growth vs. a past range of 1-1.2x to
factor in a low base on the collapse of earnings during CY10, increasing risk to
growth, which deserves de-rating, in our view. This PO implies 22% downside.
Downside risks: raw material costs, execution risk, increasing competition and
potential delay in power sector reforms/capex. Upside risk: rebound in metal &
power capex and rupee appreciation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ABB India
Disastrous 4Q on clean-up: PAT
down 74%YoY & Inflows -41%
„Whatever could, did go wrong in 4Q; Cut EPS & PO; UPF
ABB had a disastrous 4Q - PAT (pre-forex loss) Rs319mn -74%YoY on provisions for
exit from rural electrification (much of >Rs1bn in CY10 was in 4Q), increasing price
pressure in T&D space from Siemens, Areva, CRG, Chinese and Korean players, and
declining visibility (backlog 1.1x sales). Order inflows fell 41%YoY on removal of orders,
which were postponed indefinitely, increased competition, price erosion and the lack of
a domestic facility for 765kV transformer. We cut our CY11-12E EPS by ~15-17% on
the weak 4Q10, depleted backlog and extended conversion cycle on long-gestation
projects (Charts 3 & 4). We cut our PO to Rs545 to factor in the EPS cut and rollforward. Lack of visibility in earnings, rich valuations (26x CY12E), and 22% downside
potential to our PO drive our Underperform rating.
Muted execution sales +9%; Margin disappoint; Quality poor
Muted execution - sales +9%YoY and 606bps fall in margins on 646bps rise in material
cost led by copper cost pressures, staff cost +45%YoY and provision for early exit from
rural electrification business led PAT (ex-forex loss) -74%YoY. Rep PAT fell 94%YoY
on Rs375mn of exchange loss (vs. Rs121mn in 4Q09). While sales were up, led by
projects business (48% of sales) +22%YoY - power systems +49%YoY and process
automation -2%YoY vs. products business (52% of sales) +2%YoY - power product -
9%YoY and automation & low voltage products +13%YoY. Its high-margin Automation
business, margins collapsed on inexplicable reasons by 1069bps, indicating clean-up
and, consequently, poor bidding and project management at ABB.
Cut EPS ~15-17% on weak 4QCY10; Rich valuation = UPF
We cut our EPS by ~15-17% across CY11-12E on a weak backlog on removal of
slow-moving orders in 4Q10, losses in rural electrification projects, slowed sales
growth (chart 3 & 6), driven by depleted order backlog (chart 4), higher proportion
of longer gestation, extending its backlog conversion cycle. We are 13% below
consensus for CY11E. We think that a period of consensus earnings cuts ahead
doesn’t augur well for the stock, down 13%YTD vs. Sensex 11%. ABB had one of
the worst 4QCY10 results among our E&C universe. Think that ABB’s slowed growth
is a de-rating trigger for the stock. At a PE of 20x our 1-year forward EPS, we derive a
12-month fair value of Rs545 (Rs561), implying 22% downside. Hence, Underperform.
Price objective basis & risk
ABB (ABVFF)
Our PO of Rs545 is based on a PE of 20x our 1-year forward EPS. We have
valued ABB at a PEG of 0.7x to normalized growth vs. a past range of 1-1.2x to
factor in a low base on the collapse of earnings during CY10, increasing risk to
growth, which deserves de-rating, in our view. This PO implies 22% downside.
Downside risks: raw material costs, execution risk, increasing competition and
potential delay in power sector reforms/capex. Upside risk: rebound in metal &
power capex and rupee appreciation.
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