ABB India -Turnaround visible, but too expensive :: Macquarie Research

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ABB India
Turnaround visible, but too expensive
Event
 ABB declared its 1QCY11 results, where revenues surprised on the upside
while earnings were short of expectations due to margin pressure. Revenues
at Rs17.8bn were up 22% and adjusted PAT at Rs576mn was down 7% YoY.
 We revise our target price to Rs488 (from Rs414 earlier) as we roll forward
our target price to CY12. While turnaround in terms of potential order inflow
growth and margin stabilisation is visible, unrealistic multiples of 41-45x 1-
year forward earnings are on hopes of delisting. We retain Underperform.

Impact
 Revenue growth robust boosted by short-cycle projects: ABB clocked
22% revenue growth in 1QCY11. Growth in revenues was primarily driven by
execution of short-cycle projects in power systems and process automation.
 Management indicating moving margins closer to 10%, factored in our
numbers: Margins at 5.7% were down 150bps with power systems moving
back into profitability. However, margin decline on a sequential basis has
been arrested as loss-making legacy rural electrification orders near
completion. Our CY11-13 margin estimate of 9.8-9.9% is at the upper end of
management’s targeted margin.
 Management commentary on order inflow indicating some pick-up:
Order inflows in short-cycle projects and products in power and industrial
segments continue to improve. However, slower decision-making processes
have delayed ordering of larger projects. ABB remains cautious on impact of
rising interest rates and high competition on order inflows. With booking of
ABB’s share of Rs16bn in Powergrid’s HVDC order in subsequent quarters,
the order book should be up 20%. Our CY11 order inflow estimate of Rs76bn
factors in 20% inflow growth.
Earnings and target price revision
 We marginally adjust our EPS estimates by 2-3% to factor in CY10 balance
sheet. We roll forward our target price to CY12 numbers and assign a 22x
multiple (from 20x), in line with our target multiple for Siemens India (SIEM IN,
Rs861.50, Neutral, TP: Rs716.00). Our revised target price is Rs488 (Rs414).
Price catalyst
 12-month price target: Rs488.00 based on a PER methodology.
 Catalyst: further slowdown in order inflow and margin pressures due to
commodity prices and competition
Action and recommendation
 Stock at unrealistic valuations despite factoring in strong turnaround:
ABB is trading at unrealistic multiples of 45x and 41x CY11 and CY12 EPS.
Market expects parent to eventually de-list the company and that is the only
reason to keep stock at current elevated levels. We recommend switching to
Crompton Greaves (CRG IN, Rs245, OP, TP: Rs344), which has a better
earnings profile and is yet available at 14x FY12 EPS.