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ABB India
UW: Margin recovery remains elusive
A 290bp miss in margins and higher interest cost and D&A
drive yet another EPS miss of c62%
We find little comfort from order growth and believe that
margin recovery remains key to earnings growth
Lower our FY11/12e EPS by c25%/11% (c42%/25% below
cons); maintain UW with a lower target of INR510 (vs INR570)
Q3 results largely weak: Although ABB reported an outperformance in sales growth (c29%
y-o-y) and order inflow (up c23% y-o-y), we believe the results were weak overall. While
strength in order intake can be attributed to lumpiness, in our opinion, the strength in sales
growth is largely a result of a weak y-o-y comp. More important, in our view, is the continued
weakness in margins, which fell c110bp q-o-q and came in c290-310bp below our and consensus
expectations. In addition, depreciation remained high (up c110% y-o-y), interest cost came in
higher than expected (up c200% y-o-y) and the tax rate also increased (c40% vs c34% in Q2),
all of which drove an EPS miss of c62%/68% compared with HSBC/Cons estimates.
Margin recovery remains elusive: ABB has consistently missed earnings estimates over the
past 7 quarters by more than 50%, largely on account of weaker profitability. Initially, it was
projects business (PS & PA), then power products and now low voltage products – all
surprising negatively because of low-margin orders. In such a scenario, we believe growth in
order inflow holds little value as it may not necessarily translate into commensurate earnings
growth. Hence, in our opinion, a sustainable margin recovery is key to earnings growth.
Yet another double-digit downgrade: Even though we were c20% below cons on FY11e
EPS, we believe the weak Q3 numbers warrant another reduction in expectations. Hence, we
have lowered our FY11/12e EPS by c25%/11%, putting us c42% below cons on FY11e EPS
and c25% on FY12e EPS. The EPS cut is driven primarily by lower margin expectations (down
c120bp) and higher D&A and net interest estimates.
Stock remains at an unwarranted premium; maintain UW and cut target to INR510: Driven
largely by our FY12e earnings cut, we lower our target price to INR510 vs INR570 earlier. Our
new target is derived from our preferred EVA valuation methodology and implies that, 12 months
from now, the stock should be trading at a target 12M fwd PE of 23.6x. On our new estimates, the
stock is currently trading at c39.2x FY12e PE. The stock remains significantly expensive vs its
closest peers, Siemens and Areva & Crompton, which have delivered better results than ABB in
FY11, despite operating under similar market conditions. Hence, we continue to find the premium
on ABB unjustified and retain our UW rating on the stock
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ABB India
UW: Margin recovery remains elusive
A 290bp miss in margins and higher interest cost and D&A
drive yet another EPS miss of c62%
We find little comfort from order growth and believe that
margin recovery remains key to earnings growth
Lower our FY11/12e EPS by c25%/11% (c42%/25% below
cons); maintain UW with a lower target of INR510 (vs INR570)
Q3 results largely weak: Although ABB reported an outperformance in sales growth (c29%
y-o-y) and order inflow (up c23% y-o-y), we believe the results were weak overall. While
strength in order intake can be attributed to lumpiness, in our opinion, the strength in sales
growth is largely a result of a weak y-o-y comp. More important, in our view, is the continued
weakness in margins, which fell c110bp q-o-q and came in c290-310bp below our and consensus
expectations. In addition, depreciation remained high (up c110% y-o-y), interest cost came in
higher than expected (up c200% y-o-y) and the tax rate also increased (c40% vs c34% in Q2),
all of which drove an EPS miss of c62%/68% compared with HSBC/Cons estimates.
Margin recovery remains elusive: ABB has consistently missed earnings estimates over the
past 7 quarters by more than 50%, largely on account of weaker profitability. Initially, it was
projects business (PS & PA), then power products and now low voltage products – all
surprising negatively because of low-margin orders. In such a scenario, we believe growth in
order inflow holds little value as it may not necessarily translate into commensurate earnings
growth. Hence, in our opinion, a sustainable margin recovery is key to earnings growth.
Yet another double-digit downgrade: Even though we were c20% below cons on FY11e
EPS, we believe the weak Q3 numbers warrant another reduction in expectations. Hence, we
have lowered our FY11/12e EPS by c25%/11%, putting us c42% below cons on FY11e EPS
and c25% on FY12e EPS. The EPS cut is driven primarily by lower margin expectations (down
c120bp) and higher D&A and net interest estimates.
Stock remains at an unwarranted premium; maintain UW and cut target to INR510: Driven
largely by our FY12e earnings cut, we lower our target price to INR510 vs INR570 earlier. Our
new target is derived from our preferred EVA valuation methodology and implies that, 12 months
from now, the stock should be trading at a target 12M fwd PE of 23.6x. On our new estimates, the
stock is currently trading at c39.2x FY12e PE. The stock remains significantly expensive vs its
closest peers, Siemens and Areva & Crompton, which have delivered better results than ABB in
FY11, despite operating under similar market conditions. Hence, we continue to find the premium
on ABB unjustified and retain our UW rating on the stock
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