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ABB India (ABB.BO)
UW: Recovery remains elusive; valuation premium
unjustified
Q4 earnings miss but orders surprise positively; beat driven
largely by the booking of old HVDC order
Margin recovery remains elusive; negative surprises likely to
continue as restructuring benefits appear backend loaded
With further downside risk to earnings, valuation premium
unjustified; reiterate UW with a TP of INR510
Earnings miss but orders surprise positively: ABB reported another set of weak results
missing our Q4 EPS estimate by c8% but consensus by c50%. Sales growth of c6% came in
line with our expectations and was driven primarily by the Power business, which grew c13%.
Industry growth disappointed, as large automation projects failed to materialise. While the
total order intake of INR22bn surprised positively, the beat was largely driven by the booking
of the 9-month old HVDC order worth INR5.6bn. Management noted that growth in base
orders remains healthy but revival in project capex, particularly in the Industrial segment, may
take some time. The order backlog was largely in line with our expectations and stood at
INR91bn, on the back of which management expects strong (double-digit) sales growth in the
next couple of quarters.
Visibility on margin recovery remains low: While margins improved somewhat q-o-q, they
once again fell short of expectations. Management attributed weak profitability to lower
volumes, high input costs, project delays and poor project mix. We note that ABB India’s
margins have remained depressed for two years now, more so than any of its competitors, and
this may indicate poor project selection. In addition, restructuring benefits seem to be more
backend-loaded as they have hardly provided the necessary impetus to the margins in last two
years. Hence, while on a long term basis, ABB India may appear to be well placed to benefit
from India’s growth story, in the near term the outlook certainly remains weak, particularly as
expectations of recovery remain too high in spite of estimate downgrades in the last 8 quarters.
We currently forecast EBITDA margins to improve to c7.7% in CY12 and c9.1% in CY13;
however, if the project mix remains suboptimal, future results may warrant further downgrades.
We trim our CY12/13e EPS by c3%/5%; maintain UW with TP of INR510: As Q4 results
came only c8% below our forecasts and the order intake was ahead of our estimates, we are
only marginally reducing our CY12/13e earnings. Consequently, we keep our TP of INR510
unchanged and reiterate UW on the stock as we believe ABB will most likely continue to miss
expectations in the near term. In addition, the stock remains priced for perfection, trading at
c51x CY12e (Dec YE) PE and c35x CY13e PE, factoring in a solid beat to our numbers,
which appears unlikely. Hence, we would take profits at current levels. Our target price is
derived from our preferred EVA valuation methodology and implies a 12 month forward
target PE multiple of c21x on 24 month forward estimated EPS of INR24.5.
Risks and Valuation
Our target price of INR510 is derived from our preferred EVA valuation methodology, assuming a target
sales growth of c9%, through-cycle operating return margin of c9.0% and WACC of c11.7% [all
unchanged?]. Our target price implies that the stock should be trading at a 12-month forward PE of 21x
on 24-month forward EPS of INR24.5.
Under our research model, for stocks without a volatility indicator, the Neutral band is 5 percentage
points above and below the hurdle rate for Indian stocks of 11%. Our target price of INR510 implies a
potential return of -40.7%, below the Neutral band of our model; therefore, we are reiterating our UW
rating on ABB India stock. Potential return equals the percentage difference between the current share
price and the target price, including the forecast dividend yield when indicated..
Risks
We highlight the key upside risks related to our investment case for ABB below:
Significant pick-up in execution
Better-than-expected improvement in margins
Resurgence of large orders
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ABB India (ABB.BO)
UW: Recovery remains elusive; valuation premium
unjustified
Q4 earnings miss but orders surprise positively; beat driven
largely by the booking of old HVDC order
Margin recovery remains elusive; negative surprises likely to
continue as restructuring benefits appear backend loaded
With further downside risk to earnings, valuation premium
unjustified; reiterate UW with a TP of INR510
Earnings miss but orders surprise positively: ABB reported another set of weak results
missing our Q4 EPS estimate by c8% but consensus by c50%. Sales growth of c6% came in
line with our expectations and was driven primarily by the Power business, which grew c13%.
Industry growth disappointed, as large automation projects failed to materialise. While the
total order intake of INR22bn surprised positively, the beat was largely driven by the booking
of the 9-month old HVDC order worth INR5.6bn. Management noted that growth in base
orders remains healthy but revival in project capex, particularly in the Industrial segment, may
take some time. The order backlog was largely in line with our expectations and stood at
INR91bn, on the back of which management expects strong (double-digit) sales growth in the
next couple of quarters.
Visibility on margin recovery remains low: While margins improved somewhat q-o-q, they
once again fell short of expectations. Management attributed weak profitability to lower
volumes, high input costs, project delays and poor project mix. We note that ABB India’s
margins have remained depressed for two years now, more so than any of its competitors, and
this may indicate poor project selection. In addition, restructuring benefits seem to be more
backend-loaded as they have hardly provided the necessary impetus to the margins in last two
years. Hence, while on a long term basis, ABB India may appear to be well placed to benefit
from India’s growth story, in the near term the outlook certainly remains weak, particularly as
expectations of recovery remain too high in spite of estimate downgrades in the last 8 quarters.
We currently forecast EBITDA margins to improve to c7.7% in CY12 and c9.1% in CY13;
however, if the project mix remains suboptimal, future results may warrant further downgrades.
We trim our CY12/13e EPS by c3%/5%; maintain UW with TP of INR510: As Q4 results
came only c8% below our forecasts and the order intake was ahead of our estimates, we are
only marginally reducing our CY12/13e earnings. Consequently, we keep our TP of INR510
unchanged and reiterate UW on the stock as we believe ABB will most likely continue to miss
expectations in the near term. In addition, the stock remains priced for perfection, trading at
c51x CY12e (Dec YE) PE and c35x CY13e PE, factoring in a solid beat to our numbers,
which appears unlikely. Hence, we would take profits at current levels. Our target price is
derived from our preferred EVA valuation methodology and implies a 12 month forward
target PE multiple of c21x on 24 month forward estimated EPS of INR24.5.
Risks and Valuation
Our target price of INR510 is derived from our preferred EVA valuation methodology, assuming a target
sales growth of c9%, through-cycle operating return margin of c9.0% and WACC of c11.7% [all
unchanged?]. Our target price implies that the stock should be trading at a 12-month forward PE of 21x
on 24-month forward EPS of INR24.5.
Under our research model, for stocks without a volatility indicator, the Neutral band is 5 percentage
points above and below the hurdle rate for Indian stocks of 11%. Our target price of INR510 implies a
potential return of -40.7%, below the Neutral band of our model; therefore, we are reiterating our UW
rating on ABB India stock. Potential return equals the percentage difference between the current share
price and the target price, including the forecast dividend yield when indicated..
Risks
We highlight the key upside risks related to our investment case for ABB below:
Significant pick-up in execution
Better-than-expected improvement in margins
Resurgence of large orders
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