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ABB India
Execution disappoint; Backlog
up; Maintain Underperform
Weak CY11 as 4Q disappoints; Inflows up; Cut EPS; UPF
ABB CY11 Rec PAT was 15% below consensus as 4Q11 rec. PAT 61% below
ours despite a lower base (-74%YoY 4Q10) on increasing price pressure in T&D
space (Chinese players, Siemens, Alstom, and CRG), depleting visibility (backlog
1.1x sales) and higher fixed costs. However, order backlog grew 8%YoY on
strong 4Q inflows +58%YoY led by UHVDC order from parent (22% of inflows).
We cut CY12-13E EPS by ~6% to factor-in weak 4Q11. However, we maintain
our PO on roll-forward. Lack of visibility, rich valuations (42x CY12E) and 36%
downside on our PO drive our Underperform rating.
Backlog up after 4 qtrs on one-off large order
ABB 4Q11 order backlog at Rs91.3bn was up by 8%YoY after 4 quarters on 58% YoY
growth in inflows led by >Rs5bn UHVDC transmission line order from the parent (22%
of inflows). Ex-UHVDC orders, 4Q inflow growth would be 23%YoY on low base
(-41% last year). Apart from the UHVDC order, 9M11 saw large orders from Isolux
(Rs8.2bn, 10% of CY11) and a SAIL-Bhillai Steel plant order (Rs3.3bn, 4%).
Execution weak on depleted backlog
Execution was muted (sales +6%YoY) on products (52% of sales) +8%YoY - power
+10% & automation & LV products +6% vs 5.8%YoY growth in projects (48% of
sales) - power +15% & process automation -7%. EBITDA +32%YoY as 4Q10 was
hit by costs on exit from rural electrification. While Rec PAT grew 69%YoY on 16%
lower dep. on change in A/c policy for amortization of goodwill on acq. of business
(impacting profit by Rs82mn) and lower tax @ 22% vs 40% offset by +167%YoY
interest. Ex-impact of change in A/c policy, Rec PAT growth would be 44%YoY.
Slow growth and rich valuation = Under-perform
ABB had one of the worst 4QCY11 among our E&C universe. We think that ABB’s
slowed growth is a de-rating trigger for the stock. At PE of 20x of 1-year forward
EPS, we derive PO of Rs560 implying 36% downside. Hence, Underperform.
Price objective basis & risk
ABB (ABVFF)
Our PO of Rs560 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. 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
Execution disappoint; Backlog
up; Maintain Underperform
Weak CY11 as 4Q disappoints; Inflows up; Cut EPS; UPF
ABB CY11 Rec PAT was 15% below consensus as 4Q11 rec. PAT 61% below
ours despite a lower base (-74%YoY 4Q10) on increasing price pressure in T&D
space (Chinese players, Siemens, Alstom, and CRG), depleting visibility (backlog
1.1x sales) and higher fixed costs. However, order backlog grew 8%YoY on
strong 4Q inflows +58%YoY led by UHVDC order from parent (22% of inflows).
We cut CY12-13E EPS by ~6% to factor-in weak 4Q11. However, we maintain
our PO on roll-forward. Lack of visibility, rich valuations (42x CY12E) and 36%
downside on our PO drive our Underperform rating.
Backlog up after 4 qtrs on one-off large order
ABB 4Q11 order backlog at Rs91.3bn was up by 8%YoY after 4 quarters on 58% YoY
growth in inflows led by >Rs5bn UHVDC transmission line order from the parent (22%
of inflows). Ex-UHVDC orders, 4Q inflow growth would be 23%YoY on low base
(-41% last year). Apart from the UHVDC order, 9M11 saw large orders from Isolux
(Rs8.2bn, 10% of CY11) and a SAIL-Bhillai Steel plant order (Rs3.3bn, 4%).
Execution weak on depleted backlog
Execution was muted (sales +6%YoY) on products (52% of sales) +8%YoY - power
+10% & automation & LV products +6% vs 5.8%YoY growth in projects (48% of
sales) - power +15% & process automation -7%. EBITDA +32%YoY as 4Q10 was
hit by costs on exit from rural electrification. While Rec PAT grew 69%YoY on 16%
lower dep. on change in A/c policy for amortization of goodwill on acq. of business
(impacting profit by Rs82mn) and lower tax @ 22% vs 40% offset by +167%YoY
interest. Ex-impact of change in A/c policy, Rec PAT growth would be 44%YoY.
Slow growth and rich valuation = Under-perform
ABB had one of the worst 4QCY11 among our E&C universe. We think that ABB’s
slowed growth is a de-rating trigger for the stock. At PE of 20x of 1-year forward
EPS, we derive PO of Rs560 implying 36% downside. Hence, Underperform.
Price objective basis & risk
ABB (ABVFF)
Our PO of Rs560 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. 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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