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ABB Ltd
Order flows and profitability set to recover
We attended the Q3CY10 earnings conference call of ABB Group (parent of
ABB India). During the quarter, order flows for the Indian market increased 3%
YoY (order flows for the power dropped 4% YoY, while they were up 12% YoY
for the automation segment). The management of ABB Group highlighted the
recovery in the automation business driven by industrial recovery. However
according to the management the power cycle in India has not revived
(reflected in the decline in order inflows in the power segment). At our current
estimates, ABB India is trading at a P/E of 38.8x and 33.1x for CY11E and
CY12E respectively. While very clearly the worst of the business is behind ABB
India (as margins and order flows recover) however we believe valuations for
ABB India continue to remain prohibitive. We believe that given the
contraction in its RoCE, ABB India is unlikely to trade close to its historical
multiples. Maintain Hold with a target price of Rs 750.
Order flows recover for ABB India: ABB Group’s order inflows for the Indian
geography grew by 4% YoY, implying that the order flows for ABB India in
Q3CY10 stood at ~Rs 19.5bn. The average order inflows in the last 14 quarters
have been ~Rs 20 bn for ABB India.
Margins to recover in H2FY10: The management of ABB Group indicated that
the decline in margins for ABB India is likely to have been arrested, given the
improvement in the demand for the automations products and power systems.
Further increased focus on cost control measures has managed to contain
margins for the company. ABB India reported EBITDA margins of 6.2% in
H1CY10 (down 430 bps Y-o-Y). At our current estimates we expect EBITDA
margins of 9.2% in H2CY10 implying 250 bps Y-o-Y margin expansion.
Investment view: At our current estimates, ABB India is trading at a P/E of 38.8x
and 33.1x for CY11E and CY12E respectively. We believe that given the
contraction in its RoCE and growth profile, ABB India is unlikely to trade close to
its historical multiples. Maintain Hold.
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