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ABB --------------------------------------------------------------------------- Maintain UNDERPERFORM
PAT miss in 4Q; fundamentals don't justify such steep valuations
● ABB reported another weak quarter (Rs68 mn PAT vs est. of
Rs1.6 bn) with losses led by weak margins on the core business
and provisioning for losses for exiting the rural electrification
business. The impact of rural losses this quarter was not
quantified, but the annual impact is more than Rs1 bn, as per
management. Even if we strip out these losses, margin (~4%) in
low single digits is below the typical early teen range in the past.
● Management highlighted margins should improve in CY11/12, as
pricing declines in the T&D sector have troughed and it has
completed the indigenisation of 765KV transformer manufacturing.
We don’t expect order trajectory for ABB to strengthen (ex. likely
HVDC order win), as ABB does not enjoy any cost edge in India. We
expect short cycle industrial orders to deteriorate in the near term.
● While post every quarter results investors believe the worst may
be over, we note even after building in a recovery in earnings,
stock valuations appear rich and cannot be justified by
fundamentals alone. We update CY10 P&L numbers for actual
delivered and EPS falls 71% to Rs3. We maintain an
UNDERPERFORM.
Key takeaways from conference call
ABB’s management said higher raw material costs were on account of
booking provisions for exiting the rural electrification business.
Management highlighted a provision of more than Rs1 bn was made
in CY10 and the company still has a backlog of Rs0.7 bn in this
business, which is yet to be executed. We, however, believe most of
the provisions may have already been accounted for in CY10, which
reflects in the rebound in earnings that we are forecasting.
As suggested by global cues, order inflow fell 39% YoY, which was
attributed to delay in orders from clients. We, however, believe it is not
just delays but a very weak competitive positioning of ABB in India.
Management plans to bid for T&D orders aggressively, as it has
completed the localisation of its 765KV transformer manufacturing
facility. The T&D market is commoditised and ABB does not have any
cost edge. Any degree of indigenisation may not help much, as peers
such as Crompton Greaves have a very high degree of local content
in their products.
Management highlighted that pricing in the T&D sector has been a
cause for concern, but said pricing in the sector may have bottomed
out and thus margins should improve over the next few years.
Industrial business orders may weaken
The key for ABB is a recovery in the industrial projects segment,
which could lead to strength in automation orders. We, however,
believe industrial project ordering in India may remain weak this year.
There is also a risk that short-cycle industrial automation (product)
orders, which strengthened over the past year, may also weaken. In
summary, order inflows will remain weak for ABB even in CY11, and
there is a risk to our estimates (est. of Rs110 bn for CY11 vs Rs63 bn
in CY10).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ABB --------------------------------------------------------------------------- Maintain UNDERPERFORM
PAT miss in 4Q; fundamentals don't justify such steep valuations
● ABB reported another weak quarter (Rs68 mn PAT vs est. of
Rs1.6 bn) with losses led by weak margins on the core business
and provisioning for losses for exiting the rural electrification
business. The impact of rural losses this quarter was not
quantified, but the annual impact is more than Rs1 bn, as per
management. Even if we strip out these losses, margin (~4%) in
low single digits is below the typical early teen range in the past.
● Management highlighted margins should improve in CY11/12, as
pricing declines in the T&D sector have troughed and it has
completed the indigenisation of 765KV transformer manufacturing.
We don’t expect order trajectory for ABB to strengthen (ex. likely
HVDC order win), as ABB does not enjoy any cost edge in India. We
expect short cycle industrial orders to deteriorate in the near term.
● While post every quarter results investors believe the worst may
be over, we note even after building in a recovery in earnings,
stock valuations appear rich and cannot be justified by
fundamentals alone. We update CY10 P&L numbers for actual
delivered and EPS falls 71% to Rs3. We maintain an
UNDERPERFORM.
Key takeaways from conference call
ABB’s management said higher raw material costs were on account of
booking provisions for exiting the rural electrification business.
Management highlighted a provision of more than Rs1 bn was made
in CY10 and the company still has a backlog of Rs0.7 bn in this
business, which is yet to be executed. We, however, believe most of
the provisions may have already been accounted for in CY10, which
reflects in the rebound in earnings that we are forecasting.
As suggested by global cues, order inflow fell 39% YoY, which was
attributed to delay in orders from clients. We, however, believe it is not
just delays but a very weak competitive positioning of ABB in India.
Management plans to bid for T&D orders aggressively, as it has
completed the localisation of its 765KV transformer manufacturing
facility. The T&D market is commoditised and ABB does not have any
cost edge. Any degree of indigenisation may not help much, as peers
such as Crompton Greaves have a very high degree of local content
in their products.
Management highlighted that pricing in the T&D sector has been a
cause for concern, but said pricing in the sector may have bottomed
out and thus margins should improve over the next few years.
Industrial business orders may weaken
The key for ABB is a recovery in the industrial projects segment,
which could lead to strength in automation orders. We, however,
believe industrial project ordering in India may remain weak this year.
There is also a risk that short-cycle industrial automation (product)
orders, which strengthened over the past year, may also weaken. In
summary, order inflows will remain weak for ABB even in CY11, and
there is a risk to our estimates (est. of Rs110 bn for CY11 vs Rs63 bn
in CY10).
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