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ABB Ltd
Underweight
ABB.BO, ABB IN
Valuation delinked with fundamentals? Maintain UW
• Topline surprises, but margin disappoints in Mar-q: ABB reported
revenue of Rs17.8bn (+22.4% YoY), well ahead of est. (Rs15.9bn). But
OPM of 4.9% (down 100bps) disappointed (JPMe: 6.5%). Reported PAT
grew 8x, however profit adjusted for forex variation of Rs.566mn was down
36% and below our estimate of Rs740mn and street est. of Rs705mn. Order
inflows of ~Rs17bn were flat YoY, order backlog of Rs83.3bn was down
4.8% YoY.
• Topline growth (and margin pressure) was led by power systems (PS).
PS revenue was up ~50% YoY for the second consecutive quarter. However
EBIT margin in PS was just 0.3%, though management clarified that rural
electrification related cost had not been borne during Mar-q.
• Management commentary positive: In his maiden quarter, the new MD,
Mr. Bazmi Husain gave us a sense that operations are on the mend and
growth is once again on track. Short cycle ordering has seen healthy growth;
large orders are expected to be finalized by subsequent quarters. Execution
of long gestation projects (in PS and process automation) has shown a
pick-up. But competition continues to impose pressure on margins. ABB is
relying on localization of manufacturing & design, and operational cost
savings to improve margins. We are already building in expectation of
strong re-bound in margins in CY11 to 7.8% and ~9.2% in CY12.
• The market appears to be pricing in unreasonably high growth
expectation. Revenues have de-grown over past 2 years and competition
especially in the power segment has gone up significantly. In our DCF
model (WACC: 12%, g: 6%, Terminal year: CY17) we have to raise
revenue CAGR over CY10-17 to ~27% (vs. ~17% currently) to arrive at
CMP. Only a sharp rebound in inflows may justify this sentiment.
• Valuation delinked with fundamentals? ABB is trading at a fiscalized P/E
of 44.4x FY12 at a 66% premium to Siemens, which has exhibited superior
fundamentals in recent times. ABB's RoE (~15-18%) is well below CG
(~30%) and Siemens (~26%). We maintain UW on ABB and Dec-11 PT of
Rs615 and recommend switch to CG within the T&D space. The buyback
price of Rs900 seems to be providing support to ABB stock and low free
float ex-LIC (~17.35%) is a key risk to our UW rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ABB Ltd
Underweight
ABB.BO, ABB IN
Valuation delinked with fundamentals? Maintain UW
• Topline surprises, but margin disappoints in Mar-q: ABB reported
revenue of Rs17.8bn (+22.4% YoY), well ahead of est. (Rs15.9bn). But
OPM of 4.9% (down 100bps) disappointed (JPMe: 6.5%). Reported PAT
grew 8x, however profit adjusted for forex variation of Rs.566mn was down
36% and below our estimate of Rs740mn and street est. of Rs705mn. Order
inflows of ~Rs17bn were flat YoY, order backlog of Rs83.3bn was down
4.8% YoY.
• Topline growth (and margin pressure) was led by power systems (PS).
PS revenue was up ~50% YoY for the second consecutive quarter. However
EBIT margin in PS was just 0.3%, though management clarified that rural
electrification related cost had not been borne during Mar-q.
• Management commentary positive: In his maiden quarter, the new MD,
Mr. Bazmi Husain gave us a sense that operations are on the mend and
growth is once again on track. Short cycle ordering has seen healthy growth;
large orders are expected to be finalized by subsequent quarters. Execution
of long gestation projects (in PS and process automation) has shown a
pick-up. But competition continues to impose pressure on margins. ABB is
relying on localization of manufacturing & design, and operational cost
savings to improve margins. We are already building in expectation of
strong re-bound in margins in CY11 to 7.8% and ~9.2% in CY12.
• The market appears to be pricing in unreasonably high growth
expectation. Revenues have de-grown over past 2 years and competition
especially in the power segment has gone up significantly. In our DCF
model (WACC: 12%, g: 6%, Terminal year: CY17) we have to raise
revenue CAGR over CY10-17 to ~27% (vs. ~17% currently) to arrive at
CMP. Only a sharp rebound in inflows may justify this sentiment.
• Valuation delinked with fundamentals? ABB is trading at a fiscalized P/E
of 44.4x FY12 at a 66% premium to Siemens, which has exhibited superior
fundamentals in recent times. ABB's RoE (~15-18%) is well below CG
(~30%) and Siemens (~26%). We maintain UW on ABB and Dec-11 PT of
Rs615 and recommend switch to CG within the T&D space. The buyback
price of Rs900 seems to be providing support to ABB stock and low free
float ex-LIC (~17.35%) is a key risk to our UW rating.
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