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ABB Ltd. -------------------------------------------------------------------------Maintain UNDERPERFORM
Disappointing quarter; irrational valuations
● ABB's series of disappointments continue (June PAT ~55% below
estimates, margins falling ~60 bp QoQ) and yet valuations remain
steep, suggesting investors are holding on to the stock for nonfundamental
reasons (delisting trigger, etc). Order inflows, though
~36% below estimates, were up ~45% YoY due to base effect.
Management attributed the YoY jump to short cycle order wins,
across power and automation.
● Management expects margins to improve significantly with longterm
margins seen at ~8–10%. However, no timeline was specified.
In the automation segment, margins fell sharply by ~460 bp QoQ,
which was attributed to the fixed-priced nature of contracts.
● Power systems division reported an operating loss again after
showing a marginal profit in 1Q, which reflects the weak cost
structure of ABB (~35–40% of raw materials are still imported). One
key positive takeaway was the order backlog decline for rural
electrification projects from ~Rs1 bn in Dec. to ~Rs470 mn in June.
● While we/street are building in a recovery in earnings this year off
a low base, these numbers indicate the likelihood of
further downside to growth forecasts. Given steep valuations
relative to the sector (~37x FY12E earnings) and continued weak
results, we maintain our UNDERPERFORM rating on the stock.
Conference call takeaways
Management highlighted that most of the orders won in the June quarter
were short cycle orders with all the four business segments witnessing
inflow growth (~45% growth YoY reflects growing market share as per
management). The North East-Agra HVDC order (total value to parent
~US$900 mn, ABB India value ~US$130 mn) has not been booked so
far. The order will be booked once the financial closure is achieved.
Most of the engineering work for the project will be done in India.
Management commented that the dependence on government
contracts has reduced over the last 2–3 years. Although private
customers were better in terms of payment, pricing environment is still
challenging. Management mentioned that new PGCIL norms have
allowed new players (who don’t manufacture equipment) to bid for
projects. ABB is now supplying power and substation automation
products directly to these EPC contractors such that it can maintain
sales volumes without bidding for low margin projects.
Margins
Management commented that margins pressure (especially in the power
business) is due to: (1) low pricing and high competitive intensity and (2)
the absence of price variation clauses in some long cycle orders.
Acquisitions
ABB India is going to acquire Baldor Electric India Private Ltd. (turnover
~Rs300 mn with operating margins at ~20%) for ~Rs357 mn. It is
involved in the manufacturing of: (1) Motors and machines (~80% of
business) as per US standards. These are mostly exported to OEMs
outside of India. (2) Mechanical equipment such as gears and conveyor
belts, which will complement ABB’s offering of drives and motors. The
three businesses, which were acquired in April, contributed to ~Rs547
mn of revenue in the June quarter with a PBT margin of ~9%.
Automation
Outlook for the business remains good led by resilient volumes and new
energy efficiency norms brought in April 2011. Current growth in sales is
on: (1) demand for motors and drives increases as many projects are in
the final phase of execution and (2) direct sales of motors and drives.
Management commented that competitive intensity remains high, while
the projects segment is witnessing margin pressure due to high input
costs while contracts are fixed priced.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ABB Ltd. -------------------------------------------------------------------------Maintain UNDERPERFORM
Disappointing quarter; irrational valuations
● ABB's series of disappointments continue (June PAT ~55% below
estimates, margins falling ~60 bp QoQ) and yet valuations remain
steep, suggesting investors are holding on to the stock for nonfundamental
reasons (delisting trigger, etc). Order inflows, though
~36% below estimates, were up ~45% YoY due to base effect.
Management attributed the YoY jump to short cycle order wins,
across power and automation.
● Management expects margins to improve significantly with longterm
margins seen at ~8–10%. However, no timeline was specified.
In the automation segment, margins fell sharply by ~460 bp QoQ,
which was attributed to the fixed-priced nature of contracts.
● Power systems division reported an operating loss again after
showing a marginal profit in 1Q, which reflects the weak cost
structure of ABB (~35–40% of raw materials are still imported). One
key positive takeaway was the order backlog decline for rural
electrification projects from ~Rs1 bn in Dec. to ~Rs470 mn in June.
● While we/street are building in a recovery in earnings this year off
a low base, these numbers indicate the likelihood of
further downside to growth forecasts. Given steep valuations
relative to the sector (~37x FY12E earnings) and continued weak
results, we maintain our UNDERPERFORM rating on the stock.
Conference call takeaways
Management highlighted that most of the orders won in the June quarter
were short cycle orders with all the four business segments witnessing
inflow growth (~45% growth YoY reflects growing market share as per
management). The North East-Agra HVDC order (total value to parent
~US$900 mn, ABB India value ~US$130 mn) has not been booked so
far. The order will be booked once the financial closure is achieved.
Most of the engineering work for the project will be done in India.
Management commented that the dependence on government
contracts has reduced over the last 2–3 years. Although private
customers were better in terms of payment, pricing environment is still
challenging. Management mentioned that new PGCIL norms have
allowed new players (who don’t manufacture equipment) to bid for
projects. ABB is now supplying power and substation automation
products directly to these EPC contractors such that it can maintain
sales volumes without bidding for low margin projects.
Margins
Management commented that margins pressure (especially in the power
business) is due to: (1) low pricing and high competitive intensity and (2)
the absence of price variation clauses in some long cycle orders.
Acquisitions
ABB India is going to acquire Baldor Electric India Private Ltd. (turnover
~Rs300 mn with operating margins at ~20%) for ~Rs357 mn. It is
involved in the manufacturing of: (1) Motors and machines (~80% of
business) as per US standards. These are mostly exported to OEMs
outside of India. (2) Mechanical equipment such as gears and conveyor
belts, which will complement ABB’s offering of drives and motors. The
three businesses, which were acquired in April, contributed to ~Rs547
mn of revenue in the June quarter with a PBT margin of ~9%.
Automation
Outlook for the business remains good led by resilient volumes and new
energy efficiency norms brought in April 2011. Current growth in sales is
on: (1) demand for motors and drives increases as many projects are in
the final phase of execution and (2) direct sales of motors and drives.
Management commented that competitive intensity remains high, while
the projects segment is witnessing margin pressure due to high input
costs while contracts are fixed priced.
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