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ABB India (ABB IN)
UW: Results disappoint again, expectations too bullish
Earnings disappoint again driven by continued pressure on
margins, which are finding little support from growth
Consistent miss implies that consensus remains too bullish
on mgn recovery; we lower our CY11/12e EPS by c30%/16%
At c40x CY12e PE, valuation remains stretched, particularly
with risk to earnings; we reiterate UW with TP of INR590
Margins, rather than growth, key to recovery in our opinion: ABB reported yet another
set of disappointing results, missing Q2 CY11 consensus EPS estimate (by c51%) for the
fifth quarter in a row. The strong pickup in sales growth (c22% in Q1 and c17% in Q2) is
doing little to support earnings, as EBITDA margin (c5.7% in Q1 and c5.0% in Q2) remains
under pressure due to intense competition, increasing pricing pressure and rising input costs.
The order growth remains strong (new orders up c45% y-o-y in Q2); however, the large
orders are still missing. In addition, there remains little visibility on the margins embedded
into the current order book and in the new orders; hence we believe it is too early to get
excited about the reported order growth, particularly when it was driven by a weak comp.
Consistent disappointment indicates that expectations remain too bullish: While sales
have largely performed in line with expectations, margins have consistently disappointed,
indicating that recovery expectations remain too bullish. Consensus currently expects an
EBITDA margin of c8.2% in CY11e, implying a margin expectation of c11% in the second
half. Given that mgmt is guiding for normalized margins of only c8-10% over the medium
term and the external factors (such as competition, pricing pressure, inflation, interest rates,
etc) remain detrimental to margins, we believe near-term expectations need to moderate.
We have reduced our EBITDA margin estimate to c6.3% for CY11e and c8.6% for CY12e,
compared to c8.2% and c9.8% earlier, thus driving an EPS cut of c30%/16% for CY11e/12e.
Valuation continues to defy fundamentals: In an environment where most capital goods
stocks, including some of ABB’s closest peers, are trading at significant discount to their
historical average, ABB remains at a premium in spite of continued earnings
disappointments. On our new estimates, the stock is trading at c67x FY11e PE and c40x
FY12e PE vs. the historical trading average of c38.7x (12m fwd PE for the past five years).
We find this valuation premium too high and unjustified, clearly when the risks to earnings
lie on the downside. Hence, we believe the stock should derate. At this stage, we have given
ABB a benefit of doubt and believe that the company would be able to bring its profitability
back to normalcy over the next 2-3 years. Hence, we maintain our assumptions of throughcycle margin and target growth in our preferred EVA valuation methodology, thereby
keeping our target price unchanged at INR590. Our TP implies a 12m fwd target multiple of
c25x and potential negative return of c27%. Hence, we reiterate our Underweight rating.
Valuation remains stretched; maintain UW
On our new estimates, ABB is currently trading at c66.9x FY11e PE and c39.5x FY12e PE vs the
historical trading average of c38.7x (12m fwd PE for the past five years). At this stage, we have given
ABB a benefit of doubt and believe that the company would be able to bring its profitability back to
normalcy over the next 2-3 years. Hence, we maintain our assumptions of a through-the-cycle margin of
10% and target growth of 9% in our preferred EVA valuation methodology, thereby keeping our target
price unchanged at INR590. Our target price implies that 12 months from now the stock should be trading
at a 12m fwd multiple of c25x PE on 24m EPS of INR24.1.
Under HSBC’s research model, for stocks without a volatility indicator, the Neutral rating band is five
percentage points above and below the hurdle rate for India stocks of 11%. This translates into a Neutral
rating band of 6% to 16% above the current share price. Our 12-month target price of INR590 implies a
potential negative return of c27% (ex-dividend, which is below the Neutral rating band; hence, we
maintain our Underweight recommendation on the stock.
Risks
We highlight key risks related to our investment case on ABB below:
Better-than-expected improvement in margins on account of a potential decline in commodity prices
Significant increase in market share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ABB India (ABB IN)
UW: Results disappoint again, expectations too bullish
Earnings disappoint again driven by continued pressure on
margins, which are finding little support from growth
Consistent miss implies that consensus remains too bullish
on mgn recovery; we lower our CY11/12e EPS by c30%/16%
At c40x CY12e PE, valuation remains stretched, particularly
with risk to earnings; we reiterate UW with TP of INR590
Margins, rather than growth, key to recovery in our opinion: ABB reported yet another
set of disappointing results, missing Q2 CY11 consensus EPS estimate (by c51%) for the
fifth quarter in a row. The strong pickup in sales growth (c22% in Q1 and c17% in Q2) is
doing little to support earnings, as EBITDA margin (c5.7% in Q1 and c5.0% in Q2) remains
under pressure due to intense competition, increasing pricing pressure and rising input costs.
The order growth remains strong (new orders up c45% y-o-y in Q2); however, the large
orders are still missing. In addition, there remains little visibility on the margins embedded
into the current order book and in the new orders; hence we believe it is too early to get
excited about the reported order growth, particularly when it was driven by a weak comp.
Consistent disappointment indicates that expectations remain too bullish: While sales
have largely performed in line with expectations, margins have consistently disappointed,
indicating that recovery expectations remain too bullish. Consensus currently expects an
EBITDA margin of c8.2% in CY11e, implying a margin expectation of c11% in the second
half. Given that mgmt is guiding for normalized margins of only c8-10% over the medium
term and the external factors (such as competition, pricing pressure, inflation, interest rates,
etc) remain detrimental to margins, we believe near-term expectations need to moderate.
We have reduced our EBITDA margin estimate to c6.3% for CY11e and c8.6% for CY12e,
compared to c8.2% and c9.8% earlier, thus driving an EPS cut of c30%/16% for CY11e/12e.
Valuation continues to defy fundamentals: In an environment where most capital goods
stocks, including some of ABB’s closest peers, are trading at significant discount to their
historical average, ABB remains at a premium in spite of continued earnings
disappointments. On our new estimates, the stock is trading at c67x FY11e PE and c40x
FY12e PE vs. the historical trading average of c38.7x (12m fwd PE for the past five years).
We find this valuation premium too high and unjustified, clearly when the risks to earnings
lie on the downside. Hence, we believe the stock should derate. At this stage, we have given
ABB a benefit of doubt and believe that the company would be able to bring its profitability
back to normalcy over the next 2-3 years. Hence, we maintain our assumptions of throughcycle margin and target growth in our preferred EVA valuation methodology, thereby
keeping our target price unchanged at INR590. Our TP implies a 12m fwd target multiple of
c25x and potential negative return of c27%. Hence, we reiterate our Underweight rating.
Valuation remains stretched; maintain UW
On our new estimates, ABB is currently trading at c66.9x FY11e PE and c39.5x FY12e PE vs the
historical trading average of c38.7x (12m fwd PE for the past five years). At this stage, we have given
ABB a benefit of doubt and believe that the company would be able to bring its profitability back to
normalcy over the next 2-3 years. Hence, we maintain our assumptions of a through-the-cycle margin of
10% and target growth of 9% in our preferred EVA valuation methodology, thereby keeping our target
price unchanged at INR590. Our target price implies that 12 months from now the stock should be trading
at a 12m fwd multiple of c25x PE on 24m EPS of INR24.1.
Under HSBC’s research model, for stocks without a volatility indicator, the Neutral rating band is five
percentage points above and below the hurdle rate for India stocks of 11%. This translates into a Neutral
rating band of 6% to 16% above the current share price. Our 12-month target price of INR590 implies a
potential negative return of c27% (ex-dividend, which is below the Neutral rating band; hence, we
maintain our Underweight recommendation on the stock.
Risks
We highlight key risks related to our investment case on ABB below:
Better-than-expected improvement in margins on account of a potential decline in commodity prices
Significant increase in market share.
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