JPMorgan::: ABB- Revenue growth healthy but margins disappoint yet again: Maintain UW

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ABB Ltd Underweight
ABB.BO, ABB IN
Revenue growth healthy but margins disappoint yet
again: Maintain UW


 Margin pressures lead bottom-line disappointment: ABB reported healthy
in-line revenue growth of 17% YoY in Jun-q. However the reported EBITDA
margin of 3.9% was well below estimates (7.8%). Margin pressure of ~110bp
YoY (on low base of Jun-q last year) was led by RM cost pressures. As a result
reported PAT of Rs387MM (flat YoY) came in well below our and street
estimates of Rs866MM and Rs804MM respectively.
 Segmental update: Except for Power Products, where top-line growth was just
5.6%, the remaining segments posted healthy revenues. In 1H CY10, margin
pressures have been led by the power segment (both products and projects) and
process automation (or industrial projects). Pricing pressures led by competition
and commodities are visible, especially in long-cycle jobs (projects) and the
power segment.
 Is ABB sacrificing margins in its quest for orders? ABB reported Jun-q
inflows of Rs17.9B (up 44% YoY). According to management, inflow growth
has been led by short-cycle orders across sectors and business segments. ABB
said it had gained market share in a tough environment characterized by intense
competition, high inflation (and high cost of capital), uncertain macro
environment and relaxation of prequalification norms by PGCIL (to allow nonequipment
manufacturers to participate in turnkey substation jobs). Post the
conference call our sense is that margins are likely to remain in the 5-7% range
for next couple of quarters and management’s target is to improve margins to 8-
10% subsequently, well below ABB's historical margins (11-12%).
 We cut CY11E EPS by 24% and CY12E EPS by 2.4%: We have accounted
for a sharp margin disappointment in Jun-q (post Mar-q results the CY11
estimate had been pruned by 8.5%) and reduce our full year EBITDA margin
estimate by 187bp to 5.9% (1HCY11 margin of 4.4%). In CY12 we expect
margins to recover to 8.9% (in ABB’s target range of 8-10%).
Maintain UW and our Mar-12 DCF-based PT of Rs615: The positive impact of
rollover from Dec-11 earlier was negated by our estimate cuts. Despite the
recurring disappointment in operations and high valuations (32x CY12E EPS),
ABB has outperformed the Sensex by ~8% over the past 12 months. The
buyback price of Rs900 is still providing support to ABB’s stock. The low free
float ex-LIC (~17.35%) is a key risk to our UW rating.