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Maintain REDUCE on ABB India - Capex recovery awaited - HDFC Securities

Posted On: 2021-08-01 06:09:11 (Time Zone: UTC)

Mr. Parikshit D Kandpal, CFA, HDFC Securities and Mr. Chintan Parikh, Institutional Research Analyst, HDFC Securities

ABB reported revenue/EBIDTA/APAT miss of 5/16/16% due to 3-3.5 weeks of COVID-related disruptions. Strong recovery has been witnessed from Jun-21 with plant utilisation at ~80-85%. ABB has received the green signal for capacity expansion, with land already in place in existing locations. Except for tendering business, pricing power is there in private orders to take care of commodities inflation. The next phase of growth for ABB will be driven by (1) increased localisation for exports markets, (2) pick-up in private Capex, and (3) operating leverage led margins expansion. We believe most of the potential upsides on cyclical recovery are already priced into the lofty valuation. We maintain REDUCE, roll forward to 42x Jun-23 EPS with revised TP of INR 1,540/sh.

Sequential execution decline: ABB reported revenue at INR 14.3bn (+44.6%/-12.5% YoY/QoQ, 5% miss). While motion/electrification/process automation posted de-growth of 20.7%/8.9%/17.9% sequentially, revenue from robotics & discrete automation was robust at INR 890mn (+3.6x/+85.6% Q2CY20/Q1CY21). EBITDA of INR 948mn (~4x/-28.4% YoY/QoQ) was 16% below our estimate and margin of 6.6% (+427/-147bps YoY/QoQ) was 91bps lower than our estimate. Sequentially, the EBIT margin declined for all the segments with robotics at 5.1% (vs 11.1%), process automation at 6% (vs 8.8%), motion at 11% (vs 14.2%) and electrification at 6.8% (vs 11.8%). RPAT/APAT: INR 683mn (~4.6x/-28%x YoY/QoQ, 16% miss).

Order inflows decline; services business picks up, saves margin: Q1CY21 order inflows stood at INR 16.9bn (vs INR 12/18.2bn YoY/QoQ), taking the backlog to INR 45.8bn (vs INR 46.7/43.3bn YoY/QoQ). While sequential order inflows de-grew for electrification/process automation/robotics & discrete automation by -16%/-18%/-31%, motions saw 15% growth. The services business, which was muted for the past few quarters on account of mobility constraint, has started to pick up.

Limited impact of commodity price increase; capacity utilisation high; encouraging response on eMart: Given that 70% of the order backlog is short cycle in nature, ABB does not expect a negative effect of commodity price inflation on margins. For the 27 factories, capacity utilisation for the quarter on a blended basis was between 80%-85%. Response to eMart has been encouraging with increasing inquiries.

Shares of ABB India Limited was last trading in BSE at Rs. 1692.5 as compared to the previous close of Rs. 1683.8. The total number of shares traded during the day was 3059 in over 704 trades.

The stock hit an intraday high of Rs. 1723 and intraday low of 1687.65. The net turnover during the day was Rs. 5234811.

Source: Equity Bulls

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