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Research
ABB INDIA - Back to basics: Tough times call for tough measures - Edelweiss
Posted On : 2013-07-04 21:21:26( TIMEZONE : IST )
We recently met ABB India's (ABB) top management to understand key industry trends and business dynamics going ahead. While near-term outlook on the T&D equipment market is flattish, the company is focusing more on optimising product pull through by targeting large-value HVDC (High voltage direct current), FACT (Flexible alternating current transmission systems) , metro projects, oil & gas projects and fertilisers. Maintain 'REDUCE' with a TP of INR440.
Maximising product pull through across projects
ABB is focusing on optimising product pull through in power and industrial projects in target market segments. The company, over the past one-two years, has been extremely selective in taking on projects. It is targeting a healthy 25-35% product pull though across power and industrial projects, which is a decent level to attain.
Exciting opportunities in railway, oil & gas, fertilisers
The company remains optimistic about fresh potential in the Dedicated Freight Corridor, metro rail, oil & gas and fertilisers in the coming years. With electrical distribution system in new plants accounting for 10-15% of total project cost, INR55-65bn worth of new business could accrue from new fertiliser capex alone.
T&D equipment market to hover around INR200-250bn
Led by a weak investment climate, especially from SEBs, private sector the overall T&D equipment market size has shrunk 40-45% from peak to INR200-250bn currently. This has led to average industry utilisation levels declining to 40-50% across segments for most equipment players. While ABB expects the market opportunity to improve over the long term, market size over one-two years is likely to remain at current level.
Outlook and valuations: Cautious; maintain 'REDUCE'
While ABB's product focus will boost overall profitability and cash flows, lower RoEs and expensive valuations will continue to remain key drags. We maintain 'REDUCE/Sector Underperformer' with a target price of INR440 as valuations are expensive at 45x and 35x CY13E and CY14E, respectively.
