Maintain SELL on ABB India - Long road to recovery - HDFC Securities

Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities.

ABB India (Q1CY20): Long road to recovery. Maintain SELL

(TP Rs 755, CMP Rs 837, MCap Rs 177bn)

We maintain SELL on ABB India Ltd. (ABB) with a TP of Rs 755/sh (42x Mar-22E EPS). ABB business model is highly sensitive to operating leverage as Rs 3.2bn revenue shortfall (for 10days of disruption in Mar-20) led to sharp erosion in profitability (Rs 1.1bn contribution shortfall) with Rev/EBIDTA/APAT de-growing 18/90/90% YoY. We expect weaker performance in 2QCY20 with 1.5months of loss of operations. ABB 1QCY20 commentary signalled that it remains well geared to serve clients only if there is demand pick up. Muted Public/Pvt capex remains key headwind.

Weak performance: ABB posted Rev/EBIDTA/APAT miss of 10/88/89% YoY. Due to movement restrictions ABB faced logistics issues in executing Exports & Services order book. With clients shutting operations product business held back deliveries. The dislocation severely impacted financial performance. ABB has resumed limited plants operation from 4th May 2020 and is actively engaging with clients to deliver product & services. Motion/Electrification segment were key revenue driver for 1QCY20.

Focusing on gaining market share: ABB believes that it is too early to predict on demand recovery as target markets are gradually opening up both locally and globally. Coming out of pandemic and backed by stimulus Utilities Infra, Water Infra, Power Generation, Other PSU Infra, Pharma, F&B, Chemicals and Data centers are Industry segments which may see accelerated recovery. Fiscal stimulus will help MSME's recover lost ground with supply chain getting streamlined for ABB. Tier 2/3 cities have seen limited COVID-19 disruption and demand for Electrical and Motion products can revive in these macro markets. Robotics and Industrial Automation will take time to recover as largely private capex driven.

Export opportunity augurs well: ABB 1QCY20 exports revenue share reduced to 10% vs 14% for CY19. Logistics issues toward Mar-20 end impacted export deliveries. Whilst ABB indicated that prime focus remains on the domestic market, Middle East, Africa and Indian subcontinent have accepted ABB products and solution. Addressable market size remains large but ABB will cautiously expand from market to market. Over long term it wants to balance imports and exports to reduce forex volatility.

ABB business model remains highly sensitive to demand outlook. We see challenging 2QCY20 and slow ramp-up for 2HCY20. With clients conserving capital and global growth outlook bleak, capex headwinds remain. We have cut CY20E EPS estimate by 72%. We believe headwinds are not fully priced in current rich valuations. We maintain SELL on ABB. Key risks (1) Accelerated Government capex recovery, (2) Pickup in private investments, and (3) INR appreciation.

Shares of ABB India Limited was last trading in BSE at Rs.835.15 as compared to the previous close of Rs. 856.05. The total number of shares traded during the day was 4895 in over 850 trades.

The stock hit an intraday high of Rs. 863.15 and intraday low of 833.4. The net turnover during the day was Rs. 4121153.

Source : Equity Bulls

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