Maintain SELL on ABB India - Strong performance, muted outlook - HDFC Securities

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

Revenue beat of 7%, discretionary spend cut, and positive forex impact drove much higher beat on profitability. Electrification saw strong export performance, led by medium voltage switch gear division. During the quarter, a new robotics facility was inaugurated, doubling the robotics capacity in India. Railway electrification continues to remain a growth driver over the short and medium term. The ABB business model is overly sensitive to operating leverage. Hence, margin expansion will only play out when all segments expand in volume terms, especially Robotics and IA, which continue to face relatively stronger headwinds. With clients conserving capital and global growth outlook bleak, new capex headwinds remain, both locally and globally. In a restricted capex environment and deflationary expectations, high competitive intensity will curb further margin expansion. We believe the headwinds are not fully priced into the current rich valuations. We maintain SELL on ABB India Ltd. (ABB) with a target price of Rs 827/sh.

3QCY20 beat aided by 2QCY20 revenue deferrals, cost-cutting: Revenue came in at Rs 16.1bn (7% beat), driven by pent-up demand. EBITDA stood at Rs 1.2bn (-1.6% YoY, 34% beat). EBIDTA beat driven by favorable forex gains and 7% revenue beat. Consequently, APAT stood at Rs 855mn (+8.5% YoY, 48% beat). Focus to continue on discretionary spend cut which is about 25% of overall other expenditure line item. Material costs are driven by revenue mix, and were higher this quarter at 68% due to lower service mix in the revenues as personnel couldn't access client site due to restrictions at client side and logistics issues on transportation. Services continues to be delivered remotely.

Resilient order inflows: Order inflows for 3QCY20 stood at Rs 13bn ( -19% YoY). However, 3QCY20 had solar inverter business related orders which had only marginal profitability. With current order book at Rs 43.9bn, there is revenue visibility for the next 6-9 months as ABB is expected to maintain book-bill with execution progressing at a decent pace across all five factories. Revival is expected as unlock gathers momentum. Infrastructure investments by Government may further drive new order inflows.

Measures to stay resilient in CY20: To tackle short-term challenges, ABB is focusing on (1) virtual/remote client servicing , (2) cost-cutting measures till headwinds remain, (3) concerted efforts towards sectors where green shoots are emerging viz. Data Centers/Warehousing, Food & Beverage, Pharma, and Buildings & Factories, rather than spreading arms everywhere, and (4) conserving cash and further streamlining WC.

Shares of ABB India Limited was last trading in BSE at Rs.938.1 as compared to the previous close of Rs. 893.2. The total number of shares traded during the day was 17371 in over 2240 trades.

The stock hit an intraday high of Rs. 941.4 and intraday low of 905.15. The net turnover during the day was Rs. 16162604.

Source : Equity Bulls

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