ABB India Results Review - Margin expansion key to further re-rating - HDFC Securities

ABB reported revenue at INR 16.3bn (+7%/-4.2% YoY/QoQ), 12% below our estimate, due to tepid growth in electrification business. Although EBITDA was also below our estimate, better-than-expected margins (8.1% vs 7.8% est.) restricted the miss to 9%. Adjusting for the INR 745mn EO item, APAT came in at INR 947mn, beat of 2%, on lower depreciation and finance charges. Order inflows rebounded sequentially to INR 18.3bn, led by growth in motion (19% QoQ) and process automation (57% QoQ). With that, order backlog stood at INR 43.3bn. We believe most of the potential upsides on cyclical recovery are already priced into the lofty valuation. Hence, we maintain REDUCE on ABB, with unchanged target price of INR 1,426/sh (42x Mar-23 EPS).

Sequential execution decline: ABB reported revenue at INR 16.3bn (+7.0%/-4.2% YoY/QoQ, 11.9% miss). While robotics, motion and process automation posted 11-13% YoY growth, revenue from electrification remained tepid at INR 6.3bn. EBITDA of INR 1.3bn (~8.3x/-32% YoY/QoQ) was 9% below our estimate and margin of 8.1% (+716/-340bps YoY/QoQ) was 25bps higher than our estimate. While EBIT margins for robotics (11.1% vs 7.9%) and process automation (8.8% vs 5.9%) improved sequentially, motion (14.2% vs 18.4%) and electrification (11.8% vs 14.1%) declined QoQ. Adjusting for the exceptional item (gain of INR 745.3mn on sale of certain plant and property), APAT stood at INR 947mn (~10.3x YoY, -28% QoQ), beat of 2%, on lower depreciation charges and finance cost.

Order inflows resilient; industrial recovery portends robust pipeline ahead: 1QCY21 order inflows stood at INR 18.3bn (vs INR 19.6/14.7bn YoY/QoQ), taking the backlog to INR 43.3bn (vs INR 44.5/41.1bn YoY/QoQ). The sequential growth in order flow was led by motion and process automotion segment. Robotics business, though relatively smaller in size, saw order inflow double due to an order from Ola Electric. Management believes the robotics segment could grow substantially as large scale manufacturing moves to India. Overall, ABB is seeing good enquiry with recovery in industrial activity but decisions are being deferred to 2HCY21.

Limited impact of commodity price increase; decision on India e-mobility business to depend on parent's direction: Given that majority of the order backlog is short cycle in nature, management does not expect commodity price increase to impact margin much. Only 15% of the order book is hedged against the inflationary headwinds. Globally, ABB has decided to carve out its fast growing e-mobility business, which includes EV charging infrastructure. The business is in nascent stages in India and could follow the same route after necessary approvals from the board.

Shares of ABB India Limited was last trading in BSE at Rs.1382.8 as compared to the previous close of Rs. 1384.8. The total number of shares traded during the day was 22546 in over 1972 trades.

The stock hit an intraday high of Rs. 1440 and intraday low of 1360.3. The net turnover during the day was Rs. 31543296.

Source : Equity Bulls

Keywords