ABB
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-102.45 (-3.00%)
NSE Volume
2.9L+
Broker Reports
REDUCE
HOLD
HOLD
BUY
HOLD
BUY
Considering the short-cycle nature of the business and expectation of gradual recovery coupled with higher-than-estimated profitability in 2QCY20, we have raised our CY20/CY21E earnings by 12%/6%. We maintain our Buy rating with revised TP of INR1,030 (Prior: INR990) based on unchanged Mar’22E target PE multiple of 45x (at par with our target multiple for pure automation businesses and as justified by DCF; as well as ~min 1-year forward PE multiple for ABB over past 10 years). ABB’s RoEs are depressed due to high-cash balance. Improvement in the business model is better captured in RoIC calculations. We expect RoIC to improve from ~21% in CY19 to ~35% by CY22E.
SELL
Key takeaways from ABB’s CY20 AR are as follows: (1) The share of exports in the revenue has grown from 11% to 18% over CY17-19; (2) Switchgear/Electrical Control, Supply/Motors, and other machines delivered robust CY17-19 revenue CAGR of 14/19/34% and contributed 31/24/19% to CY19 revenue (cumulative revenue mix of 74%); (3) net cash status of Rs 16bn. With clients conserving capital and global growth outlook bleak, new capex/opex headwinds remain. ABB’s performance is highly sensitive to demand outlook. A challenging 2QCY20 with slow ramp-up in revenue will limit further re-rating. We believe headwinds are not fully priced into current rich valuations (51.3x Mar-22E EPS). Maintain SELL with TP of Rs 755/sh.
BUY
ABB’s top line decline of 18% was led by poor performance across segments. While Robotics and Motion witnessed headwinds from the Auto sector, Industrial Automation revenues were impacted by the lockdown. Lower absorption of fixed cost resulted in margin led earnings miss. Considering the short-cycle nature of ABB’s business and expectation of gradual recovery coupled with the impact of fixed costs, we have cut our CY20E/CY21E earnings by 60%/25%. ABB remains a pure play on longer-term industrial automation and the ‘Make-in-India’ theme. Thus, we maintain our Buy rating with lower TP of INR980 (Prior: INR1,255).
HOLD
Despite various stimulus packages announced by governments and central banks around the world along with some initial signs of recovery in economic activity from China, we believe recovery would take time as macro-indicators point at global recession. We have cut our earnings estimates by 43%/7.8% for CY20E/21E owing to a) Slowdown in the Automotive segment heavily impacting robotics and industrial automation division, b) gradually recovery in supply chain issues c) delay in cash collections resulting into working capital pressure and d) dismissal operating performance of 1Q. We maintain Hold rating with revised TP of Rs874 (valuing at 45x CY21E).
REDUCE
ABB India has delivered a subdued performance in 4QCY19 with revenue declining by 1% YoY to Rs19.5bn owing to 20% lower revenue in industrial automation and significant decline in other segments. Revenue from Electrification and Motion segment grew by 11% and 7%, respectively. EBITDA margin fell by 390bps YoY to 7.1%, while EBITDA declined by 36% YoY to Rs1.4bn impacted by lower margin across segments. Adjusted PAT declined by 45% YoY to Rs1.1bn due to poor operating performance, while reported PAT declined by 81% YoY to Rs387mn, as the company has provided Rs697mn towards remeasurement of fixed assets and inventory for sale of solar inverter business. Order inflow declined by 16% YoY to Rs16bn in 4QCY19. The current order book stands at Rs41.2bn (0.6x of CY19 revenue). Lower visibility of the order book is attributable to short-cycle nature of the business. We downgrade our recommendation on the stock to REDUCE from HOLD to factor in subdued performance, lower order inflow and high valuation with a revised Target Price of Rs1,186.
REDUCE
ABB India reported flat revenue growth YoY driven by Robotics & Motion and Electrification business. Industrial Automation business was impacted due to slowdown in automotive sector and weak challenging environment. Sectors like Data centers, Food & Beverage, Transportation, Education continues to witness strong traction. Order book stands at Rs41.2bn as on CY19 having revenue visibility of next 6-8 months. Management remains optimistic on growth in the infrastructure segment coupled with adoption of robotics by Tier II and III customers which would drive demand. We have marginally reduced our revenue estimates by 3.4% / 3.9% for CY20E / 21E due to a) Slowdown in the Automotive segment impacted growth in the robotics and industrial automation division b) No large orders received during the quarter c) new tax will be applicable from CY20 onwards. We maintain Reduce rating with revised TP of Rs1122 (valuing at 45x Sep CY21E).
BUY
Maintain Buy with TP of INR1,460: We assign TP of INR1,460 to the stock based on target PE multiple of 45x on CY21E EPS of INR32.4. Our target multiple remains unchanged for the continued business. Maintain Buy.
REDUCE
We have reduced our consol earnings estimates by 6.3%/2.3% for CY19/20E factoring lower than expected margin in Industrial Automation & Power Grid(PG) business and slowdown in automotive sector. 2QCY19 numbers of ABB India were lower than our and street estimations, largely on the back of lower than expected revenue growth in Robotics & Motion and Industrial Automation. Management indicated sluggish offtake due to elections, weak macros being the key reasons for lower revenue growth. However, strong traction in exports partially neutralized the slowdown in the domestic market. While automotive sector has been going through slowdown, sectors like Industrial, Oil & Gas, Transportation, Pulp & paper, Education continues to witness strong traction. Base orders during the quarter were up 16% YoY, resulting 23% YoY growth in order inflow (ex-PG). PG demerger is on track, the court convened shareholders and creditors meeting on August 9, 2019. Divestment of Solar Inverter business (~7-9% of total ex- PG revenue) would be completed by 1QCY20. We maintain Reduce rating with revised SOTP based TP of Rs1296 (Residual Business Rs927 (45x CY20E) + Power Grids Rs369 (25x CY20E)).
BUY
REDUCE
we expect CEAT’s operating performance to remain under pressure due to limited pricing power. Moreover, higher debt in B/S due to high capex over the next 2 years may prove to be major headwind for the stock in the medium-term. In view of lower volume, margin pressure, higher depreciation and interest expenses for higher debt, we cut our EPS estimates by 22%/6% for FY20E/FY21E. We expect down-cycle for automobile industry in FY21 and stock to underperform. Maintaining our P/E valuation multiple at 12.5x factoring lower return ratios on higher capex, we maintain our REDUCE recommendation on the stock with a revised Target Price of Rs875 (from Rs930 earlier), valuing it at 12.5x FY21E EPS.
REDUCE
We believe ABB has been successful in consolidating its position over the last few years in terms of capacity and localization and is ready to benefit from the market upturn. On the digitalization, the company continues to collaborate with customers, deploy solutions from digital portfolio and support the new era of growth through smarter, greener grids, electrification of transport and digitalizing industries for greater efficiency and productivity. We expect ABB to witness revenue/PAT CAGR of 15%/23% over next two years (CY18-20E). We maintain Reduce rating with SOTP based TP of Rs1320 (Residual Business Rs936 (45x CY20E) + Power Grids Rs384(25x CY20E)).
REDUCE
We are downgrading ABB India from Hold to Reduce given high valuations post recent run up (~19% in last three months) in stock price. ABB Ltd’s (ABB’s) CY18 annual report indicates that digitalization, automation and smart infrastructure will be company’s future growth drivers. With higher focus on the digitalization and exit of Power Grids, we expect further increase in share of high margin service income in coming years (21% of sales in CY18 v/s 12-13% earlier). The company has also reiterated its willingness and ability to expand its export business by increasing penetration in key geographies. The management remains positive on sectors like road, railways, waterways, airports, urban infrastructure (smart cities) and electric vehicles. We believe that ABB has the best combination of products and services coupled with cutting engineering technologies that can be adopted by the Indian industry. We expect ABB to witness revenue/PAT CAGR of 15%/23% over next two years (CY18-20E). The stock is currently trading at 51x/41x CY19/CY20E.
HOLD
Changing our valuation methodology to SOTP so as to value the discontinued business separately, we downgrade our recommendation on the stock to HOLD from BUY with a revised Target Price of Rs1,247. We have valued its Power Grid business at 17x CY18 EBIT (~50% premium to the global deal multiple of 11.2x) and its continued business at 50x its CY20 earnings.
SELL
We have changed the valuation methodology for ABB to SOTP so as to value the discontinued business separately. We have valued its discontinued T&D business at 20x its CY20 earnings (in line with GE T&D) and its continued business at 37x its CY20 earnings (in line with Honeywell automation). Given expensive valuations, we maintain Sell with a target price of INR1,020.
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About
ABB India Ltd.
NSE: ABB | BSE: 500002 | ISIN: INE117A01022 | Sector: Electric Equipment
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