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)).
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.
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)).
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.
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.