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Capital Goods-Electrical Equipment July 25, 2014
ABB India
Bloomberg: ABB IN Reuters: ABB.BO
SELL
Institutional Equities
India Research
RESULT REVIEW
Recommendation
CMP: Rs1040
Target Price: Rs687
Previous Target Price: Rs 475
Downside (%) 33%
Stock Information Market Cap. (Rs bn / US$ mn) 222/3698
52-week High/Low (Rs) 1200/430
3m ADV (Rs mn /US$ mn) 141/1.4
Beta 1.3
Sensex/ Nifty 26272/7831
Share outstanding (mn) 212
Stock Performance (%) 1M 3M 12M YTD
Absolute (1.7) 27.8 86.9 51.3
Rel. to Sensex (5.0) 11.3 42.9 21.9
Performance
Source: Bloomberg
Earnings Revision
(%) CY14E CY15E
Revenue 1.8 2.1
EBITDA 2.1 3.4
PAT 2.2 2.7
Source: Company, Karvy Institutional Research
Analyst Contact Rupesh Sankhe
022 6184 4315
200 400 600 800 1,000 1,200
15,500 17,500 19,500 21,500 23,500 25,500 27,500
Jul-
13
Sep
-13
Oct
-13
No
v-1
3
Jan
-14
Feb
-14
Mar
-14
May
-14
Jun
-14
Jul-
14
Sensex (LHS) ABB
Net Profit up 20% YoY on Lower Base, Results
below our expectations; ABB India has reported 4.1% growth in revenue vs. our expectation of 5.7%
growth on lower executions led by poor performance in Process Automation
& Discrete Automation & Motion.
Poor Performance of Automation System – ABB India’s revenue grew 4.1%
YoY to Rs. 18.2 bn in Q2CY14 compared to Rs. 17.5 bn in Q2CY13 & Rs. 18.2
bn in Q1CY14. Its revenues from Discrete Automation & Motion (-5.3% YoY)
& Process Automation (-6.0% YoY while Power System (+6.5% yoy); Power
Products (+5.4%) & Low Voltage Products (23%) were the growth drivers in
the quarter.
Net Profit up 20% YoY on Margins Improvements but our expectations: ABB
India has posted Rs. 476.9 mn net profit in Q2CY14 (vs. our expectation of Rs.
577 mn), while margin improved due to cost optimization and decline in low
margins orders. Focused initiatives in streamlining operations, optimizing
costs and increasing localization have yielded cost savings.
Margins to Remain Lower: ABB India’s order inflow rose 15% YoY to Rs. 20.0
bn in Q2CY14. Considering lower order intake and rising competition on
pricing power, we believe that the Company may not be able to attain higher
margin. We expect the its margin to remain in the range of 5-7% in CY12-14
period, significantly lower than 11-13% in CY06-08 period.
Outlook & Valuation In spite of significant deterioration in its earning, the stock continues to trade
at higher multiples of 68x, 6.8x & 34x of P/E, P/B & EV/EBITDA to its CY15E
respectively which is expensive given the return profile. We reiterate our
“SELL” recommendation with target price of Rs. 706 per share (from Rs 475
previously) which has been arrived at P/E of 45x (Earlier 30x) (25% discounts
to its mean multiple of 60) based on CY15 EPS on the back of improved
investment sentiment. We believe ABB continue to trade at premium
multiple to its peers due to presence in high growth business segment.
Key Financials
Y/E Dec (Rs mn) CY12 CY13 CY14E CY15E
Revenue 74,703 76,316 83,994 92,978
Growth (%) 1.4 2.2 10.1 10.7
EBITDA 2,418.3 3,794.4 4,954.6 6,228.4
Net income 1,374.3 1,759.5 2,486.6 3,237.0
EPS (Rs) 6.5 8.3 11.7 15.3
ROE 5.4 6.7 8.9 10.6
ROCE 6.6 8.9 10.2 12.0
P/E (x) 160.4 125.3 88.6 68.1
P/BV (x) 8.3 8.1 7.5 6.8
Source: Company, Karvy Institutional Research
2
July 25, 2014
ABB India
Results Review
Order Inflow: ABB India received orders worth Rs. 20.1 bn in Q2CY14,
compared to order intake worth of Rs. 17.5 bn in Q2CY13. Focus on short cycle
orders have been supported by increase in large orders. Exports continued to
grow at a faster pace while emerging business streams also supported the
growth momentum.
Order Backlog: ABB India’s order backlog was lower at Rs. 80.3 bn in Q2CY14
vs. Rs. 82.6 bn in Q2CY13.
Exhibit 1: Quarterly Performance
Rs Mn Q2CY13 Q1CY14 Q2CY14 QoQ (%) YoY (%)
Net Sales 17,512 18,277 18,222 -0.3 4.1
Operating Costs 16,433 17,020 16,964 -0.3 3.2
EBIDTA 1,079 1,257 1,258 0.1 16.6
EBIDTA Margin (%) 6.2 6.9 6.9 0.0 74
Other Income 38 11 4 -63.7 -89.3
Interest 256 221 254 14.9 -0.9
Depreciation 260 274 279 1.6 7.4
Profit Before Tax 602 774 730 -5.6 21.3
Tax 205 257 253 -1.5 23.2
Tax Rate (%) 34.1 33.2 34.7 - -
Reported PAT 396 517 477 -7.7 20.3
Source: Company, Karvy Institutional Research
Exhibit 2: Segment Revenue
Q2CY13 Q1CY14 Q2CY14 YoY % QoQ %
1. Segment Revenue
Power Systems 5,035 4,766 5,364 6.5 12.5
Power Products 5,250 5,739 5,535 5.4 -3.6
Discrete Automation & Motion 4,179 4,352 3,955 -5.4 -9.1
Process Automation 3,211 2,890 3,016 -6.1 4.4
Low Voltage Products 1,563 1,814 1,931 23.5 6.4
Unallocated 96.8 104 147 51.9 41.3
Total 19,335 19,667 19,951 3.2 1.4
Less: Inter Segment Revenue -1824 -1,390 -1729 -5.2 24.4
Net sales/income from Operations 17,511 18,277 18,221 4.1 -0.3
2. PBIT
Power Systems 283.8 231.3 314.7 10.9 36.1
Power Products 449.5 579.7 349.7 -22.2 -39.7
Discrete Automation & Motion 2427 192.1 209.9 -91.4 9.3
Process Automation 1020 205.5 282.3 -72.3 37.4
Low Voltage Products 312 78.2 112.8 -63.8 44.2
Total 1109.2 1286.8 1269.4 14.4 -1.4
Interest -256 -220.7 -253.6 -0.9 14.9
Other un-allocable exp expenditure -251.5 -292.4 -285.8 13.6 -2.3
Total Profit Before Tax 601.7 773.7 730.0 21.3 -5.6
3
July 25, 2014
ABB India
Our “SELL” recommendation is based on following
premises.
1. Margin to Remain Significantly Lower
2. Return Ratios are Unlikely to Scale-back to CY07-08 Levels
3. Order Inflows Remains Feeble
1. Significantly Expensive Valuation
ABB traded in the 1-year forward P/E band of 24x-90x during CY07-09 on the back
of CAGR earnings growth of 26.8% during CY06-08 with RoE at 30-32%. We
expect ABB’s earnings to see 29% CAGR in CY12-15E on a lower base, while RoE is
likely to improve marginally to 10.6% in CY15E. The stock is trading at 65x CY15E,
which looks unjustifiable. In spite of significant deterioration in its earnings
power, the stock continues to trade at higher multiples. ABB is trading at a
premium valuation on both PE and P/B compared with return profile.
2. RoCE / RoE to Improve – Return Ratios are Unlikely to
Scale Back to CY07-08 Levels
We expect the improvement in ABB’s profitability (29%) in CY12-15E period,
which will lead to rise in RoE from 2.62% in CY10 to 10% in CY15E. However, this
improvement is far below 32-35% levels registered in CY07-CY08. As ABB’s
margins are expected to structurally remain weak due to intense competition, the
return ratios are unlikely to scale back to CY07-08 levels.
3. Order Inflows Remains Feeble
ABB received orders worth Rs. 20.1 bn in Q2CY14 compared to order intake worth
of Rs. 17.5 bn in Q2CY13. Its order backlog continued to remain flat at Rs. 80.3 bn
in Q2CY14 vs. Rs. 82.6 bn in the year-ago quarter. Its order-book remained flat
with book-to-bill-ratio declining from 1.2x to 0.9x.
4. Margin to Remain Significantly Lower
Considering lower order intake and increased competition on pricing, we believe
that ABB may not be able to attain a higher margin. We expect ABB’s margin to
remain in 5-7% range in CY13-15 period vs. 11-13% in CY06-08. Its margins are
likely to remain lower on account of the following.
Intense pricing pressure in power T&D domain (53% of revenue),
Slowdown in industrial capex activities, and
High proportion of fixed-price contracts (only 20-25% of orders have price
variation clause).
4
July 25, 2014
ABB India
Financials
Exhibit 3: Income Statement
Y/E Dec (Rs mn) CY12 CY13 CY14E CY15E
Revenues 74,703 76,316 83,994 92,978
Growth (%) 1.4 2.2 10.1 10.7
EBITDA 2,418 3,794 4,955 6,228
Growth (%) (14.6) 56.9 30.6 25.7
Depreciation 941 1,041 1,131 1,221
EBIT 1,477 2,753 3,823 5,007
Growth (%) (27.4) 86.3 38.9 31.0
Interest 432 1,011 1,008 1,162
Other income 1,017 974 924 1,023
EBT 2,062 2,715 3,739 4,868
Income taxes 688 956 1,253 1,631
Effective tax rate (%) 33.4 35.2 33.5 33.5
Adjusted net income 1,374 1,760 2,487 3,237
Growth (%) (25.5) 28.0 41.3 30.2
EPS (Rs) 6.5 8.3 11.7 15.3
Growth (%) (25.5) 28.0 41.3 30.2
Source: Company, Karvy Institutional Research
Exhibit 4: Balance Sheet
Y/E Dec (Rs mn) CY12 CY13 CY14E CY15E
Cash and cash eq 766 3,167 2,524 4,594
receivable 32,644 32,357 36,819 40,248
Inventories 9,204 9,889 10,632 10,878
Oth. current assets 8,169 10,249 11,966 12,991
Investments 525 166 166 166
Gross fixed assets 15,856 17,356 18,856 20,356
Net fixed assets 12,073 12,532 12,901 13,179
CWIP 1,170 1,858 1,100 1,400
Deferred tax 148 279 279 279
Total assets 64,700 70,496 76,387 83,736
payable 14,107 20,826 18,377 20,418
Other current Lia 18,832 13,960 20,243 22,501
Provisions 2,408 2,692 2,485 2,589
Debt funds 3,373 6,243 6,243 6,243
Equity capital 424 424 424 424
Reserves & surplus 25,557 26,352 28,615 31,560
Shareholder's funds 25,980 26,777 29,039 31,985
Total liabilities 64,700 70,496 76,387 83,736
5
July 25, 2014
ABB India
Exhibit 5: Cash Flow Statement
Y/E Dec (Rs mn) CY12 CY13 CY14E CY15E
Net income + Depreciation 2,315 2,801 3,618 4,458
Other adjustments - - -
Changes in working (5,527) (348) (3,295) (297)
Cashflow from Operations (3,212) 2,452 323 4,161
Capital expenditure (1,130) (2,188) (742) (1,800)
Change in investments (18) 359 - -
Other investing cashflow (1,085) (935) - -
Cashflow from Investing (2,233) (2,764) (742) (1,800)
Issue/repay debt 3,373 2,870 - -
Dividends paid 194 (158) (224) (291)
Change in cash & cash eq (1,878) 2,400 (643) 2,070
Closing cash & cash eq 766 3,167 2,524 4,594
Source: Company, Karvy Institutional Research
Exhibit 6: Key Ratios
Y/E Dec CY12 CY13 CY14E CY15E
EBITDA margin (%) 3.2 4.97 5.90 6.70
EBIT margin (%) 2.0 3.6 4.6 5.4
Net profit margin (%) 1.8 2.3 3.0 3.5
ROE (%) 5.4 6.7 8.9 10.6
ROCE (%) 6.6 8.9 10.2 12.0
Valuation ratios
EV/Sales (x) 3.0 2.9 2.7 2.4
EV/EBITDA (x) 89.0 64.3 43.4 34.5
P/E (x) 160.4 125.3 88.6 68.1
P/B (x) 8.3 8.1 7.5 6.8
Source: Company, Karvy Institutional Research
Institutional Equities Team Rahul Sharma
Head – Institutional Equities /
Research / Pharma +91-22 61844310/01 [email protected]
Gurdarshan Singh Kharbanda Head - Sales-Trading +91-22 61844368/69 [email protected]
INSTITUTIONAL RESEARCH
Analysts Industry / Sector Desk Phone Email ID
Mitul Shah Automobiles/Auto Ancillary +91-22 61844312 [email protected]
Parikshit Kandpal Infra / Real Estate / Strategy/Consumer +91-22 61844311 [email protected]
Rajesh Kumar Ravi Cement/ Logistics/ Paints +91-22 61844313 [email protected]
Rupesh Sankhe Power/Capital Goods +91-22 61844315 [email protected]
Asutosh Mishra Banking & Finance +91-22-6184 4329
Varun Chakri Research Associate +91 22 61844326 [email protected]
Vinesh Vala Research Associate +91 22 61844325 [email protected]
INSTITUTIONAL SALES
Celine Dsouza Sales +91 22 61844341 [email protected]
Edelbert Dcosta Sales +91 22 61844344 [email protected]
INSTITUTIONAL SALES TRADING & DEALING
Aashish Parekh Institutional Sales/Trading/ Dealing +91-22 61844361 [email protected]
Prashant Oza Institutional Sales/Trading/ Dealing +91-22 61844370 /71 [email protected]
Pratik Sanghvi Institutional Dealing +91-22 61844366 /67 [email protected]
For further enquiries please contact:
Tel: +91-22-6184 4300
Disclosures Appendix
Analyst certification
The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed
herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of
his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views
contained in this research report.
Disclaimer
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contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for
the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any
loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all
investors. Investors must make their own investment decisions based on their specific investment objectives and
financial position and using such independent advice, as they believe necessary. While acting upon any information
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futures nor other derivatives related to such securities.
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Stock Ratings Absolute Returns Buy : > 15% Hold : 5 - 15% Sell : < 5%
