ABB- Improving margins but valuations remain expensive

Improved execution, cost rationalization helping stabilize margins: ABB
reported sales of Rs22bn, up 7.4% YoY (PLe: Rs19.5bn). Execution in the power
product (up 10% YoY) and power system (up 13% YoY) segments continued to
improve, while sales for processes automation (down 16%) continued to be
subdued. EBITDA was up 303% YoY to Rs1.4bn. Gross margin improved 620bps
YoY and 10bps QoQ. EBITDA margin improved 500bps YoY to 6.8% (PLe: 6.5%).
Improved mix (in favour of products) and focus on cost control measures are
helping margin improvement. RM percentage sales ratio has stabilised at ~70%
over the last few quarters and management believes it is working on measures
to bring down the ratio further. PAT was up 2.5x to Rs586m (PLe: Rs515m).

Increasing focus on short cycle/base orders to counter slowdown: Order inflow
for the quarter was up 5% YoY and for CY13, was down 4% YoY. Base
orders/short cycle from a wider spectrum of customers and improved exports
helped offset dearth of large projects in domestic markets. Export order inflow
for CY13 (~15 of inflows) was up 30% YoY and management believes this growth
is sustainable even for CY2014. The company continues to tap sectors like
renewable energy, data centre, railways, grid stability, mining and oil & gas
which look increasingly promising. Order book at the end of CY13 was down
11% YoY to Rs77bn.]

Outlook and Valuation: ABB has been investing in capacities in India as they
remain optimistic on the long-term outlook for Indian markets. We believe ABB
should benefit from the capacities created and cost rationalization measures as
demand environment improves over the next few years. Despite factoring in
50% earnings CAGR over CY13-15E, the stock is still trading at an expensive
valuation of 36x CY15E earnings. We believe expensive valuation and uncertain
outlook in the near term will restrict any meaningful upside on the stock in the
near term.

View More