Maintain SELL on ABB India - Headwinds remain - HDFC Securities

Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities.

ABB India (Annual Report Analysis): Headwinds remain

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.

Composition of product and business segments: while ABB's product segments can be broadly categorized into (1) Switchgear, (2) Motors & Generators, (3) Drives & Electronics, and (4) Services, its business segments are centered around solutions provided to customers: (1) Motion, (2) Robotics, (3) Electrification and (4) Industrial Automation (IA). Electrification and Motion constitute ~75% of revenue and bulk of the profitability. Robotics remains small, as of now, and IA is suffering from high under-absorption, apart from a few legacy lower margin infrastructure and power projects, due to sluggish rate of growth in investments in greenfield refinery, thermal power and petrochemical domain. Consolidation in the steel market and slowdown in the auto sector have impacted CAPEX additions and production.

Power Grids (PG) demerger and Solar inverter business sale: During the year, PG business was demerged to APPSIL and listed separately. PG offered HV products and solutions across the generation, T&D value chain apart from railways and EV charging. This was part of a global deal to sell the PG business to Hitachi. With this cyclical chunky project-based business now hived off, ABB is a pure-play product and value-add services-based entity with short cycle orders. Sale of Solar Inverters business (7-8% of revenues, thin margins, 50:50 domestic: exports) will also be margin accretive.

While exports continue to drive growth, prime focus to be on domestic markets: Exports contributed 18% to CY19 revenue (13/11% in CY18/17). ABB registered double-digit growth for the third year in exports, embarking on a journey of "Make in India for the World". With capacity expansion not being a constraint as land is available, focus is firstly on domestic business stabilization and profitability, bringing quality to international standards, and then going in for export-driven growth. So, exports would remain ~20% of revenue.

Key growth drivers: ABB stands to benefit from impetus given to railways electrification; MRTS construction is planned over 26 cities; gas & water distribution infra opportunities would emerge in the Smart Cities Mission (AMRUT). While capex remains elusive, increasing digitization across core industries like cement, metal/mining, marine, oil & gas, etc., and deeper tier-2/3 cities' penetration will lead the next leg of growth. Digitisation opportunities would emerge in process industries, pharma, F&B, and data centers.

Shares of ABB India Limited was last trading in BSE at Rs.912.45 as compared to the previous close of Rs. 917.1. The total number of shares traded during the day was 5677 in over 828 trades.

The stock hit an intraday high of Rs. 925.35 and intraday low of 910. The net turnover during the day was Rs. 5195170.

Source : Equity Bulls

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