ABB India Ltd - Q3CY20 Result Update - YES Securities

Comprehensive beat; Retain 'BUY'

Our View: We raise our CY20 earnings estimates by 22% to factor in the comprehensive beat during Q3CY20. However, retain CY21/CY22 earnings estimates unchanged as we have already factored in the sharp earnings recovery led by margin expansion on the account of, i) Increasing contribution of high margin 'electrification products', ii) Parent's endeavor to increase margins by leveraging relatively low cost India operations, iii) Exit from solar inverter business which had wafer thin margins, iv) Higher sales contribution by exports and services, v) Increase in local content & vi) Efficiency improvement through cost rationalization. The Stock is trading at 59x Sept'21 earnings vs 15-yr average forward P/E of ~72x, implying ~17% discount. We retain 'BUY' rating with TP of Rs1041 at 45x Sept'22 earnings.

Demand outlook: ABB management indicated that demand recovery in Q3CY20 was aided by pent up opportunities with green-shoots in few emerging sectors. Government investment into infra will be a key factor to fuel growth, which management expects to happen going forward. ABB will retain its focus on growth segments like Data Center, Warehouse logistics, Food & beverages, Pharma, Chemicals, Renewables, Rail & Metros while conventional sectors like Powergen, Pulp & Paper continue to face headwinds. Announcement of Agricultural reforms would result in expansion of capacities by FMCG companies which are expected to generate business for ABB India.

Q3CY20 Performance highlights: Comprehensive beat!!

- Sales were down 7.6% yoy, came in 11% ahead of our est. as ABB's execution improved sequentially in Q3CY20. Motion (MO) segment posted revenue growth of 4% yoy led by good demand for traction motors & converters while all other segments like Industrial Automation (IA)/ Electrification (EL)/ Robotics & Discrete Automation (RA) had revenue decline of 9%/16%/25% respectively.

- EBITDA margins expanded 46bps yoy to 7.5% (much ahead with our est. of 3.7%) due to i) Revenue mix driving material cost change, ii) Employee cost rationalization, iii) Other expenses behavior aligned with volume changes & accounting norms & iv) Relative favorable forex position.

- Adjusted PAT stood at Rs855mn, up 8.5% yoy (+120% vs our est of Rs388mn)

- Order inflow de-grew by 18.6% (ex-solar inverter) to Rs13bn as ABB secured orders for, i) Traction motor and convertor order for Indian Railways and metro projects, ii) Compact Secondary Substations and Ring Main Units for private power distribution company, iii) Distributed Control Systems and Manufacturing Execution System for an Indian pharma major, iv) Robotics orders for assembling and packaging applications from global electronics manufacturer.

- Order backlog stood at Rs43.9bn, flat yoy (0.7x TTM sales). Backlog contribution from IA/EL/RA/MO segments were at 30%/30%/37%/3% respectively.

Electrification: From emerging high growth segments to deeper penetration of the tier 2 markets with greater focus on exports and service will aid in the delivery of consistent growth. The business will strive to build solution leadership and reinforce hardware in e-mobility, leverage e -commerce models and address the mid-range market with new products and solutions, where innovation will play a key role. Data Centres, Metro Rail, Food & Beverage are showing good demand traction. ABB received repeat orders for medium voltage distribution. It launched anti-bacterial switches in Q3CY20. Capacity uptick & cost rationalization helped margin accretion in Q3CY20.

Industrial Automation (IA): Margins of Industrial automation are continuously under pressure due to i) Lower contribution of services & exports & ii) Weakness in turbocharger market & iii) Execution of legacy orders. Segment is broadly divided into 4 sub parts

- IA Process Industries (IAPI): End customers from Cement, Steel are showing good order visibility while pulp, paper are subdued with no real recovery. The process industries customers are looking at improving efficiencies and reliability by introducing advanced digital techniques into their value chains. Indian Life Sciences industry continues to be a significant contributor to meet the global demands of vaccines and generic medicines.

- IA Energy (IAEN): O&G, Chemicals sectors have good inquiries while Power Gen market remained subdued. Project business from Powergen is facing multiple demand headwind. Gaining momentum and growing awareness of digitalization in the energy domain is likely to be another growth driver. The increased focus on clean energy fuel and increasing the share of renewable energy initiatives will drive growth in city gas distribution.

- IA Measurement Analytics (IAMA): Vertical is doing well in terms of business inflow along with decent profitability

- Turbochargers: Bangladesh & Sri Lanka are doing well for turbocharger market due to exposure towards diesel rail cars & marine. While India is undergoing structural weakness for turbochargers due to faster adoption of electrification from Indian Railways side.

Motion: Sectors like Transportation, Steel and Water & Waste Water have been performing well. Government's push on railway electronification and infrastructure expansions keeps up the growth momentum. ABB is expanding portfolio into high energy efficient solutions. Better customer connects, holistic service approach & timely support led to business traction from customers. Market has also picked up month-on-month basis from June 2020. ABB is witnessing goods order inquiries for traction motors, converters. Channel business took more time to recover & as of now it has reached to pre-Covid level.

Robotics and Discrete Automation: Revenue decline was relatively steep due as customer sites still not operational or facing restricted movement of outsiders. ABB also had lower orders from Auto OEMs and Tier 1 in Q3CY20. Automotive demand will continue to be uncertain over the next few quarters. Food and Beverage, consumer goods and warehousing automation are showing strong signs of growth and the with the existing product portfolio and application expertise, the business is well in line to support customers with cost efficient flexible automaton solutions. Opportunities are expected to come from consumer and electronic going forward. Higher services revenue mix led to margin uptick.

Exports: No major improvement in order inflow from exports (12% of total order inflow)

ABB enhances portfolio of high-speed industrial robots with Codian acquisition: Codian's delta robots primarily used for high-precision, pick-and-place applications. Good traction from non-automotive segments. Codian Robotics' offering includes a hygienic design line, ideal for hygiene-sensitive industries including food and beverage and pharmaceuticals. In the future, ABB will be able to provide its customers with a broader range of delta robots and integrated solutions from a single source, contributing to ABB's machine-centric robotics strategy which integrates machine automation and robot control into a single platform.

https://ysil.in/docs/default-source/research/instieq/abb-india-q3cy20.pdf

Shares of ABB India Limited was last trading in BSE at Rs.896.2 as compared to the previous close of Rs. 880.45. The total number of shares traded during the day was 5310 in over 850 trades.

The stock hit an intraday high of Rs. 904 and intraday low of 882. The net turnover during the day was Rs. 4737956.

Source : Equity Bulls

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