ABB India's Q2CY18 results (Underperformer) - Pick up in execution; order inflow weak
Q2CY18 result highlights
- ABB’s PAT at Rs1bn (+36% yoy): was below estimates due to lower than expected other income and higher than expected interest cost.
- Execution picked up: Revenues +22.3% yoy to Rs26.8bn led by pick up in execution particularly the Raigarh-Pugalur HVDC order which is starting to mature in its execution cycle. Services (13-14% of revenues) and exports (15% of revenue) continued to see traction.
- OPM +86bps yoy to 6.1%: led by low base and positive operating leverage. Gross margins declined by 220bps due to higher share of project revenues (HVDC order) as also headwinds in form of rupee depreciation (~Rs100mn) and rise in commodity prices. Core OPM +150bps yoy to 5.8% (low base).
- Order intake led by base, service and export orders: Intake was at Rs24.7bn (+7.5% yoy), led by growth in base orders, export orders (+68% yoy) and services orders (+52% yoy). This helped offset the decline in T&D segment. Industrial segment (cement, metals, mining, O&G, chemicals) continues to be driven by brownfield and efficiency related orders. Ordering from consumption driven industries (auto, food and beverages, etc) remained robust. Overall, digitisation (factory automation, efficiencies, etc), process industries (food & beverages, etc) and railways (consolidated orders) continued to drive inflows.
Key positives: Pick up in execution, base order intake
Key negatives: Decline in gross margin
Impact on financials: CY18E /19E EPS cut by 5% each to Rs23.6/29.1
Valuations & view
ABB’s focus on selective intake, cost efficiencies and increasing localization across segments has led to overall margin improvement. ABB continues its focus on short cycle and base orders as also growing segments like digitisation, renewables and railways, apart from introducing new products. However, considering that 50% of revenues are facing headwinds from slowdown in power T&D, we believe valuations are rich at 41x CY19E earnings, which adequately capture a likely improvement in earnings momentum (21% earnings CAGR over CY17-19E) and leave limited room for disappointment. Underperformer.
ABB is engaged in power and automation technologies that enable utility and industry customers to improve their performance while lowering environmental impact. Co. works with customers to engineer and install networks, facilities and plants with particular emphasis on enhancing efficiency, reliability and productivity for customers who generate, convert, transmit, distribute and consume energy. Co.'s portfolio ranges from switches and sockets to robots, and from large transformers to control systems that manage entire power networks and factories.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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