ABB India's Q3CY18 results (Underperformer) - Strong quarter; intake uptick critical
Q3CY18 result highlights
- ABB’s PAT at Rs1.08bn (+30% yoy): led by strong revenues and margins.
- Execution picked up: Revenues +32% yoy to Rs24.9bn led by sustained execution of the Raigarh-Pugalur HVDC order (50% complete) as also uptick across segments.
- OPM +140bps yoy to 6.8%: led by positive operating leverage, cost efficiencies. We note that gross margins were flat despite higher share of project revenues (HVDC order), forex impact as also rise in commodity prices. Core operational margins expanded 200bps yoy to 6.1%.
- Order intake led by base, service and export orders: Intake was at Rs23.6bn (+22% yoy), led by growth in base orders (+16% yoy), export orders (+171% yoy) and services orders (+18% yoy). Industrial segment (cement, metals, mining, O&G, chemicals) continues to be driven by efficiency related orders as capex remains muted (likely to pick up only post 2019 elections). Overall, digitisation (factory automation, efficiencies, etc), process industries (food & beverages, etc) and railways continued to drive inflows.
- Exiting EPC substation business: Considering low returns, higher cash conversion cycles, ABB is exiting EPC Substation business (~5% of CY17 revenues). ABB will focus on technology based value added products (continue its product offering in substations) thereby improving margin.
Impact on financials: CY18E EPS raised by 2% to Rs24.
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, we believe, growth trajectory will become a challenge, once RP800 is completed and order intake needs to keep pace with execution (order backlog at Rs114bn, 1.1x CY18E revenues). Moreover, margin improvement is being restricted by rising input costs and rupee depreciation. Accordingly, we believe valuations at 41x CY19E earnings are rich and 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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