ABB India's Q4CY18 results (Underperformer) - Uncertainty on India PG sale
Q4CY18 result highlights
- ABB’s PAT post discontinued operations at Rs1.98bn (+15% yoy): led by strong revenues and margins. CY18 continued ops revenues +10% yoy to Rs66bn, while margins +20bps to 5.8%, EBITDA +12.5% yoy to Rs3.8bn and PAT at Rs2.5bn (+13% yoy).
- Execution picked up: driving 15% yoy growth in revenues (ex-power grid) to Rs19.4bn. Growth was particularly strong in Robotics & Motion (RM) which grew 31% yoy to Rs7bn. Further, sustained growth in exports & services aided revenues. Revenues (incl PG) +12% yoy to Rs31bn.
- OPM for continued ops +270bps yoy to 9.7%: led by positive operating leverage, cost efficiencies and higher share of services. Core operational margins expanded 173bps yoy to 7.9%.
- Order intake led by base, service and export orders: Intake was at Rs19bn (+17% yoy), led by growth in base orders and services (+7% yoy). Backlog is at Rs42bn (+10% yoy; 0.64x CY18 revenues).
- Exiting Power Grid (PG) business: In order to focus on digital, automation and electrification and maintain its leadership position, ABB has decided to sell its PG biz to Hitachi for US$11bn at 11x TTM EV/EBITDA. In India, the PG biz will be demerged into a separate entity which will be sold to Hitachi. The deal dynamics for India are yet to be disclosed.
Impact on financials: CY19E EPS cut by 45% to Rs16.2 (sale of PG biz).
Valuations & view
The sale of PG business is positive as it has low growth & return profile. However, PG accounted for ~45-50% of PAT and the residual business is more industrial and infra driven and will need to scale up to fill in the gap. We note these segments have been growing at a faster pace driven by ABB’s increased offerings and also have an asset light, short cycle and superior return profile. We believe the PG sale in India will have to be at significant premium compared to parent deal valuations. We believe, listing the demerged PG entity would drive limited minority shareholder erosion in case of a low valuation offered by Hitachi. Based on our SoTP of Rs1194 (PG: 18x CY18 EBIT/ 30x PAT; continuing ops at 40x CY20 earnings), we believe the stock is adequately valued and leaves limited room for disappointment on earnings or PG valuation and unforeseen costs related to the sale. 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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