ABB India's Q4CY17 results (Underperformer) - Margin miss continues; base orders improve
Q4CY17 result highlights
- ABB’s PAT at Rs1.7bn (+5% yoy): was below estimates due to lower than expected revenues and margins. ABB restated Q4CY16 EBITDA/PAT by -5%/+3% to Rs2.4bn/Rs1.6bn for Ind-AS.
- Execution picked up: Revenues +11.5% yoy to Rs27.4bn as GST related issues receded driving an uptick in execution. Exports (15% of revenues) and services (13% of revenues) continued to see strong traction.
- OPM -46bps yoy to 9.3%: led by declined in gross margins by 300bps. This was partly offset by muted employee costs (+2% yoy) and other expenses (-1% yoy). Operational OPM expanded 26bps yoy to 10.4%.
- Order intake led by base orders: Intake was at Rs29.1b (+44% yoy, adjusting for Rs36bn HVDC order win in 4Q16), with base orders +19% yoy. Orders for exports (double yoy) & services exhibited growth. Industrial segment (cement, metals, mining, O&G, chemicals) saw efficiency related orders. T&D capex is being driven by SEB, offsetting slower PGCIL orders. Further, digitisation (factory automation, efficiencies, etc) are railways (consolidated orders) are aiding inflows.
- CY17 PAT +12% yoy to Rs4.2bn: Revenues +5.3% to Rs89.6bn, with OPM +20bps to 6.8% driving EBITDA +4.5% to Rs6.1bn. Notably CY17 operational OPM declined 50bps to 6.6%. Order intake adjusted for large orders (HVDC & traction transformers), increased by 19% yoy, while backlog declined 2.4% yoy to Rs115bn (1.3x CY17 revenues).
Key positives: Pick up in execution, base order intake
Key negatives: decline in gross margin, operational OPM for CY17
Impact on financials: CY18E EPS cut by 7.6% to Rs27.9; CY19 EPS at Rs35
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 valuations are rich at 57x/46x CY18E/CY19E earnings, which adequately capture a likely improvement in earnings momentum (32% 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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