ABB India's Q2CY19 results (Underperformer) - Healthy order inflow; all priced in
Q2CY19 result highlights
- PAT (continued ops) at Rs697mn (+57% yoy): led by margin expansion.
- Muted execution: resulted in 3.7% yoy revenue growth to Rs17.09bn largely led by growth in products, while projects was flat and services saw a decline. Growth was particularly weak in Industrial automation (IA) which was flat yoy at Rs3.8bn, while Robotics & Motion (RM) grew 9% yoy to Rs6.7bn and Electrification grew 14% yoy to Rs7.3bn. Further, weakness in automotive sector impacted growth. Revenues (incl PG) were up 2% yoy to Rs27.8bn.
- OPM +196bps yoy to 6.2%: led by higher utilisations, cost efficiencies and improved revenue mix towards value added digital offerings. Core OPM +290bps yoy to 7.8%. EBITDA +51% yoy to Rs1.07bn.
- Order intake led by base orders: Intake was at Rs19.9bn (+23% yoy), led by robust growth in base orders (+16% yoy). Backlog is at Rs46.6bn (0.63x CY19E revenues). Growth in base orders was led by process industries, transportation and infrastructure sectors partially offset by lower service orders and slowdown in autos. While the slowdown in government and private capex poses challenges to ABB, it is focussing on targeting fast growing segments and customers in Tier I & II cities.
- Stable Power Grid performance: Revenues -1% yoy to Rs10.5bn while EBIT margins declined 40bps yoy to 9.7%. PAT +5% yoy to Rs607mn.
Impact on financials: CY19E /20E EPS cut by 3.8%/2.8% to Rs18/22
Valuations & view
In a muted capex cycle, ABB has focussed on improving its offering towards digitisation and efficiency improvement that will see sustained growth as is visible from the quarter’s robust order intake and margin expansion. ABB’s increased offerings also have an asset light, short cycle and superior return profile. Further, the exit from solar inverter business (7-8% of total revenues) will boost margins. While the quarterly earnings have been encouraging, the backlog provides limited revenue visibility for sustained revenue traction. Based on our SoTP of Rs1340 (PG: 30x PAT; continuing ops at 45x CY20 earnings; 35% earnings CAGR over CY18-20E), we believe the stock is adequately valued and leaves limited room for disappointment on core earnings or PG valuation (to be listed separately). Maintain Underperformer.
ABB specializes in power and automation technologies. Co. provides a broad range of products, systems, solutions and services that are designed to boost industrial productivity, increase power grid reliability, and enhance energy efficiency. Co.'s automation businesses serve a full range of industries with process optimization, control, measurement and protection applications. Co.'s power businesses focus on power transmission, distribution and power-plant automation, and support electric, gas and water utilities, as well as industrial and commercial customers.
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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