MOSL: ABB (Sell)-Miss on margins dampens performance

ABB: Miss on margins dampens performance

(ABB IN, Mkt Cap USD3.5b, CMP INR1140, TP INR950, 17% Downside, Sell)

• Operational performance below expectations: 2QCY18 revenue rose 22% YoY to INR27.1b, broadly in line with our estimate of INR27b. EBIDTA margin of 7.2% (+60bp YoY) was below our estimate of 7.8%. EBITDA grew 33% YoY to INR1.96b, below our estimate of INR2.1b, impacted by an adverse revenue mix, an increase in raw material prices and weakening of the rupee. PAT of INR1.0b, too, missed our estimate of INR1.1b.
• Gross margin shrinks 270bp YoY to 33.5%: Gross margin contraction was led by (a) higher contribution from the low-margin project business, primarily the Raigarh Pugular HVDC line, (b) adverse impact from weakening of the INR, as ABB is a net importer and (c) an increase in raw material prices. A forex loss of INR100m was booked during the quarter.
• 2Q order inflow up 7% YoY led by higher base orders: Order inflow grew 7% YoY to INR25b, led by strong base order finalization. Order inflow growth was seen across sectors: (a) in utilities segment led by renewables, sub-transmission and distribution, (b) in transport segment led by rail, metro and ports and (c) in industrial segment led primarily by consumer-facing industries. Order backlog stands at INR107b (-11% YoY), providing revenue visibility of 1.1x its TTM revenue.
• Concall takeaways: (a) Orders primarily driven by base orders; poor large order visibility. (b) Focusing on new segments (solar, rail, digitalization) to drive orders growth.