MOSL: ABB (Sell) - Performance impacted by weaker-than-expected margins

ABB: Performance impacted by weaker-than-expected margins

(ABB IN, Mkt Cap USD4.0b, CMP INR1270, TP INR1060, 16% Downside, Sell)

• Operational performance below expectations: 1QCY18 revenue rose 17.4% to INR25.3b, broadly in line with our estimate of INR25.8b. EBIDTA margin of 7.5% (flat YoY) was below our estimate of 9.6%. EBITDA grew 17.4% YoY to INR1.9b, below our estimate of INR2.5b, impacted by an adverse revenue mix, an increase in raw material prices and strengthening of EUR. PAT of INR1.0b, too, missed our estimate of INR1.4b.
• Gross margin shrinks 440bp YoY to 31.8%: Gross margin contracted 440bp YoY to 31.8% due to a) higher contribution from the low-margin project business, b) strengthening of EUR, which had an adverse impact as ABB is net importer and c) an increase in raw material prices. Despite this, EBIDTA margin remained flat YoY at 7.5%, led by better control on employee cost (-40bp YoY to 8.6% of sales) and other expenses (-410bp YoY to 15.6%).
• 1Q order inflow up 10% YoY led by higher base orders: Order inflow grew 10% YoY to INR25.8b in 1QCY18, led by a 14% rise in base order finalization. Of the total order inflow of INR25.8b, 92% were base orders. Order inflow growth was witnessed across sectors: (a) utilities segment order inflow was driven by renewables, sub-transmission and distribution, (b) transport segment order inflow was driven by rail, metro and ports and (c) industrial sector growth was led by consumer-facing industries. Order backlog stands at INR116b (-3% YoY), providing revenue visibility of 1.2x its TTM revenue.