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MOSL: ABB (Downgrade to Sell)-Below-estimate performance-order inflow up 28% YoY off a low base

​ABB: Below-estimate performance; order inflow up 28% YoY off a low base

(ABB IN, Mkt Cap USD4.9b, CMP INR1538, TP INR1200, 21% Downside, Downgrade to Sell)

• Operational performance below expectations: 1QCY17 revenue of INR21.7b (+8% YoY) was marginally below our estimate of INR22b, while EBIDTA margin of 7.9% (-110bp YoY) was lower than our estimate of 9.7%. The miss on revenue was led by weak execution in Electrification Products (+3.5% YoY) and Process/Industrial Automation (+3.4% YoY). EBITDA of INR1.7b (-5% YoY) was below our estimate of INR2.1b, led by ECL provisioning done under Ind-AS accounting system and a weak sales mix. PAT of INR0.9b too was below our estimate of INR1.0b.
  
• Gross margin at all-time high, but operating margin contracts 110bp YoY: Gross margin at 36.2% improved 30bp YoY to touch an all-time high level. Initiatives undertaken over past 3-4 years in terms of increased localization, rationalization of supply chain, improving efficiency, better project management capabilities and lower raw material prices have helped keep gross margin at all-time high. However, EBITDA margin shrunk 110bp YoY to 7.9%, led by higher provisioning on account of expected credit loss (ECL) under the Ind-AS accounting system.
  
• 1Q order inflow up 28% YoY; order backlog increases 54% YoY: Order inflow in 1QCY17 increased strongly by 28% YoY to INR23.4b, driven by a low base and finalization of a few large-sized orders. Order backlog of INR120b (+54% YoY) provides strong revenue visibility. Of the total order book, 50% of the backlog constitutes of long-cycle orders and the balance comes from short- and medium-cycle orders.