Buy ABB; target Rs 1266: Citigroup

RELATED NEWS Morgan Stanley overweight on SBI; target of Rs 1850 Maruti Udyog market outperformer: tgt 931: Enam Buy Indoco Remedies; target Rs 355: Karvy Buy Dena Bank: KJMC Capital Buy Bharti Airtel; target Rs 1151: HDFC Sec ALSO READ News and Notices about ABB See interviews with ABB Management See what other Experts & Brokerages are saying about ABB See previous Results of ABB ABB BSE | NSE 25/05/12 Are Mutual Funds betting on ABB?

Citigroup is bullish on ABB and has recommended buy rating on the company raising the target price to Rs 1266 from Rs 1103.20. Research firm expect earnings CAGR of 49% (from 42% earlier) over CY06-09E with RoEs at the 37% level, driven by sales CAGR of 42%.

Citigroup report on ABB:

Raise target price to Rs 1,266:

We are raising our target price to Rs 1,266 (from Rs 1,103.2 earlier) on the back of a 7-17% earnings revision over CY06- 09E. We now expect earnings CAGR of 49% (from 42% earlier) over CY06-09E with RoEs at the 37% level, driven by sales CAGR of 42%.

30% premium to BHEL:

Our target price is based on a P/E of 30x FY09E at a 30% premium to BHEL given: 1) EPS CAGR of 49%; 2) RoEs of 37%; 3) Access to parent technology; and 4) ABB India's importance in the ABB Group.

Power opportunity: Stronger for longer:

India needs investments to the tune of USD 246 billion in the power sector in the XIth Plan (FY08-12). Of this, 41.8% pertains to T&D and RE that ABB can address. Further, with generation targets set at 82.2GW in the XIIth Plan (FY13-17) vis-à-vis 78.6GW in the Xth Plan, this opportunity will only grow bigger.

Can ABB India match ABB China?:

ABB China grew sales at a CAGR of 33% over a 7-year period between CY98 to CY05. ABB India may find it possible to repeat this feat in India given India is the fastest growing T&D market in the world, a fact corroborated by both ABB an Areva.

Increasing importance in the ABB group:

India is not only a promising domestic market, where ABB is well-positioned as a market leader in power and automation technologies, but also a key regional and global resource base because of lower costs and higher productivity. ABB India is now a 1) global sourcing hub; 2) global R&D centre; and 3) regional excellence centre.

New target price of Rs 1,266

We are raising our target price to Rs 1,266 (from 1103.2 earlier) on the back of a 7-17% earnings revision over CY07E-09E. Our target price is based on 30x FY09E (same as earlier), which is a 30% premium to BHEL. Our argument about why ABB should trade at a premium to BHEL (BHEL.BO - Rs 1,806.15; 1L) remains the same:

1) Business and Financial Perspective

ABB is the best play on the India's T&D capex, in our view, and we believe the T&D capex cycle will be stronger for longer.

ABB has a significant presence in the automation space, which is being driven by an unprecedented corporate capex wave.

Access to the parent (a global leader in power and automation technology) implies ABB has no technological constraints and does not have to worry about getting a technology partner for new products, as has been the case with BHEL in its tie-ups with Alstom and Siemens for super critical technology and with GE for advanced class gas turbines.

ABB India is now increasingly important in the ABB group scheme of things because it is a: 1) global sourcing hub; 2) global R&D centre; and 3) regional
excellence centre.

Higher RoEs without leverage and stronger earnings CAGR vis-à-vis peers.

2) Trading Perspective

ABB has traded at average premium of 50%+ to BHEL for the past three years. The premium actually narrowed in CY03-06 compared to CY99-03, as BHEL has re-rated significantly in the past three years.

ABB has also traded at an average premium of 85%+ to the BSE Sensex over the past three years.

Raising our earnings estimates

We are raising our earnings estimates for ABB by 7%, 14% and 17% for CY07E, CY08E and CY09E respectively on the back of:

• 53% YoY growth in sales, 111bps EBITDA margin expansion and 58% YoY growth in PAT in the 1HCY07.
• Our higher sales number is on strong order booking (OB at the end of 1HCY07 was Rs46.4bn up 48% YoY) and strong order inflow outlook.

As we factor in some amount of operating leverage kicking in we have increased our EBITDA margins assumptions by 70-120bps over CY07E-09E We now expect an EPS CAGR of 49% (vis-à-vis 42% previously) over CY06-09E with RoE at the 37-40% levels.