Hold ABB; target of Rs 733: KRChoksey

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Hold ABB; target of Rs 733: KRChoksey

KRChoksey has recommended hold rating on ABB with a target of Rs 733, in its March 21, 2011 research report.

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KRChoksey has recommended hold rating on ABB with a target of Rs 733, in its March 21, 2011 research report.

"ABB India is one of the world's leading engineering companies, which helps customers to use electrical power effectively and to increase industrial productivity in a sustainable way. ABB operations in India include 14 manufacturing facilities with over 8000 employees. Customers are served through an extensive countrywide presence with more than 23 marketing offices, 8 service centers, 3 logistics warehouses and a network of over 550 channel partners."

"Power system witnessed a sharp rise in top line by 48.9% YoY to Rs 634.9 cr largely on back of order booking in rural electrification segment. Company registered a loss at EBIT level (Rs 38.1 cr) for the fifth straight quarter marred by continuing cost of exit from rural electrification business. On a positive note, ABB has made the provisioning of over Rs 100 crs during CY10 for cost overruns in Rural electrification (RE) business. Order book in RE segment has come down from Rs 200 cr at start of CY10 to Rs 70 cr at end with the provisioning for most of the cost overruns done during the year. Going forward, we believe that it will take at least 2-3 quarters before the company completely exits the RE business but the impact on bottom line will be not as severe as in CY10. Order inflows declined sharply by 41.3% YoY during the quarter largely impacted by price erosion and increased competition in power segment, while automation segment remained stable. Order inflows for the CY10 declined by 27 % to Rs 6,350 from Rs 8,685 in CY09. While order backlog at the end of CY10 stood flat at Rs 8,436 giving the company a revenue visibility for 1.3 years."

"EBIT margins declined sharply by 514 bps, 453 bps and 511 bps in process automation, discrete automation and low voltage products segments, respectively in CY10. Discrete automation and low voltage product segment has been largely impacted by loss on derivative contracts used to hedge firm pay commitments. Process automation segment margins have been impacted by long term contracts with fixed price clause undertaken by the company during the slowdown."

"We believe that worse is over for the company as cost of exit from RE business has mostly been provisioned for in CY10. Company stands to benefit from huge T&D capex pipeline and industrial capex in core industries because of its superior product range. Although, profitability will remain under pressure on account of increased competition, which is already factored in the price. We have cut our CY12 earning estimates and target price by 15.6% and 9% respectively. We have valued the company at ~45x CY12 earning to arrive at a target price of Rs 733 and maintain a 'HOLD' recommendation on the stock," says KRChoksey research report.

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To read the full report click on the attachment