Sell ABB; target of Rs 745: KRChoksey

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Sell ABB; target of Rs 745: KRChoksey

KRChoksey is bearish on ABB and has recommended sell rating on the stock with a target of Rs 745 in its May 13, 2011 research report.

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KRChoksey is bearish on ABB and has recommended sell rating on the stock with a target of Rs 745 in its May 13, 2011 research report.

"ABB India net sales grew by a robust 22.4% driven by the strong execution in Power system and short cycle orders in automation segment. Power and automation segment grew by 24.3% and 12.4% YoY. Operating margins improved by 417 bps YoY cushioned by the provision made the company in CY10 for cost overrun in rural electrification (RE) business even as raw material cost increased by 29.3% led by the sharp rise in copper prices. Order inflows during Q1CY11 were largely flat at Rs 1,695 crore against Rs. 1,689 crore as some large orders were deferred on account of procedural delays. ABB's order book at the end of Q1CY11 stands at Rs. 8,329 crore down 5% YoY giving it a revenue visibility of 1.3 years. Order book in terms of segment stands at 50% Power and 50% Automation, while product accounts for 60% of the order book."

"Order inflows for the Q1CY11 were flat at Rs. 1,695 crore as there were procedural delays in the finalisation of a number of large projects. Although, it was compensated by sharp traction in short cycle orders. ABB has indicated that it has not booked the $900 mn. Assam-Agra HVDC project order (15% to be booked by ABB India) as the financial closure for the project has not been achieved. Further, company expects the momentum of short cycle orders to continue as they are unaffected by the higher interest rates unlike projects. Pick up in maintenance capex in Cement, Oil & Gas, Paper and steel industry augurs well for the automation business of the company."

"Operating margins of the company witnessed a marked improvement by 417 bps to 5.7% during the quarter even as raw material prices increased by 29.3%. Operating margins of the company still remains much below its peak level. Lower profitability in Power projects (RE Business) and higher input cost continues to be an overhang on the ABB's operating performance. Company has indicated that worst is behind them as legacy of RE orders is over. In the medium term, we expect that company will have margins in the range of 7-9% on back of its focus on supply chain management and optimisation of cost structure. ABB is localising the manufacturing of 765KV transformers, HV circuit breakers and other high voltage equipment to counter domestic competition and streamline the cost structure."

"We believe that worse is over for the company as the legacy of RE order book is almost over. Company stands to benefit from huge T&D capex pipeline and industrial capex in core industries because of its superior product range. Although high interest rates will remain a macro overhang in the short term. We have increased our CY11 earning estimates by 8% to factor in these changes.ABB at CMP of Rs. 862 is trading at ~42x CY12 earnings and looks rich on valuation. We have valued the company at ~36x CY12 earnings to arrive at a target price of Rs. 745 and initiate a 'SELL' recommendation on the stock," says KRChoksey research report.  

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