ABB India: An export story?

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A section of analysts tracking the capital goods sector is bullish on ABB India’s export business. That may seem counterintuitive considering concerns over a likely recession in the US and Europe, and fund managers staying away from companies with exposure to these geographies.

Kotak Institutional Equities is in the camp which feels the prospects for ABB appear good. The brokerage firm has upgraded its rating on the ABB India stock to ‘buy’ from ‘reduce’ with an unchanged fair value of Rs 3,100. The rationale for the upgrade is that the company is capable of catering to the European and US markets.

Since 2020, parent ABB Global has shut down facilities in the US in the large motors and generators segment, which benefitted India. The company shut its units in Italy in the IEC standard low voltage motors, which China took advantage of, said Kotak Institutional Equities.

“Europe is a large market for LV (low voltage) motors at $2.8 billion or 5 times the size of the Indian market,” the brokerage firm said.

Over the past four years, ABB India’s sales in the LV motors division have grown 60 percent. Its offering is fully localised and productivity has improved.

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“We also note the case for the Europe business for large motors and generators moving to emerging markets such as India where component suppliers have a higher utilisation versus those in Europe,” the brokerage firm explained.

Strong traction

The company operates in four segments – robotics, motion, electrification and process automation.

HDFC Securities said ABB India has strong export traction in the electrification and motion verticals and robust pace in process automation. Owing to strong demand, the company’s mature plants are running at about 90 percent capacity utilisation, it added.

“The company is taking steps to expand capacity organically, through plant optimisation and productivity enhancement. The expansion is being undertaken to cater to both local and global demand. This will be aided by a healthy cash position of Rs 3,180 crore,” HDFC Securities said.

ABB India’s exports account for 13 percent of its total turnover, according to the company’s annual report 2021. Its latest investor presentation showed that the company’s export orders grew 53 percent YoY.

Order inflows in the third quarter of 2022 were at Rs 2,634 crore, up 38 percent YoY, taking the total to Rs 6,500 crore, as against Rs 6,000 crore at the end of June 2022.

However, other analysts said that even with export growth, the needle may not move much for ABB India. Some market participants are concerned that exports could slow down because of recession fears and the geopolitical crisis.

Nomura had expressed concern over the valuation of the integrated equipment manufacturer, which is a supplier to a wide range of industries. In its report dated November 17, Nomura said the outlook for the company is strong but its stock appears to be turning pricey.

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At that time, the stock traded at Rs 3,036. The stock has declined 11 percent in the past three months and is up 27 percent in the past year. The question is whether to buy the stock at this valuation.

In November, Nomura valued the company’s stock at 60 times CY24 earnings per share (EPS) of Rs 52 to arrive at a higher target price of Rs 3,121 from Rs 2,720.

“Currently, our P/E multiple of 60 times factors in a 20 percent order inflow CAGR (compounded annual growth rate) over CY21-24 and sales growth CAGR of 21 percent,” it said.

The order inflow trend may remain strong in the near term due to growth in areas like data centre and warehousing, the foreign brokerage said.

Looking at the stock technically, Sneha Seth of Angel Broking said it has surpassed its 200-day simple moving average level and is recovering from its support level.

The stock has dropped off from its 52-week high of Rs 3,445.65 on September 2, 2022. This provides a decent entry point, Seth said. Given the decline, the stock could even resume its upside momentum from here, she added.

The ABB India stock added 1.3 percent to Rs 2,843.55 at the close on the BSE on January 6. The company is slated to release its earnings on February 10.

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