Reduce ABB; target Rs 696: KRChoksey

KRChoksey has recommended reduce rating on ABB with a target price of Rs 696 in its May 10, 2012 research report.

"ABB’s net sales remained almost flat at Rs. 1,790.3 cr on account of hesitance w.r.t offtake from industrial customers, watchful execution of projects with cash flow concerns and delivery schedule. After continued disappointment on EBIDTA front for last eight quarters, adjusted EBIDTA margins improved to 7.3% as power system registered positive segmental margins. However, forex loss of Rs. 32.7 cr eroded positive impact on EBIDTA and consequently PAT declined by 20% to Rs. 47.6 cr.  Order backlog as of Q1CY12 stands at Rs 9,028 cr vs Rs 9,128 cr in Q4 CY11, while order inflow stood at Rs 1,632 cr."

"ABB net sales declined by 0.3% to Rs. 1,790.3 cr as power system, automation products and process automation registered decline in sales. Macro concerns along with delivery schedule which hampered faster execution (in process automation and power systems) dragged net sales growth. On adjusted basis ABB registered improvement in operating margins, as margins increased to 7.3%, this was primarily on account of 5% segmental margins registered by power system segment, which has for last 10 quarter reported negligible/ negative margins. Power system segmental margins were positive as it did not execute any rural electrification orders in current quarter. As of Q1 CY12 ABB is still carrying orders worth Rs 25 cr of RE business. Efforts like rationalizing cost, improvements in designs and supply chain initiatives also contributed to improvement in operating margins. Management commented current margins are sustainable with variance of 50 bps. However, in spite of improvement in operational performance a forex loss of Rs. 32.7 cr impacted the earnings and consequently PAT declined by 20% to Rs. 47.6 cr."

"Order inflow declined by 4% to Rs 1632 cr vs Rs. 1695 cr on account of slowing industrial capex. Orders from power sector continued to grow. However, industrial orders were impacted due to poor market sentiment primarily driven by overcapacities and high cost of capital. Current order backlog stands at Rs. 9028 cr. At CMP of Rs 734, ABB is trading at a P/E of 84x CY11 EPS, 40x its CY12 EPS and 26x its CY13 EPS. Thus considering expensive valuation and slowed down in industrial capex which is impacting execution & order inflows as well as pricing pressure in the industry, we recommend a REDUCE on ABB with price target of Rs 696 (25x CY13E EPS of Rs 27.8)," says KRChoksey research report.

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