Reduce ABB; target of Rs 925: Edelweiss

Edelweiss's research report on ABBABB India’s (ABB) Q4CY15 operational performance surpassed our estimates as EBITDA margin catapulted 300bps to 10.9% riding increased localisation, raw material cost advantage, operational efficiencies and favourable revenue mix. Revenue grew 8.3% YoY led by 15% plus growth in products business; however, system business remained muted. Order intake slipped 17% YoY in Q4CY15, but improved 4% YoY for CY15. Order book stood flat at ~INR81bn. Management maintained its bullish commentary on solar equipment (revenue jumped 2x during CY15) and railway business. We estimate ABB’s profitability momentum to sustain over CY15-17 (up 130bps) driven by higher share of localised products and cost saving benefits. While we estimate 15% revenue CAGR and 35% EPS CAGR over CY15-17, the stock continues to trade at expensive valuation of ~46x CY17E EPS. Maintain ‘REDUCE’ with target price of INR925.ABB has launched several niche products in low-voltage and solar segments, which has improved the company’s overall profitability versus most peers. While we estimate 35% EPS CAGR over CY15-17, the stock continues to trade at expensive valuation of ~46x CY17E EPS. We maintain ‘REDUCE/SP’ with target price of INR925, assigning 37x P/E on CY17E EPS.

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