Sell ABB India; target Rs 442: Angel Broking

Angel Broking's report on ABB India

"For 3QCY2013, ABB India (ABB) reported a 1.3 percent yoy decline in top-line to Rs 1,786cr (marginally better than our estimate of Rs 1,763cr). The top-line was mainly driven by a 9.2 percent yoy growth in the discrete automation segment to Rs 455cr and 12.6 percent yoy growth in low voltage products to Rs 173cr. However, the power systems segment declined sharply by 10.3 percent yoy to Rs 453cr."

"Order intake during the quarter grew by 4.9 percent yoy to Rs 1,762cr. Although there is dearth of large orders (order higher than Rs 75cr is classified as large order), growth in order intake came on back of short cycle orders in discrete automation and low voltage segment. However, the Management has cautioned that customers are not only postponing capex plans but also hesitating on investments (which may impact short cycle orders). The company’s order backlog stands at Rs 8,252cr as at the end of 3QCY2013, down 8.9 percent yoy, implying order book coverage of 1.1x (trailing 4 quarter revenues)."

"ABB’s increased focus to improve operational efficiencies through cost control and supply chain optimizations has led to 223bp yoy improvement in OPM to 5.9 percent. However, interest cost remains at elevated levels (Rs 27cr in 3QCY2013 vs Rs 12cr in 3QCY2012) due to higher working capital borrowings. Consequently, ABB's bottom-line grew by 66.6 percent yoy to Rs 36cr."

Outlook and valuation: "ABB continues to witness a decline in order backlog due to slowdown in investment cycle. Although the company has taken steps like improving efficiency through supply chain initiatives and increased focus on localization, the margin is expected to remain range-bound near 7 percent in CY2014. In spite of these structural issues, the stock is trading at expensive valuations of 42.9x CY2014E EPS. Hence, we recommend Sell on the stock with a target price of Rs 442," says Angel Broking research report.

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