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Execution to pick up on account of strong order inflows
Maintaining Sell given expensive valuations
* Below estimated performance in continued business: Revenue increased 4% YoY to INR17.3b in 2QCY19 (below our est. of INR18.5b). EBITDA grew 42% YoY to INR1.2b (below our est. of INR1.5b), while recurring PAT rose 59% YoY to INR697m (below our est. of INR0.9b). ABB has entered into an agreement with Hitachi globally to sell its ‘power grid’ business; as a result, it is showing ‘power grid’ as a discontinued business. During the quarter, revenue from the discontinued business increased 2% YoY to INR11b; EBIT was up 3% YoY to INR1b with margin at 9.4%.
* Margin improvement supported by better revenue mix: Gross margins for the quarter improved 290bp YoY to 34.8% supported by better revenue mix, thus, resulting into an operating margin improvement of 190bp YoY to 7.2%. EBIT margin shrank for Industrial Automation (-110bp to 10.1%), but improved for Electrification products (+80bp to 9.7%). Robotics & Motion margins remained stable during the quarter at 8.3%.
* Order inflow registers healthy growth of 23% YoY: Order inflow increased 23% YoY to INR19.9b in 2QCY19, led by robust inflow in base orders (+16% YoY). Order book stood at INR46.6b (+9% YoY), providing revenue visibility of 0.7x its TTM revenue of INR69b; this can be ascribed to the short cycle nature of the business that ABB now retains with itself.
* Valuation view: We value ABB on an SOTP basis in order to value the discontinued business separately. We have valued its discontinued T&D business at 25x and current core business at 42x Mar’21 EPS. Given the expensive valuations, we maintain our Sell rating on the stock with a target price of INR1,240.
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