Look beyond near-term challenges of short-cycle business
Rise in order inflows silver lining in 1QCY20
* ABB’s top line decline of 18% was led by poor performance across segments. While Robotics and Motion witnessed headwinds from the Auto sector, Industrial Automation revenues were impacted by the lockdown. Lower absorption of fixed cost resulted in margin led earnings miss.
* Considering the short-cycle nature of ABB’s business and expectation of gradual recovery coupled with the impact of fixed costs, we have cut our CY20E/CY21E earnings by 60%/25%. ABB remains a pure play on longer-term industrial automation and the ‘Make-in-India’ theme. Thus, we maintain our Buy rating with lower TP of INR980 (Prior: INR1,255).
Operating performance disappoints, order inflow strong
* Revenues came in at INR15.2b, down 18% YoY and 7% below our estimates. Higher staff cost and other expenses, coupled with lower revenues across segments led to lower EBITDA of INR495m. EBITDA margin stood at 3.3%, significantly lower than expectation due to lower absorption of fixed costs.
* PBT of INR648m saw negative impact due to (a) revenue shortfall of INR3.2b, which led to an impact of INR1.12b, (b) INR depreciation impact of INR350m, and (c) other items: INR350m. Adj. PAT stood at INR507m.
* Exceptional item includes gain of INR384m which pertains to reversal of exceptional costs (related to sale of the Solar Power business)
* Total order inflows stood at INR19.5b, up 10% YoY. Adjusted for solar orders, growth stood at 18% YoY. Key order wins included an order from Indian railways worth INR180m, wind turbine generators, SCADA solutions for monitoring gas flow, FGD projects, LV switchgear and busbar orders.
Key management commentary highlights
* All factories are now open and management is taking stock of the demand situation across verticals. Most suppliers have also started production but would take some time to ramp up.
* Cash collection remains top priority in this situation. The company began CY20 with INR15b cash. It lost ~INR2b due to lower collection during 1QCY20, but an equal amount was received from the sale of the solar business. This cash is expected to support 1.5-2 months even in case of nil collections. The company is debt free and has adequate bank financing facilities available.
* Management expects end markets like Food and Beverages, Pharma, Utility infra, Data center and Hospitals to rebound quickly.
Valuation and view
* Given the short-cycle nature of its business and expectation of a gradual recovery coupled with the impact of fixed costs, we have cut our CY20E/CY21E earnings by 60%/25%. ABB remains a pure play on longer-term industrial automation and the ‘Make-in-India’ theme. Thus, we maintain our Buy rating with lower TP of INR980 (Prior: INR1,255). CY19 marked strong growth in services/exports revenue, which is our key investment thesis for the longer term.
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