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We maintain NEU on ABB India Ltd. (ABB) with a TP of Rs 1,219/sh (42x ABB continuing business). Whilst ABB is navigating through weak economic undercurrent and holding onto growth, capex recovery will take time to pan out. Strong balance sheet, Automation Products/Solutions expertise and cross cycles experience limits downside.
HIGHLIGHTS OF THE QUARTER
* One off’s impact profitability: ABB posted Rev/EBIDTA/APAT (de-growth)/growth of (0.7) /(35.8)/4.4% YoY. Execution was led by Robotics/Motion/Electrification revenue growing 10/7/11% YoY. Industrial automation de-grew 20% YoY on back of muted capex. EBIDTA margins contracted 387bps YoY to 7.1% due to margin hit on legacy projects in Industrial Automation. Services/Exports rev. grew 8/55% YoY during CY19. ABB recorded Rs 697mn as exceptional impairment in Solar business towards remeasurement of fixed assets and inventory.
* Exports seeing strong growth: ABB Exports revenue share in the mix has increased from 12.6% to 17.8% for CY19 YoY. ABB indicated that while prime focus remains on the domestic market, the benefit of factories feeding global supply chain in exports markets will continue. Middle East, Africa and Indian subcontinent have accepted ABB products and solution. Addressable market size remains large but ABB will cautiously expand from market to market.
* Navigating muted economic undercurrent: ABB has seen order inflow de-growth in Robotics and Industrial automation segment during CY19. Weak Automotive demand and slow capex in Industrial segment impacted ordering. ABB is banking on opportunities in Data centers, Motion and Exports to mitigate this impact.
ABB has levers in place to mitigate slow uptick in capex. One offs/legacy project margin hit has been a disappointment and continues to restrict margin expansion. Export growth is panning out well and mitigating domestic weakness. Balance sheet has net cash Rs 19.5bn to fund growth as an when recovery pans out. We believe rich valuation price in these tailwinds and multiple re-rating is contingent on capex recovery. We maintain NEU on ABB. Key risks (1) Delays in Government capex recovery, (2) Slowdown in private investments, and (3) INR depreciation.
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