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Margin improvement trajectory is better than expectations

ABB India 3QCY22 results beat estimates. Net sales were up 19.2% YoY (5% above JMFe), while EBITDA reported strong growth of 25% YoY (10% above JMFe). Sales growth was driven by improved execution across segments, on strong order book execution and demand improvement. Revenue in electrification business grew by 27% YoY, given robust backlog and better supply chain coordination; Motion business witnessed growth of 26% YoY due to higher export allocation and customer penetration in tier-2/3 cities, while Process Automation grew by just 3% YoY, as execution in large projects was weak. Operating margins were 40bps higher than expectations at 10% (+50bps YoY), on account of better capacity utilisation and cost optimisation. Adjusting for one time gain, PAT grew by 41% YoY (18% above JMFe). Management highlighted that some segments are facing cyclicality in demand and the company is also facing challenges on imports from Europe, which is likely to be sorted in coming quarters and unlikely to impact operation as higher costs are already included in contracts. We maintain BUY rating with revised TP of INR3,350.

* Order book execution drives revenue growth: Net sales were up 19.2% YoY to INR 21.2bn, 5% above JMFe. The growth was strong execution of backlog and higher exports in electrification products (+27% YoY) and motion segment (+26% YoY), while process automation reported muted growth of 3% YoY. Robotics reported de-growth of 10% YoY given supply chain impact, although semiconductors supply is improving.

* Healthy margins despite challenging environment: Gross margins largely remained stable at 34.8%, while operational efficiency like decline in staff expenses by 70bps YoY to 7.4% (8.1% in 3QCY21) aided in EBITDA margin expansion of 50 bps. EBITDA reported robust growth of 25% YoY and came in at INR2.1bn. Segment wise, EL saw sharp margin expansion of 250bps to 14.5%, while PA and Motion witnessed contraction given inflationary pressure. Management intends to sustain double digit PBT margins through a mix of factors like volume growth, better sales mix and cost reduction initiatives in CY22.

* Growth in inflows continues: Order inflows saw a healthy improvement of 38% YoY to INR 26.3bn, led by orders in materials, utility, renewables and railways. Order backlog stood at INR 65.1bn (0.8x TTM sales), showing no material change in visibility. Process Automation reported growth of 96% YoY in order inflow to INR7.1bn on the back of wins from large conglomerates in steel, cement, gas. Electrification business was up by 36% compared to 3Q21, due to strong customer connect leading to good order inflows across all channels. Motion business orders were up 20% YoY and were supported by good contribution from channel business.

* Maintain BUY with TP of INR3,350: Management expects continuity in order inflows on the back of government spends on projects incentivizing local production and fast tracking infrastructure projects. We forecast 19%/35% CAGR in sales/adj PAT over CY21- 24E. We maintain BUY with revised TP of INR 3,350, based on 65x Dec’24E EPS, as we roll forward to Dec’23 TP. Key risk: Deferment of private sector capex.

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