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Operating performance in line; Balance Sheet strength intact

Outlook still cautious owing to the second wave of COVID-19

* Revenue growth stood at 7% YoY and was 10% below our expectation. EBITDA stood in line with our estimate, with margin coming in higher owing to increased localized offerings and favorable product mix. While the pace of recovery has been a tad slower than expected (exports continue to remain muted), certain segments like Data Centers, Renewables, and Electronics (led by the PLI scheme) have witnessed robust growth and now contribute ~80% to ABB’s business.

* The management has demonstrated commendable control over cash flows and improved its Balance Sheet further. Its cash balance now stands at ~INR25b and forms ~65% of its net worth.

* ABB is a pure play on the long-term industrial automation and ‘Make-inIndia’ theme, and stands to benefit from the ongoing PLI-driven increase in manufacturing across the country. We have largely maintained our CY21E/CY22E estimates. Post reopening of the economy after the first lockdown, order inflows steadily increased sequentially. Recent statewide lockdowns could lead to a short-term disruption with respect to execution. The short-cycle nature of the business implies that the recovery could be very swift if the economy continues to improve. We maintain our Buy rating, with a TP of INR1,565 per share (55x Mar’23E EPS). We expect its premium valuations to sustain in the near term, given the growing opportunity in the Manufacturing space in India.

EBITDA in line; lower other income leads to earnings miss

* Revenue increased 7% YoY to INR17.3b and was 10% below our estimate. Gross margin stood at 33.3% (+120bp QoQ/-150bp YoY). EBITDA came in at INR1.3b and was in line with our expectation. EBITDA margin at 8.1% was better than our estimate of 7.2%.

* Other income declined 45% YoY to INR253m and was 37% below our estimate of INR400m. Adjusted PAT stood at INR947m and was 8% below our expectation.

* Loss from discontinued operations stood at INR93m, whereas exceptional gains from the sale of assets stood at INR745.3m (pretax). As a result of the exceptional gains, reported PAT came in at INR1.4b and was 37% ahead of our expectation.

* Order inflow declined 7% YoY to INR18.3b. The order book stood at INR43.3b (-3% YoY).

* Segmental highlights: a) Robotics and Motion: Revenue grew 11% YoY to INR6.8b. PBIT margin stood at 14%. b) Electrification Products: Revenue was flat at INR6.3b. PBIT margin stood at 11.8%. c) Industrial Automation: Revenue grew 11% to INR3.3b. PBIT margin stood at 8.8%.

Key highlights from the management commentary

* Data Centers, Renewables, and Electronics are some of the key end-markets expected to see healthy growth in CY21, followed by Food and Beverage, Pharmaceuticals, and Railways.

* ABB has installed smart sensors and soft starters to reduce water usage in Shimla (HP). The company will use this template to implement Water projects across other geographies.

* Export orders constitute 11% of the total order book (v/s 13-14% earlier). While 15-20% of the orders are hedged for price variations, a large part of the remaining order book are short cycle orders, which have been recently won (factoring the recent surge in commodity costs).

Valuation and view

ABB is a pure play on the long-term industrial automation and ‘Make-in-India’ theme, and stands to benefit from the ongoing PLI-driven increase in manufacturing across the country. We have largely maintained our CY21E/CY22E estimates. While the recent statewide lockdowns remain a concern, we expect a quick recovery in short-cycle businesses. We maintain our Buy rating, with a TP of INR1,565 per share (55x Mar’23E EPS). We expect its premium valuations to sustain in the near term, given the growing opportunity in the Manufacturing space in India.

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