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In line result; order inflows indicate recovery is on track

Balance Sheet strength intact

* ABB’s 2QCY21 result stood in line with our expectations. While the demand recovery was strong in Jun’21, it lost 3-3.5 weeks of operations, which is reflected in its performance. Capacity utilization has now scaled up to 80- 85% across its different manufacturing locations, indicating that a gradual recovery is in progress. While order inflows moderated sequentially, it stood healthy across all segments, with the Systems and Services business witnessing a strong growth in orders after a couple of quarters. Order inflows across various end-markets grew at similar levels, with a recovery visible in the Automotive segment.

* The management has demonstrated commendable control over cash flows and improved its Balance Sheet further. Its cash balance now stands ~INR24b and constitutes ~64% of its net worth.

* ABB is a pure play on long-term industrial automation and ‘Make in India’ theme. It stands to benefit from the ongoing PLI-driven increase in manufacturing across the country. The short cycle nature of the business implies a very swift recovery, if the economy continues to improve. We maintain our Buy rating, with a TP of INR2,000 per share (60x Jun’23E EPS). We expect its premium valuations to sustain in the near term, given the growing opportunity in the Manufacturing space in India, and likely higher adoption of Automation Solutions in various industries.

Recovery witnessed across all segments

* Revenue grew 45% YoY to INR14.3b and was in line with our expectation. Gross margin improved slightly on a sequential basis to 33.6% v/s 33.3% in 1QFY21. On a YoY basis, gross margin is down 130bp. EBITDA quadrupled to INR947m and was in line with our expectation. EBITDA margin came in at 6.6%, slightly better than our expectation of 6.3%. Adjusted PAT came in at INR683m and was in line with our expectation.

* CFO stood at INR3b (v/s INR3.2b in CY20-end), with FCF at INR2.8b (v/s INR2b in CY20-end).

* Order inflows grew 41% YoY to INR16.9b, but were down 7% sequentially. Order book stood at INR45.8b, down 2% YoY.

* Segmental highlights: a) Robotics and Motion: Revenue grew 41% YoY to INR5.9b. PBIT margin expanded to 10.1%. b) Electrification products: Revenue grew 61% YoY to INR5.8b. PBIT margin stood at 6.8%. c) Industrial Automation: Revenue growth was tepid at 13% YoY. PBIT margin stood at 6%.

Key highlights from the management commentary

* For ABB’s products, pricing power accrues via: a) market share in the segment, and b) customer requirement. For instance, in end-markets like Data Center, Food and Beverages, and Power distribution, customers require best-in-class products and are ready to pay a premium. However, segments like Railways have no pricing power, owing to tendering, but offer healthy volumes.

* Intensity of competition was high in Water and the Waste Water segment. With specifications changing towards more efficient motors and higher reliability parts, competition has evened out with pricing power coming in.

* Export orders constitute 16%/12% of total order inflows/2QCY21 revenue. Services contributed ~18% to 2QCY21 revenue, with the contribution expected to further scale up on the back of robust orders.

Valuation and view

ABB is a pure play on long-term industrial automation and ‘Make in India’ theme. It stands to benefit from the ongoing PLI-driven increase in manufacturing across the country. While the recent statewide lockdowns remain a concern, we expect a quick recovery in shorter cycle businesses.

We maintain our Buy rating, with a TP of INR2,000 per share (60x Jun’23E EPS). We expect its premium valuations to sustain in the near term, given the growing opportunity in the Manufacturing space in India, and likely higher adoption of Automation Solutions in various industries.

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