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Margin expansion key to further re-rating

ABB-adjusted EBITDA margin of 10.9% came in as a surprise (adjusted for Rs 930mn one-off expenses, 6% reported margin) though, historically, 4QCY is a better margin quarter for the company. Going ahead, the key to further re- rating is contigent on utilisation levels picking up in Industrial/Robotics automation as ABB business model is overly sensitive to operating leverage and resultant margins impact. We believe there will be no further stress coming out of the streamlining of Industrial Automation (IA) segment. Robotics remains sub-scale; though recent OLA order and management efforts to demonstrate applications/use-cases across industries presents a multiplier opportunity. Most of the potential upsides on cyclical recovery is already priced into the lofty valuation. Hence, we maintain REDUCE on ABB and roll forward our valuation to Mar-23E. We revise our TP to Rs 1,426/sh vs. Rs 1,268/sh earlier. We have retained our estimates.

* Margin surprise despite Rs 930mn one-off expense: Revenue – Rs 17bn (- 13%/+5.5% YoY/QoQ, 14% miss). EBITDA – Rs 1bn (-26/-16% YoY/QoQ, 27% beat) and margin of 6% (-105/-150bps YoY/QoQ, 192bps beat). Adjusted for a one-time impact of Rs 800mn in certain businesses of IA due to ramp-down of power-gen segment and Rs 135mn of VRS costs, adjusted EBITDA margins stood at ~10.9%. Other income at Rs 144mn (-63/-29% YoY/QoQ). RPAT: Rs 622mn (-27% QoQ, Rs 50mn loss YoY; 8% beat). APAT stood at Rs 1,320 mn (-1.6% YoY, +54% QoQ).

* Order inflows resilient but remain moderate: 4QCY20/CY20 order inflows stood at Rs 14.7/59.3bn (vs Rs 15.8/69.7bn YoY), taking the backlog to Rs 41.1bn (vs Rs 41.2bn YoY). Infrastructure investments and PLI incentives by government may further drive new order inflows. Ola today announced that it has selected ABB as one of its key partners for robotics and automation solutions for its mega scooter factory. This is emerging as a unique opportunity and may have a multiplier effect on revenue with improvement kicking in on profitability.

* Segmental outlook: While Motion & Electrification have recovered performance in 4QCY20, Robotics is seeing encouraging market response; it remains sub-scale as of now. Auto Capex will also take some time to materialise. Industrial Automation is exposed to the core sector vis-à-vis energy/power, mining, metals, cement and other process industries. This segment will gradually pick up pace as the economy gathers steam. High growth end-user industries: Data Centres, Renewables & Electronics. Moderate growth: Food & Beverage, Pharmaceuticals, Power Distribution, Water & Waste water, Railways & Metro, Automotive. Low growth: Buildings & Infra, Oil & Gas, Chemicals, Cement & Steel.

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