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Benefiting from quality, localization and penetration

* ABB’s PAT came in ahead of our estimate in 4QCY23, as margins significantly beat our expectation. Revenue growth was lower than our estimate due to a higher share of its long-duration projects business. Order inflows have plateaued over the last four quarters and future growth will depend on how fast the orders are finalized and how fast the private sector recovers. ABB has been benefiting from strong demand for quality players across industries - government or private. With a deeper penetration across market segments and geographies and control over costs via localization, ABB has been able to gain higher margins. We continue to believe that ABB’s addressable market is expanding fast across segments like transmission, railways, data center, electronics, and PLI-led capex. We expect the company’s margins to remain strong at around 14%. We raise our CY24/CY25 EPS estimates by 2%/4.4% and increase our DCF-based TP to INR5,800 (from INR5,480), implying a P/E of 65x on Mar’26E EPS. ABB remains our top pick in the sector.

Results were ahead of our estimates on strong margin/PAT beat

Revenue grew 14% YoY to INR27.6b, driven by Robotics & Motion (+2%), Electrification (+19%), and Process Automation (+23%). Gross margin at 37.5% expanded ~140bp YoY/80bp QoQ, led by a favorable product mix. EBITDA at INR4.1b clocked 15% YoY growth, while margin stood at 15.1%, flat YoY and down 70bp QoQ. PAT at INR3.4b grew 13% YoY, led by a healthy operational performance. Order inflow stood at INR31.4b (+35% YoY), while the order book stood at INR84b (+30% YoY). On an annual basis, revenue/EBITDA/PAT came in at INR104.4b/INR14.9b/INR12.4b, up 22%/55%/80% YoY. EBITDA margin expanded ~310bp to 14.3%. Cash balance stood at INR48.1b vs. INR31.5b in CY22. FCF generation was INR11.7b (+104% YoY).

Demand outlook remains strong, near-term weakness may persist

ABB is benefiting from demand tailwinds emerging from high-growth areas such as renewables, data centers, railways, metros, and electronics. Although traditional sectors, such as cement, metals, oil & gas, and pharma, are not growing at the desired pace, they still account for the bulk of the order book of ~INR84b. The management indicated that as these sectors gather steam, they will act as growth catalysts going ahead. Overall, the domestic market is expanding at a much faster rate than the export market. We believe that with an expected revival of the private sector, inflows will start ramping up faster, which had been flat in the previous four quarters. So far the company has been benefiting from opex-led orders from the private sector and will now start witnessing capex-led orders from the private sector in few quarters after elections.

Margin expansion driven by product mix, localization and improved penetration

ABB is fairly comfortable about its gross margin, which stood at 36.8% in CY23, and it has achieved these gains through an improved product mix, increased localization, and a deeper penetration in markets, which we believe will sustain. The company intends to maintain its gross margin at this level through value-added products and a deeper penetration in markets despite a higher share of large projects and waning down of RM tailwinds. Improved employee productivity and control over costs led to strong margins of 15.1% despite an adverse impact of forex of INR100m in 4Q.

Segment-wise performance was strong from electrification and process automation

The electrification segment is witnessing strong traction from data centers, OEMs, and major metals and energy players and will also see improved inflows from renewable projects. The motion segment has benefited from large orders for traction motors in 3Q/4QCY23, but its margins were impacted by forex fluctuations on import dependence for drives. We expect the motion segment to continue to benefit from a strong addressable market for railways and metro-related projects. The preference for quality products from ABB is also helping the company tide over aggressive pricing in some segments of motors. Process automation order inflows came from sectors such as power, metals and logistics, and service orders due to the healthy installed base. Robotics has seen delays in finalization, which will start coming in the next few quarters. Overall, we expect ABB to benefit from increasing investments across: 1) electrification – driven by T&D & renewable power (INR2.4t), data center (INR400-500b), and EV charging (INR140b); 2) motion and mobility – led by planned investments by the government in metro, high-speed rail and RRTS (INR5-6t); 3) industrial automation – driven by a surge in investments in smart manufacturing led by PLI (INR4t); and (4) robotics.

Financial outlook

We raise our CY24/CY25 EPS estimates by 2%/4.4% to bake in better margins and higher other income. We expect a CAGR of 18% in ABB’s order inflow over CY23-25 and expect a CAGR of 23%/22%/20% in revenue/EBITDA/PAT, driven by EBITDA margin of 13.7%/13.9% in CY24/CY25.

Valuation and recommendation

We increase our DCF-based TP to INR5,800 from INR5,480, implying P/E of 65x on Mar’26E EPS. ABB remains our top pick in the sector.

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