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Quality versus price

ABB, in its annual report, highlighted its growth strategy to continue targeting high growth profitable markets that benefit from key megatrends. The company’s improved penetration into Tier II and Tier III cities, higher localization efforts, benefits from global feeder factories for exports, and improved product portfolio are helping it expand its presence across markets spanning 23 market segments. The company has been able to double its share of orders from high-growth segments in the last five years. ABB has been one of our top picks in the sector and has consistently outperformed on earnings. While the stock is expensive on valuations, it has one of the best RoIC in the capital goods sector. We remain positive on the company and maintain our BUY rating on the stock.

Remain focused on new high growth segments

ABB’s order inflow for CY23 was up by 23% YoY, led by orders from diverse sectors, including data centers, electronics, metros, railways, renewables, automotive, water and wastewater, and power distribution. Moreover, the company strengthened its presence in segments such as metals, mining, cement, pulp, and paper through its energy-efficient and eco-friendly solutions. ABB’s portfolio has expanded significantly, now serving 23 market segments, comprising both core and emerging sectors, compared to the seven segments before the onset of the COVID-19 pandemic. The share of the emerging segments (data centers, electronics, water, F&B, pharma, warehouse, and logistics, etc.) in the order book has doubled in the last five years. Improved penetration toward tier II-III cities, global feeder factories, product customizations, OEM or channel focus, and local certifications have ensured preference for ABB India products in varied markets..

Targeting opportunities across segments

Electrification and motion continue to remain key segments for ABB. The Annual Report for 2023 highlighted that 1) Electrification business witnessed significant growth and increase in market share during the year. Growth in this segment would be driven by focus on energy efficiency and increased requirements of electrification network. Improving demand from emerging segments such as green hydrogen, semiconductors, battery manufacturing, energy storage as well as established segments such as renewables, data centers, metals, cement, oil and gas, and food & beverages are likely to lead growth, 2) Motion and robotics segment growth was driven by strong export orders, increased penetration in Tier II, III, and IV cities through channel partners. Future growth will be driven by continued investments in high-speed rail, metros, market expansion into Tier II/Tier III cities and industrial capex, 3) Process automation segment revenues were driven by sectors such as city gas distribution, terminal automation, life sciences, metals & mining, and cement,refineries and the petrochemical industry, upstream energy and power OEMs. Future growth in process automation will be driven by steel, cement, mining, ethanol, green hydrogen, etc., 4) Robotics segment has a small share in revenues and inflows were driven by automotive, electronics, food & beverages, and service industries.

Valuation and recommendation

We expect the company to continue to benefit from improved addressable market and improve upon its share of high growth segments. We incorporate AR2023 details and expect revenue to grow by 24.5%/22.1%/19.3% in CY24/25/26E and we bake in margins of 14.4%/14.7%/14.8% for the same period, translating into PAT growth of 24.6%/22.8%/20% for CY24/25/26E. ABB has been one of our top picks in the sector and has continuously outperformed on earnings. The stock is expensive on valuations at 74.3X/62.0X on CY25/26E earnings, but has one of the best RoIC in the capital goods sector. We incorporate AR2023 details and revise our TP. We remain positive on the company and maintain our BUY rating with a two-year forward price target of INR7,500.

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