IGI Logo

Poised for a long growth runway

ABB India’s 1QCY24 results were much ahead of our estimates, driven largely by strong improvement in margin. Our thesis, as highlighted in our latest AR2023 update (link), of margin improvement is playing out quite well and we expect the company to keep benefiting from its pricing advantage, operating leverage gain, improving product mix toward higher-margin segments, and a wide product portfolio. We expect a large part of these gains to sustain in the coming years amid a strong demand scenario. We increase our estimates for CY24/25/26 by 23%/24%/20% to bake in 1QCY24 performance and higher margins. We increase our TP to INR8,500 (from INR7,500), implying a P/E of 70x on Jun’26E EPS. We maintain BUY and ABB remains our top pick in the sector.

Results were far ahead of our estimates

ABB’s 1QCY24 revenue was largely in line with our estimate at INR30.8b (+28% YoY/12% QoQ). This was driven Electrification (+30% YoY), Process Automation (+73% YoY) and Robotics & Motion (+8% YoY). Gross margin at 40.2% saw a healthy ~390bp YoY/270bp QoQ expansion, likely led by a superior product mix, improved pricing power, higher share of services and exports, localization, and better control over supply chain costs. Employee costs moved up due to annual salary revisions and headcount increase. Other expenses as % of sales came down due to better operating leverage and a one-time favorable tax refund. The overall share of services moved up to 16% (from 13% in 1QCY23). All these factors led to all-time high EBITDA margin of 18.3% (+650bp YoY/+320bp QoQ), ahead of our estimates. Aided by a robust cash balance (INR50.4b), other income grew by 21% YoY. This led to PAT growth of 87% YoY at INR4.6b. Order inflow at INR36.1b jumped 15% YoY, while the order book stood at INR89.3b (+25% YoY). Among the segments, electrification and process automation witnessed 34%/17% YoY order inflow improvement, while inflows declined YoY in motion and robotics on delays in decision-making on system orders. PBIT margins improved sharply across all segments.

1QCY24 margin outperformance driven by several levers

ABB’s margins have surprised positively across segments on continued benefit of several levers EBITDA margin for 1QCY24 stood at 18.3% (+650bp YoY), far ahead of our estimates. This margin outperformance is driven by 1) operating leverage on higher volumes, 2) seamless execution of cost improvement initiatives, 3) positive price impact to pass on inflation and cost increase, 4) higher share of service and export revenues, 5) stable currency and commodity price level. 

ABB India surpasses parent in overall revenue growth and segmental margins

ABB India’s order inflow and revenues grew by 15% and 28% YoY, respectively, in 4Q, far ahead of its global parent’s growth in inflows and revenue (which stood at - 4%/+2% YoY for 1QCY24). Global parent inflow growth was impacted by a decline in markets like US (-3% YoY), Europe (-9% YoY) and China (-18% YoY), while Indian markets grew at a faster pace. It was driven by continued demand growth in India, coupled with demand from parent group companies outside India as well as thirdparty customers outside India. Increased market penetration, a wide product portfolio and global offshoring help the company grow its inflows faster than parent. ABB has positioned itself rightly in domestic markets to benefit from private capex, industrial automation, PLI-led capex, global offshoring, improved energy demand, and technological advancements across user industries. ABB India’s segmental margins have also now surpassed those of the parent (Ref Exhibit 13).

Margin improvement is progressing well

Our thesis of further scope for margin improvement, as highlighted in our AR2023 update (link), is progressing well. ABB is benefiting well from its advantageous position as one of the top five to six players in its critical segments, such as electrification, automation, and data centers. With ABB being a preferred choice as a quality player with full control over the value chain, it is benefiting from improved product mix, higher services share, better operating leverage (despite nearly 8% of sales going to the parent as royalty), IT fee, and group management fee. We thus expect the net impact of the pass-on of lower RM prices and improved product pricing to be favorable for margins. We raise our margin estimates to 17.4%/17.3%/16.6% for CY24/CY25/CY26 to bake in 1QCY24 performance and the favorable demand scenario for ABB.

Valuation and recommendation

ABB is currently trading at 64.2x/55.6x P/E on CY25/CY26 estimates. We expect revenue to grow by 29%/26%/20% in CY24/CY25/CY26 and bake in margins of 17.4%/17.3%/16.6% for the same period, translating into PAT growth of 54%/24%/16% for CY24E/CY25E/CY26E. This results in a PAT CAGR of 30% over CY23-26. We arrive at a revised TP of INR8,500, based on DCF, implying 70x P/E on Jun’26E EPS. The company has one of the best RoIC in the capital goods sector and will continue to benefit from improved addressable market and will improve its share of high-growth segments. We maintain BUY on ABB.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412