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Changing mix of order book hurts 3Q

ABB India (ABB)’s 3QCY24 performance was below our expectations due to lower-than-expected order inflows and execution. The quarter was hit by the changing mix of order book towards a higher share of long-gestation, large-sized orders. Margin performance, though, remained strong YoY, with improved pricing and lower RM costs. We expect the near-term execution velocity to be affected by slower-than-expected growth in order inflows and a shift of order book towards longer-gestation projects. However, with higher value-added content in large-sized order inflows, we expect margin performance to remain healthy. Order inflow growth across segments, except Electrification, was hit by decision delays from the private sector and high base in select segments. We cut our estimates by 9%/10%/11% for CY24E/CY25E/ CY26E to factor in 9MCY24 performance and the near-term impact on execution due to the longer execution cycle of orders. Our revised TP stands at INR8,500 (vs. INR9,500 earlier), implying 72x P/E on Dec’26E EPS. We continue to maintain our positive stance on ABB based on its ability to benefit from the high growth segments with its wide offerings and deeper penetration network. Reiterate BUY.

Lower-than-expected order inflows and execution dent performance

ABB reported a miss in 3QCY24 vs. ours and consensus expectations. Revenue at INR29.1b grew 5% YoY, missing our expectation of INR34.3b as the order book tilted towards slightly longer gestation projects. Robotics & Motion/ Electrification segments grew 8%/11% YoY, while Process Automation declined 12% YoY. With robust demand, stable commodity prices, price hikes, and a better product mix, gross margin expanded ~670bp YoY to 43.4%. Other expenses rose during the quarter due to higher warranty costs. EBITDA margin came in at 18.6% vs. 15.8% in 3QCY23. PAT grew 22% YoY to INR4.4b, aided by higher other income (+21% YoY). Order inflows at INR33.4b rose 11% YoY, taking the order book to INR99.9b (+25% YoY). Cash balance stood at INR50b at the end of 3QCY24. For 9MCY24, ABB reported a revenue/EBITDA/PAT growth of 15%/ 54%/49% YoY. For 4QCY24, we expect a revenue/EBITDA/PAT growth of 14%/ 38%/36% YoY.

Shifting mix of order book vs. the past

ABB’s order book mix has changed over the past few quarters, with a good share of large-sized order inflows (INR5b or more) coming from high-growth segments (refer to Exhibit 8). Larger orders follow a project milestone trajectory, and hence it has hurt revenue growth (+5% YoY) during the quarter. In the current order book of INR99b, the share of large orders is around 25%. Along with this, ABB’s quarterly order inflow run rate had already moved up to INR30-35b per quarter from INR20-25b. Due to delayed decision-making from a few sectors, we expect the order inflow trajectory to plateau over the next few quarters before it starts improving again.

Execution growth hurt by the high exposures to low-growth sectors

ABB caters to diverse businesses through its 23 market segments. The high-growth segments, such as data centers, railways, and electronics, are growing at 20%+; moderate growth segments like water, power T&D, renewable, automobiles, and buildings and infra are witnessing 10-12% growth; while low-growth segments, such as base industries, are growing at less than 10%. ABB has a large installed base across base industries, and nearly 45-50% of the business originates from this segment, which is growing at less than 10%. About 15-20% of the business is from the fast-growing segments, which are experiencing 20%+ growth, and the remaining 30-35% of the business comes from the moderate growth segments. Due to longer gestation of the projects in high-growth segments, revenue growth was hurt during the quarter. However, as the pace of growth improves across base industries, we expect that overall revenue growth will start improving again.

Electrification segment continues to see strong inflows

The electrification segment witnessed a 71% YoY increase in 3QCY24 in order inflows, driven by orders from data centers, railways, and exports. Execution pace stood at 11% YoY in 3QCY24 as large-sized orders from data centers, railways, etc. have longer gestation periods and are linked with project milestones. Execution will improve as large orders get executed. Demand momentum remains strong across power T&D, renewables, building, and infrastructure.

Motion segment’s performance hit by low capex and pricing pressure

The motion segment’s order inflows were hit by pricing pressure in LT motors as well as muted demand from core sectors such as cement and steel. Despite pricing pressure, ABB has benefited from its offerings in traction motors and drives as well as energy-efficient motors. Pricing erosion in this segment appears to have bottomed out, and ABB expects to benefit from improved demand in the coming quarters.

Process automation segment witnesses both inflow and revenue declines

The process automation segment’s inflows remained weak in 3QCY24 and even in 9MCY24 due to delays in decision-making from core industries. ABB gained on inflows from the process and energy industries and expects to gain further from the expansion of city gas distribution, blending projects, de-bottlenecking of existing refineries of state PSUs or the private sector, pharma sector expansion, and paint sector expansion, while inflows so far remained weak from the core industries. We expect this segment to witness improvement once private capex starts improving.

Valuation and recommendation

ABB is currently trading at 69.5x/59.7x P/E on CY25/CY26 estimates. We cut our estimates by 9%/10%/11% for CY24E/CY25E/CY26E to factor in 9MCY24 performance and the near-term impact on execution due to the longer execution cycle of orders. We thus expect revenue growth of 15%/18%/20% in CY24/CY25/ CY26 and margins of 19.0%/18.6%/18.0%, translating into a PAT growth of 51%/ 16%/16% for CY24/CY25/CY26E. Accordingly, we estimate a PAT CAGR of 27% over CY23-26. We reiterate our BUY rating with a DCF-based TP of INR8,500, implying a multiple of 72x P/E on Dec’26E EPS.

Key risks and concerns

Slowdown in order inflows, pricing pressure across segments, increased competition, supply chain issues, and geopolitical risks are a few risks that can affect our estimates and valuations.

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