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Margin outperformance continues

ABB India reported mixed results in 2QCY24 as revenue was weak but margins continued to beat estimates for another quarter. Revenue miss was due to delayed revenue booking in some orders, while margin outperformance was mainly driven by pricing gains. We believe that operating leverage gives limited scope to improve margins, but they will be driven by pricing gains from an improved share of high-margin segments. We expect the company to benefit from its pricing advantage, 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 raise our EPS estimates for CY24/CY25 by 7%/2% to bake in slightly lower revenues and higher margins. We maintain our BUY rating with a DCF-based TP of INR9,500, implying 72x P/E on Sep’26E EPS. ABB remains our top pick in the sector.

Strong margins offset weakness in revenues

ABB India’s 2Q results continued to reflect strong pricing power of the company and its focus on high-margin segments. Better-than-expected margins offset the weak revenue performance, resulting in nearly in-line PAT at INR4.4b (est. INR4.5b). Revenue at INR28.3b grew 13% YoY, driven by 23%/23%/16% YoY growth in Robotics & Motion/Electrification/Process Automation. Revenues could have been higher by nearly INR2b, but the postponement was due to the alignment with customer delivery schedule. Driven by a favorable product mix and better margin orders, gross margin saw a strong expansion of 630bp YoY/ 260bp QoQ, while employee costs and other expenses as a percentage of sales moved up YoY. EBITDA margin stood at 19.2%, up 530bp YoY. Accordingly, EBITDA grew 56% YoY to INR5.4b. PAT came in line at INR4.4b, up 50% YoY, led by robust operational performance and higher other income (+16% YoY). Order inflows came in at INR34.3b, up 13% YoY, taking the order book to INR95.1b (up 23% YoY). Base orders remained flat YoY due to elections.

Margin outperformance driven by pricing gains

PBIT margins remained strong for all segments, with 22.5%/23.1%/16.2% EBIT margins for Robotics & motion/Electrification/Process Automation. This is a sharp jump YoY, indicating that ABB India continued to benefit from product mix and pricing. It has benefited from internal factors such as cost optimization, improved utilization and localization, which provided a 350bp YoY margin gain. External factors such as customer preference for ABB’s better quality products, market penetration, and higher services and exports. In motion segment, ABB India’s more than half of motor production is from IE3 and IE4 motors. It has seen good demand for its motors even though IE2 motors mostly dominate the market. In electrification segment, it is benefitting froms favorable demand-supply scenario and preference for quality players, resulting in pricing gains.

MO and EL will continue to gain on strong demand from FMIG

ABB India’s motion and electrification segments are benefiting from strong demand for fast-moving industrial goods (FMIG), where the company is providing engineered to order types of products. These industrial customers tend to prefer quality players and have better pricing than retail customers. Demand for FMIG is higher during an uptrend and ABB is capitalizing on this demand from its motion and electrification segment. This demand can continue for another 5-10 years and industries are comfortable paying higher pricing. We thus believe that margins in these two segments will remain higher over the next few years.

ABB India continues to outpace parent in revenue growth and margins

ABB India continues to perform better than its parent in revenue growth and margins in 2QCY24 too. ABB India’s order inflows and revenues grew by 13% YoY each, far ahead of its parent’s flat inflows and 4% revenue growth. The parent’s inflow growth was impacted by a decline in the Americas (-4% YoY), Europe (-4% YoY) and China (-7% YoY), while Indian markets continued to grow at a faster pace. Moreover, ABB India is benefiting from higher localization, expanded offerings across markets and geographies, client preference for quality players, and productivity measures.

Overall demand outlook remains strong

The emerging and high-growth segments like data centers, railways and metros continue to provide growth momentum to overall order inflows. While energy and metal segments remain growth drivers, mining and buildings are witnessing consolidation. Renewables, water and power distribution would be other catalysts of business growth. The government’s focus on low carbon technology and energy transition is also providing a leg up to different business segments of ABB India.

Valuation and recommendation

ABB India is currently trading at 69.8x/59.8x P/E on CY25/CY26 estimates. We raise near-term revenue estimates to account for a higher share of long gestation projects in the overall order book. We also increase our margin estimates to factor in better pricing power in the motion and electrification segments. We thus expect revenue growth of 27%/21%/20% in CY24/CY25/CY26 and margins of 19.1%/18.5%/18.0%, translating into PAT growth of 65%/18%/17% for CY24E/CY25E/CY26E. Accordingly, we estimate a PAT CAGR of 31% over CY23-26. We maintain our BUY rating with a DCF-based TP of INR9,500, implying a multiple of 72x P/E on Sep’26E EPS. The company has the best RoIC in the capital goods sector. It will continue to benefit from an improved addressable market and will improve its share of high-growth segments. Key risks and concerns Slowdown in order inflows, pricing pressure across segments, increased competition, supply chain issues, geopolitical risks are few risks that can affect our estimates and valuations.

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