Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities.
We maintain SELL on ABB India Ltd. (ABB) with an increased target price of Rs 827/sh (42x), rolling forward to 2QCY22. The ABB business model is overly sensitive to operating leverage. ~45 days of revenue shortfall (offset partly by Mar-20 deferred billing) led to a sharp erosion in profitability with revenue/EBIDTA/APAT de-growing 43/81/79% YoY. With clients conserving capital and global growth outlook bleak, new capex headwinds remain, both locally and globally. In a restricted capex environment and deflationary expectations, high competitive intensity will curb further margin expansion. We believe the headwinds are not fully priced into the current rich valuations.
2QCY20 beat aided by 1QCY20 revenue deferrals, cost-cutting: Revenue came in at Rs 9.8bn (24% beat). EBITDA stood at Rs 234mn (estimate of Rs – 867mn). HSIE EBITDA estimate miss was on account of ABB reporting positive delta on (1) lower-than-expected cut in employee cost (+Rs 400mn QoQ), (2) contribution delta from higher than expected execution (+Rs 671mn), and (3) favourable forex gains of Rs 340mn. The total delta was Rs 1,071mn vs our estimate of Rs 867mn loss. The net would have been Rs 204mn EBIDTA vs Rs 234mn reported. While material expenses remain stable at ~65%, employee expenses declined due to cuts in bonuses and performance incentives. APAT: Rs 148mn (vs our estimate of Rs -681mn).
Resilient order inflows: Order inflows for 2QCY20 stood at Rs 12bn ( -32% YoY excluding Rs 2.4bn solar inverter biz orders in 2QCY19) despite the 45- days shutdown due to COVID lockdown. With current order book at Rs 46.7bn, there is revenue visibility for the next 6-9 months as ABB is expected to maintain book-bill with execution progressing at a decent pace across all five factories.
Measures to stay resilient in CY20: To tackle short-term challenges, ABB is focusing on (1) virtual/remote client servicing via sensors & cloud, (2) cost-cutting measures till headwinds remain, (3) Concerted efforts towards sectors where green shoots are emerging viz. Data Centers/Warehousing, Food & Beverage, Pharma, and Buildings & Factories, rather than spreading arms everywhere, and (4) conserving cash and further streamlining WC.
Shares of ABB India Limited was last trading in BSE at Rs.892 as compared to the previous close of Rs. 912.15. The total number of shares traded during the day was 4304 in over 573 trades.
The stock hit an intraday high of Rs. 912 and intraday low of 890.05. The net turnover during the day was Rs. 3857514.
