1
May 11, 2018
ABB India Ltd
Industrials - Electrical Equipment
ABB India Ltd
India Research - Stock Broking
BUY
Bloomberg Code: ABB IN
Recommendation (Rs.)
CMP (as on May 10, 2018) 1268
Target Price 1575
Previous Target Price 1693
Upside (%) 24
Stock Information
Mkt Cap (Rs.Bn/US$ Bn) 268.7 / 4.0
52-wk High/Low (Rs.) 1749 / 1175
3M Avg. daily value (Rs. mn)
132.8
Beta (x) 0.8
Sensex/Nifty 35246 / 10717
O/S Shares(mn) 211.9
Face Value (Rs.) 2.0
Shareholding Pattern (%)
Promoters 75.0
FIIs 3.2
DIIs 13.6
Others 8.2
Stock Performance (%)
1M 3M 6M 12M
Absolute (1) (20) (6) (17)
Relative to Sensex (4) (23) (12) (29)
Source: Bloomberg
Relative Performance*
Source: Bloomberg; *Index 100
For private circulation only. For important information about Karvy’s rating system and other disclosures
refer to the end of this material. Karvy Stock Broking Research is available on Thomson Reuters &
Bloomberg (Code: KRVY<GO>)
Exhibit 1: Valuation Summary
YE Dec (Rs. Mn) CY15 CY16 CY17 CY18E CY19E
Net Sales 81403 86422 90873 102587 119236
EBITDA 7125 6945 7361 8772 11591
EBITDA Margin (%) 8.8 8.0 8.1 8.6 9.7
Net Prot 2999 3745 4200 5022 6811
EPS (Rs.) 14.2 17.7 19.8 23.7 32.1
RoE (%) 10.0 11.4 11.6 12.5 14.9
PE (x) 79.0 58.9 70.8 53.5 39.5
Source: Company, Karvy Research; *Represents multiples for CY15-CY17 are based on historic market price
Micro Factors Aiding Growth for ABB
ABB revenue grew by 17% on the back of strong growth in Power Grid (PG)
segment as the company has started booking High-Voltage Direct Current (HVDC)
revenues and higher traction in Robotics and Motion (RM) which grew by 20%
in Q1CY18. Industrial Automation (IA) was at and Electrication Products (EP)
was down by 5% in quarter. Gross margin dropped due to unfavourable revenue
mix and commodity ination which limited earnings growth to 14%. Base orders
grew by 14% and inows were higher by 10% in Q1CY18. Our earnings estimate
for CY18E/19E has been brought down by ~1-2% and we also raise our discount
to 25% to its long term average multiple (~65, 10 yr average) and value ABB at
49x CY19E earning with a ‘BUY’ rating for a target of Rs. 1575. Lack of large order
inow remains a key concern for the stock.
Order backlog cover 1.2x of revenue: At Rs. 116 bn backlog was lower by
3% by Q1CY18 which covers 1.2x TTM revenue. Of this, base orders constitute
~85-90% and 10% of HVDC has been booked till Q1CY18. Demand originated from
consumption based sectors, transportation, RE apart from productivity and eciency
focused investment. Exports (~18% of revenue), Services (~13%) Railways (7-8%)
and Solar (~6%) did well. Management commented that Solar has become part of
exports portfolio and expect it to gain traction along with overall exports.
Earnings marginally revised for CY18E/19E: Though demand from traditional
market remains low, ABB gained traction in all its new verticals. We take into account
management commentary on demand from SEBs particularly T&D segment which
could compensate for lower PGCIL orders, export of solar products, services and
transportation (railways and metros). In Q1CY18 gross margins dropped by 440bps
to 31.8%. However savings in employee costs (~40bps) and other expenses
(~410bps) led to at EBITDA of 7.5%. We moderately tweak our margins down to
accommodate for higher material costs and forex impact.
Valuation and Risks
We expect ABB to attain earnings growth of 27% in next two years. However, lack
of large inows remain a key concern. At CMP of Rs. 1268, ABB is available at 39x
CY19E earnings and we maintain our ‘BUY’ rating for a target price of Rs. 1575.
Lack of large order inows and commodity ination remains a key risk.
Earnings Revision (%)
YE Dec CY18E CY19E
Sales (%) 1.3 1.3
EBITDA (%) (1.2) (2.0)
PAT (%) (1.3) (2.2)
Source: Karvy Research
L
L
L
L
L
L
Company Update
Analysts Contact
De Arul Kaarthick
040 - 3321 6280
arul.kaarthick@karvy.com
75
85
95
105
115
125
May-17
Jun-17
Jul-17
Aug -17
Sep-17
Oct-17
Nov-17
Dec
-17
Jan-18
Feb-18
Mar -18
Apr-18
ABB India Ltd
Sensex
2
May 11, 2018
ABB India Ltd
Key takeaways from quarterly earnings
Demand is from consumer led sector like F&B, Auto. Other than that productivity
gaining investments in Cement and Mining have aided growth. Metal demand
remains subdued. However, BS VI related investments could pickup in renery
segment.
Focusing on fast charging in the EV infra segment rather than the LV products and
ABB is not interested in the upcoming ELSS tender.
ABB India being the sourcing hub for Solar products opens up huge opportunity. At
present ABB exports to US and Middle East markets. Management believes pricing
pressure to persist across Solar value chain.
Its Vadodara factory has installed micro grid and sees large opportunity in micro
grid which could serve power requirement for about ~3 hrs / ~1.5MW.
HVDC project carries higher material cost, however, operating leverage could help
mitigate the impact as commodity ination could eat into the margins.
Focused investment in digitization (ABB Ability Platform) is showing up as
un-allocable expenses apart from brand building costs and absence of tax write
back in this quarter.
Gross margins dropped by
~440bps to 31.8%
New investments gaining
traction
Operating leverage
improved in PG and in RM
& EP unfavourable product
mix dented protability
Exhibit 2: Q1CY18
YE Dec (Rs. Mn) Q1CY18 Q4CY17 QoQ % Q1CY17 YoY %
Turnover 25255 27794 (9.1) 21512 17.4
Expenditure 23365 24857 (6.0) 19903 17.4
EBITDA 1890 2937 (35.7) 1609 17.4
Depreciation 232 178 29.8 212 9.3
EBIT 1658 2759 (39.9) 1397 18.7
Interest 356 432 (17.6) 376 (5.3)
PBT 1302 2327 (44.1) 1021 27.5
Other Income 269 188 43.1 318 (15.5)
Ta x 546 800 (31.7) 440 24.2
PAT 1025 1715 (40.2) 900 13.9
EBITDA Margin (%) 7.5 10.6 (309) bps 7.5 0 bps
PBT Margin (%) 5.2 8.4 (322) bps 4.7 41 bps
Net Prot Margin (%) 4.1 6.2 (211) bps 4.2 (12) bps
Source: Company, Karvy Research
Exhibit 3: Segmental Financials
YE Dec (Rs. Mn) Q1CY18 Q4CY17 QoQ % Q1CY17 YoY %
Segment-wise revenues
Robotics and Motion 5969 5318 12.2 4989 19.6
Electrication Products 6509 6332 2.8 6890 (5.5)
Industrial Automation 3024 4687 (35.5) 2988 1.2
Power Grids 9698 10899 (11.0) 6851 41.5
Segment-wise EBIT
Robotics and Motion 431 540 (20.1) 381 13.2
Electrication Products 670 924 (27.5) 782 (14.4)
Industrial Automation 394 881 (55.2) 114 246.6
Power Grids 1026 1483 (30.8) 625 64.1
Segment-wise EBIT Margin (%)
Robotics and Motion 7.2 10.1 (292) bps 7.6 (41) bps
Electrication Products 10.3 14.6 (431) bps 11.4 (106) bps
Industrial Automation 13.0 18.8 (574) bps 3.8 924 bps
Power Grids 10.6 13.6 (303) bps 9.1 145 bps
Source: Company, Karvy Research
3
May 11, 2018
ABB India Ltd
Decadal PE for ABB
India averages to 65x
1yr forward earnings.
Its a combination of
MNC premium, liquidity
premium and technological
capability premium
Exhibit 4: Quarterly Revenue Trend
Source: Company, Karvy Research
Exhibit 5: Quarterly EBIT Trend
Source: Company, Karvy Research
Exhibit 7: ABB India-PE Valuation
Source: Bloomberg, Karvy Research
Exhibit 6: Change in Earnings Estimates
YE Dec - Standalone (Rs. Mn)
CY18E CY19E
Old New % Change Old New % Change
Net Sales 101303 102587 1.3 117692 119236 1.3
EBITDA 8875 8772 (1.2) 11829 11591 (2.0)
EBITDA Margin (%) 8.8 8.6 (21) bps 10.1 9.7 (33) bps
Adj. PAT 5089 5022 (1.3) 6966 6811 (2.2)
EPS (Rs.) 24.0 23.7 (1.3) 32.9 32.1 (2.3)
Source: Karvy Research
45
43
52
77
96
90
107
69
96
77
97
62
66
77
67
54
49
70
69
64
47
63
65
48
51
61
45
46
48
55
50
46
45
53
60
31
28
39
30
36
40
43
19
35
29
47
3
0
100
200
300
Q215
Q315
Q415
Q116
Q216
Q316
Q416
Q117
Q217
Q317
Q417
Q118
Power Grids
Electrification Products
Robotics and Motion
Industrial Automation
2.4
1.6
6.0
4.9
4.5
1.7
5.8
6.3
7.0
5.2
6.6
10.3
5.0
6.9
9.5
9.4
5.8
4.8
8.4
7.8
6.5
4.6
9.2
6.7
4.0
4.4
1.8
4.6
1.1
2.0
9.5
3.8
3.1
4.0
5.4
4.3
2.8
2.5
4.8
1.8
2.9
4.6
6.5
1.1
3.2
3.9
8.8
3.9
0
10
20
30
Q215
Q315
Q415
Q116
Q216
Q316
Q416
Q117
Q217
Q317
Q417
Q118
Power Grids
Electrification Products
Robotics and Motion
Industrial Automation
Decadal PE for the Capital
Goods index averages to
27x 1yr forward earnings
Exhibit 8: S&P BSE Capital Goods Index - 10 yr PE Valuation
Source: Bloomberg, Karvy Research
19
24
29
34
39
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
S&P BSE Capital Goods Index
Average
+1SD
-1SD
40
50
60
70
80
90
2012
2013
2014
2015
2016
2017
2018
1 yr Fwd PE
Average P/E
+1 SD
-1 SD
4
May 11, 2018
ABB India Ltd
Financials
Exhibit 9: Income Statement
YE Dec (Rs. Mn) CY15 CY16 CY17 CY18E CY19E
Revenues 81403 86422 90873 102587 119236
Growth (%) 5.3 6.2 5.2 12.9 16.2
Operating Expenses 74278 79477 83513 93815 107645
EBITDA 7125 6945 7361 8772 11591
Growth (%) 28.2 (2.5) 6.0 19.2 32.1
Depreciation & Amortization 1598 1510 1580 1522 1603
Other Income 1382 2544 2469 1734 1994
EBIT 5527 5436 5781 7250 9988
Interest Expenses 912 919 773 10 8
PBT 4746 5733 6218 7691 10430
Tax 1747 1988 2018 2669 3619
Adjusted PAT 2999 3745 4200 5022 6811
Growth (%) 31.2 24.9 12.1 19.6 35.6
Source: Company, Karvy Research
Exhibit 10: Balance Sheet
YE Dec (Rs. Mn) CY15 CY16 CY17 CY18E CY19E
Cash & Equivalents 5736 11892 14917 11831 13230
Sundry Debtors 33909 29707 27878 37468 41918
Inventory 9396 9403 11536 13044 15155
Loans & Advances 10967 12921 18493 13044 15155
Investments 164 163 2706 2706 2706
Net Block 13427 13227 13351 13132 12764
Total Assets 73599 77312 88881 91227 100928
Current Liabilities & Provisions 37513 38406 52732 51134 55265
Debt 6000 6039 80 61 51
Total Liabilities 43513 44445 52812 51195 55316
Shareholders Equity 424 424 424 424 424
Reserves & Surplus 29662 32443 35645 39608 45188
Total Networth 30086 32867 36069 40032 45611
Total Networth & Liabilities 73599 77312 88881 91227 100928
Source: Company, Karvy Research
We assume RM, EP and
PG to grow between
18-20% in the next two
years
Commodity ination
remains a key risk to
protability
ABB could maintain lower
leverage on its balance
sheet for next two years
5
May 11, 2018
ABB India Ltd
Exhibit 11: Cash Flow Statement
YE Dec (Rs. Mn) CY15 CY16 CY17 CY18E CY19E
PBT 4746 5733 6218 7691 10430
Depreciation 1598 1510 1580 1522 1603
Interest 912 919 773 10 8
Inc/dec in Net WC (1285) 2645 8450 (7248) (4539)
Ta x (1747) (1988) (2018) (2669) (3619)
Others (130) (1216) (1210) (450) (450)
Cash ow from operating activities 4093 7602 13792 (1144) 3432
Inc/dec in capital expenditure (710) (1309) (1704) (1303) (1235)
Inc/dec in investments 0 1 (2543) 0 0
Others 130 1216 1210 450 450
Cash ow from investing activities (580) (93) (3038) (853) (785)
Inc/dec in borrowings 2244 39 (5959) (19) (10)
Dividend paid (945) (1021) (1086) (1059) (1231)
Interest paid (912) (919) (773) (10) (8)
Others (426) 548 89 0 0
Cash ow from nancing activities (38) (1353) (7730) (1088) (1249)
Net change in cash 3475 6156 3025 (3085) 1399
Source: Company, Karvy Research
Exhibit 12: Key Ratios
YE Dec CY15 CY16 CY17 CY18E CY19E
EBITDA Margin (%) 8.8 8.0 8.1 8.6 9.7
EBIT Margin (%) 6.8 6.3 6.4 7.1 8.4
Net Prot Margin (%) 3.7 4.3 4.6 4.9 5.7
Dividend Payout Ratio (%) 46.3 35.5 34.3 26.1 22.6
Net Debt/Equity (x) 0.01 (0.18) (0.41) (0.29) (0.29)
RoE (%) 10.0 11.4 11.6 12.5 14.9
RoCE (%) 8.3 9.6 11.6 12.5 14.9
Source: Company, Karvy Research
Exhibit 13: Valuation Parameters
YE Dec CY15 CY16 CY17 CY18E CY19E
EPS (Rs.) 14.2 17.7 19.8 23.7 32.1
DPS (Rs.) 3.7 4.0 4.4 5.0 5.8
BVPS (Rs.) 137.3 148.5 162.7 179.6 202.1
PE (x)* 79.0 58.9 70.8 53.5 39.5
P/BV (x)* 8.1 7.0 8.6 7.1 6.3
EV/EBITDA (x)* 33.3 30.9 38.4 29.3 22.0
EV/Sales (x)* 2.9 2.5 3.1 2.5 2.1
Source: Company, Karvy Research; *Represents multiples for CY15 - CY17 are based on historic market price
Going forward with cash
in focus, working capital
position to improve
6
May 11, 2018
ABB India Ltd
Stock Ratings Absolute Returns
Buy : > 15%
Hold : 5-15%
Sell : < 5%
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