Q1CY23 Review: ABB India: Delivering growth with profitability

8 May 2023 , 01:38 AM

ABB India exuded confidence in sustaining profitable growth by up grading margin outlook from 10% PBT margins to 10% net margins for CY23. Strong cyclical demand in traditional sectors, ABB’s targeted approach to penetrate deeper into emerging high-growth segments and a deeper reach in tier 2-4 towns – delivering impressive results. Favourable mix, better price realisations, productivity gains from factory automation and operating leverage has enabled OPMs in 11-12% range (50% jump since CY21).

Healthy growth visibility: 

While CY23 kick-started with 36% YoY jump in inflows in Q1, Mgmt highlighted good visibility of new orders and healthy gross margins in the current order book (Rs72bn, +37% YoY, 0.8x TTM sales). Its short-cycle product portfolio growth is broad based across geographies, customer categories and end markets. Base orders should grow by 12-15%, apart from projects and large orders.

Cyclical growth + structural changes aiding OPMs: 

Favourable demand-supply equation, better price realisation and acceptance of technology products, internal cost optimisation initiatives and an enhanced local manufacturing footprint has aided OPMs of 11.8% (12.8% adjusted for Rs232m one-time prudent warranty provision). ABB India’s OPMs are now at par with Siemens, despite higher royalty payouts.

Pursuing bolt-on acquisitions: 

In addition to expansion of its domestic manufacturing footprint, ABB is pursuing bolt-on acquisitions (global M&As with local footprint + local portfolios) leveraging its strong cash chest of Rs40bn (~75% of net worth). Analysts of IIFL Capital Services forecast revenue/ Ebitda and PAT Cagr of 25/31/41% in CY22-24.

Analysts of IIFL Capital Services upgrade CY23/24/25 Ebitda by 11/7/6% and EPS by 20/15/11%, respectively. ABB is likely to retain rich valuations, as earnings surprises and upgrades continue. Developments on bolt-on M&A will be watched out. Their Mar’25 TP implies ~11% upside. They maintain buy recommendation with a target price of Rs 4145.