ABB India: Robust growth, but cautions on near term

18 Apr 2024 , 11:16 AM

In CY23 AR, ABB India focuses on growth through portfolio expansion across 23 segments (3x in 4 yrs), wherein the share of emerging segments in the order book has doubled in last 5 years. Key takeaways are: a) Productization and portfolio realignment have strengthened India portfolio and GTM, b) cautions of slowdown in core sector inflows in H1CY24 due to general elections after 2Y Cagr of 27%, c) healthy FCF; OCF/PAT was robust at 109%, d) strong RoE (23%), incremental RoIC (85%) through a mix of leaner NWC cycle, expansion in OPM (+300bps) and higher asset turns, and e) better receivable quality with ECL provision declining to 2.6% of sales. Stretched valuations in the near term, however, cap upsides while analysts of IIFL Securities forecast a modest Sales/PAT Cagr of 21/18% in CY23-26 with moderation in OPMs.

Favourable mix drives growth:

Services (5% of mix) grew 26% YoY to Rs5.2bn (2Y Cagr 24%). Higher localisation, short-cycle orders from manufacturing & infra, and thrust on efficiency upgrades aided 22% YoY in product revenue (95% of sales). Electronics grew fastest at 42%, followed by 32% growth across various new product portfolio while baseline products like switchgears and motors grew by 18/6%, resp. Domestic revenues (90% share, 24% YoY) outpace export revenue (7% YoY), given robust uptick in the domestic capex cycle.

Multiple levers for 3pps OPM expansion:

Despite 35% YoY jump in sourcing from group entities (at 37% of Cogs) for new technologies, Gross margins increased 150 bps YoY driven by better pricing and favourable input prices. Share of payments to group entities (IT + RTM fees) reduced 50 bps YoY, to 6.1% of sales. First time post PG demerger, employee base increased 8% YoY to support new factories and growth needs.

Robust Cash flows soften RoE:

Strong operating performance and negative NWC cycle aided robust cash chest of Rs48bn, +53% YoY (80% of NW) with nominal capex of Rs1.8bn. Dividend pay-out ratio jumped to 50% vs 11% in CY22 with special dividend in CY23.