Q3CY24 Review: ABB India: Stellar performance

10 Nov 2023 , 01:35 PM

ABB India continues to exude outperformance in efficient execution of its short cycle orders, driving productivity gains and operating leverage. Early investment in distribution and reach is driving deeper penetration of its products while localisation has ensured competitive cost structure for the local market and opening up export mandates from global supply chains. Analysts of IIFL Capital Services raise CY23 EPS by 12% driven by a strong beat in Q3, keeping broad forecasts unchanged for CY24-25 which implies 20% revenue Cagr in CY23- 25 and 17% EPS Cagr, even as they moderate net margins by 60 bps, to 10.6%. Strong cash chest of Rs44bn will be deployed for organic and inorganic growth opportunities driving long term visibility. Analysts of IIFL Capital Services prefer ABB over Siemens and maintain BUY with TP of Rs5,047 (65x TPER).

 Demand momentum holding up: 

Even as short cycle base orders have seen some moderation in the near term, the volume of enquiries remain healthy with increasing share from tier 3-4 cities. Large orders (products and projects) driven by investments in focus sector and pick-up in core sector capex is aiding 23% growth in order book at Rs80bn. ABB will sustain Rs30bn inflow run-rate leveraging increasing penetration in emerging segments like data centres, electronics, warehousing and renewables. 

Magic of operating leverage shows up: 

While gross margins have sustained at 36% levels in the last 4 quarters (driven by better realisation orders, stable input prices, higher share of services and favourable sales mix), operating leverage has been the key driver for 2pps QoQ jump in OPM at 15.8% and net margins of 13% (Mgmt guidance: 10% net margins). While increase in share of projects and recent re-priced orders come in for execution in CY24, analysts of IIFL Capital Services expect OPMs to moderate back to 12% levels with 10% net margin profile. 

Portfolio enhancement and investing in capabilities: 

Deploying automation and industry 4.0 at its own factories has enabled ABB India to sharply improve its productivity and expand portfolio footprint with minimal brownfield capex. It continues to add local manufacturing portfolio for domestic & global market and is eyeing new greenfield facilities as well.