>ABB (MOTILAL OSWAL)

● Order intake to improve in power segment; automation division under pressure: ABB India’s management indicated that while order intake in power segment is likely to be healthy, automation business is expected to witness slowdown. In CY08, segments like Iron and Steel, Cement and Aluminium contributed to bulk of the growth in the automation segment,
where the demand outlook is weak. We believe that automation products is the weakest link for ABB India (CY08: 23% of Revenues and 26% of EBIT) as it has the shortest order book (0.3x) and given the diverse business profile, capacity and resources need to be constantly adjusted depending on market conditions.

● EBITDA margins to decline with change in business mix, pricing pressures: We expect share of revenues of automation business to decline from 42% in CY08 to 40% in CY09 and 36% in CY10; and share in EBIT to decline from 48% in CY08 to 42% in CY09 and 36% in CY10. Given the change in composition towards power business in CY09 / CY10, we expect EBIT margins to decline from 10.7% in CY08 to 10.1% in CY09 and 9.4% in CY10.

● Higher than expected working capital, net cash at Rs2.8b in December 2008 (v/s Rs6.5b YoY): Working capital has witnessed deterioration and stands at 17% of revenues in CY08, v/s 8% in CY07. Also, net cash level has declined from Rs6.4b in December 2007 to Rs2.8b in December 2008.

● Financials and valuations: We are downgrading our earnings estimates for CY09 by 3.5% and CY10 by 6.7% to factor in the business headwinds. The stock trades at PER of 14.8x CY09 and 15.5x CY10. Maintain Neutral with price target of Rs368/sh (15x CY09E).

To see full report: ABB