>ABB LIMITED (CITI)

Maintain Sell: Raising Our Target Price to Rs503

■ PAT 32% below expectations — 2QCY09 PAT at Rs836mn was down 37% YoY on sales growth of -7% YoY and 326bps EBITDA margin compression. Inflows down 4% YoY at Rs21bn and order backlog at Rs76bn up 13% YoY.

■ Severe price undercutting in the T&D segment — In the transmission segment prices have declined 15-20% since Jan09 and fallen 25-30% in the distribution segment (lower technology and intense competition). With the entry of Korean players there is a panic reaction in market with major price undercutting. Fall in commodity prices will provide some cushion so full impact will not come to the bottom line but margins will be definitely hit.

■ Earnings revised down 7-8% — To factor in marginally lower sales and structurally lower EBITDA margins in the face of severe competition. We expect ABB to grow EPS at a CAGR of 8% over CY08-11E with average RoE 20%.

■ Maintain Sell (3L) — We believe that consensus estimates are more aggressive (higher by 5-13%) than ABB can achieve and we find no merit in investors according a CY09E P/E multiple of > 25x when 1) earnings should de-grow in CY09E and 2) RoEs are moving to 20% levels.

■ Target price increased to Rs503 — Up from Rs380 to factor in 1) our earnings revision; 2) increase in target P/E multiple to 20x (from 15x) earlier; and (3) roll forward of our target multiple to Dec10 from June10 earlier. Our target P/E multiple is set in line with that of Areva T&D and ~ 10% discount to BHEL.

To see full report: ABB