>ABB INDIA: Growth in base orders remains healthy but revival in project capex, particularly in the Industrial segment, may take some time

UW: Recovery remains elusive; valuation premium unjustified

• Q4 earnings miss but orders surprise positively; beat driven largely by the booking of old HVDC order 
• Margin recovery remains elusive; negative surprises likely to continue as restructuring benefits appear backend loaded
• With further downside risk to earnings, valuation premium unjustified; reiterate UW with a TP of INR510

Earnings miss but orders surprise positively: ABB reported another set of weak results missing our Q4 EPS estimate by c8% but consensus by c50%. Sales growth of c6% came in line with our expectations and was driven primarily by the Power business, which grew c13%. Industry growth disappointed, as large automation projects failed to materialise. While the total order intake of INR22bn surprised positively, the beat was largely driven by the booking of the 9-month old HVDC order worth INR5.6bn. Management noted that growth in base orders remains healthy but revival in project capex, particularly in the Industrial segment, may take some time. The order backlog was largely in line with our expectations and stood at INR91bn, on the back of which management expects strong (double-digit) sales growth in the next couple of quarters.

Visibility on margin recovery remains low: While margins improved somewhat q-o-q, they once again fell short of expectations. Management attributed weak profitability to lower volumes, high input costs, project delays and poor project mix. We note that ABB India’s margins have remained depressed for two years now, more so than any of its competitors, and this may indicate poor project selection. In addition, restructuring benefits seem to be more backend-loaded as they have hardly provided the necessary impetus to the margins in last two years. Hence, while on a long term basis, ABB India may appear to be well placed to benefit from India’s growth story, in the near term the outlook certainly remains weak, particularly as expectations of recovery remain too high in spite of estimate downgrades in the last 8 quarters. We currently forecast EBITDA margins to improve to c7.7% in CY12 and c9.1% in CY13; however, if the project mix remains suboptimal, future results may warrant further downgrades.

We trim our CY12/13e EPS by c3%/5%; maintain UW with TP of INR510: As Q4 results came only c8% below our forecasts and the order intake was ahead of our estimates, we are only marginally reducing our CY12/13e earnings. Consequently, we keep our TP of INR510 unchanged and reiterate UW on the stock as we believe ABB will most likely continue to miss expectations in the near term. In addition, the stock remains priced for perfection, trading at c51x CY12e (Dec YE) PE and c35x CY13e PE, factoring in a solid beat to our numbers, which appears unlikely. Hence, we would take profits at current levels. Our target price is derived from our preferred EVA valuation methodology and implies a 12 month forward target PE multiple of c21x on 24 month forward estimated EPS of INR24.5.

RISH TRADER