ABB: After weak Q2, analysts hopeful of firm's recovery in key focus areas

Increased need for automation may help firm rebound faster than peers

Despite ABB India’s better-than-expected performance in the June quarter (Q2), the Street wasn't impressed, as the stock declined over 4 per cent after the announcement of results on Thursday evening. ABB's financial year is from January to December.

Revenue at Rs 986 crore declined 43 per cent year-on-year and excluding the divested solar business, it fell 38 per cent. As service revenues suffered on account of the lockdown, travel restrictions, and non-receipt of delivery clearances, all key business segments — industrial automation, electrification, motion and robotics — reported a 35-64 per cent decline in revenue. 

Electrification and robotics were most impacted.

Measures on cost control and favourable forex movement partly compensated for the lower revenue, as ABB reported a profit before interest, tax, depreciation and amortisation (Ebitda) versus expectations of an operating loss. Ebitda at Rs 23.4 crore, though, was down 81 per cent YoY. Profit before tax and exceptional items at Rs 21.4 crore was lower than last June quarter's Rs 112.7 crore.

The lockdown also impacted order inflows, which plunged to Rs 1,200 crore from Rs 1,989 crore last year. Excluding solar orders worth Rs 240 crore that were won last year, order inflow was still down over 31 per cent YoY.

 

 

The Street's worry stems from limited revenue visibility and a soft near-term outlook amid lack of clarity over restart of the domestic economy and continuing global uncertainty due to Covid-19. Moreover, ABB is suffering more due to the short-cycle nature of orders, which otherwise remained its strength, but is now hurting its revenue and order book. Order backlog as of June 30, 2020, at Rs 4,671 crore is flat YoY, and is roughly equal to a year's revenue.

Analysts, however, are hopeful and say that ABB will be among the few to rebound fast as the economy revives, given the significant opportunities in the industrial space, railways, metro rail, hotels, and food & beverages, besides industries looking to increase automation. Electrification segment outlook also remains decent and robotics will see opportunities from pharma and F&B.

Umesh Raut at YES Securities, who has a buy rating, said that the postponement of major capex to subsequent quarters due to Covid has led to a greater focus on plant upkeep, optimisation, automation and digital solutions, which should augur well for ABB.

What's more, June and July have seen double-digit year-on-year growth in order inflows/revenue, say analysts. Based on the trend, Motilal Oswal Securities has increased its CY20 and CY21 earnings estimates by 12 per cent and 6 per cent, respectively. Yet, even though ABB has tracked the Sensex since May lows, valuation at 76 times trailing 12 month earnings is expensive.