ABB earnings support remains elusive

While valuations have moderated significantly, earnings support is weak

The ABB India stock is up four per cent since its results last week, on strong earnings growth and order inflow in the September quarter. Though net revenue at Rs 2,055 crore lagged the expectation, net profit increased by 38 per cent to Rs 81 crore, ahead of Street estimates.

What boosted the net profit, in addition to lower interest costs, was other income at Rs 37 crore due to profit on sale of assets. The key operational positive was a five per cent year-on-year increase in order inflow (Rs 2,967 crore), taking the order book to Rs 8,676 crore. This provides a year’s earnings visibility.

The stock's valuation has also moderated. Currently, ABB India trades at 45 times its price to estimated calendar year earnings. A year before, this ratio was 60-75 times. Even so, it is critical for earnings growth to be strong to justify the present level.

Though the September quarter saw four per cent revenue growth, its mainstay segments of power grids (40 per cent of total revenue) and electrification (18 per cent) saw a two and five per cent year-on-year shrinkage. Discrete automation and motion & process automation expanded by three per cent and 22 per cent, respectively.

However, ABB India has emerged as the lowest bidder for Power Grid Corporation's Raipur-Pugalur high-voltage direct current order. This is yet to reflect in the order book; once it does, it can provide a major boost, given the uniqueness and the expertise likely to be involved.

In the near term, the railway and renewable energy sectors, showing signs of turnaround in tendering, seem to be the key revenue engines. A majority of order inflow also comes from these sectors, where ABB India has reasonable dominance. While the Street is positive on order inflow, what requires monitoring is the operating margins, sown almost 100 basis points to seven per cent over a year. Most analysts had expected 8-8.5 per cent, given the improvement in the June quarter to eight per cent.

In fact the decline in the September quarter prompted analysts at Emkay Global Financial to lower their earnings per share target for calendar years (CYs) 2017 and 2018 by 12 per cent and 16 per cent, respectively, on lower revenue and margin assumptions. So, too, with brokerage Prabhudas Lilladher, which has cut its earnings target by 13 per cent for CY17. Analysts say although the scrip's valuations have moderated, they would keep an eye on any pick-up in revenue and margins to turn optimistic on the stock.