High valuations may cap further upside in ABB stock; prospects 'positive'

The company posted better than expected results for the March quarter, and prospects remain strong

ABB India beat expectations with net sales up 23 per cent year-on-year (YoY) and earnings before interest, tax, depreciation and amortisation (Ebitda) posting a strong growth of 52 per cent in the first quarter of the 2023 calendar year or Q1CY23 (the company has year-end on Dec 31). The sales growth came from the electrification and motion segments, where revenues grew 16 per cent and 36 per cent – YoY -- respectively. Process automation also grew by 23 per cent YoY. Robotics was relatively flat at 4 per cent growth.

The operating profit margins (OPM) rose 230 basis points (bps) YoY to 11.8 per cent with better capacity utilisation and favourable mix. Order inflows were up 36 per cent YoY at Rs 3,130 crore, and the order book stood at Rs 7,170 crore, which is up 37 per cent YoY – this is roughly 80 per cent of annual revenue.

The substantial cash balance of Rs 3,940 crore could help target growth via acquisitions. The parent, ABB Global, reported healthy growth in order inflows (+9 per cent YoY) and anticipates further growth of 10 per cent in CY23. Most orders are short-cycle.

Gross margins improved by 230 bps YoY, to 36.3 per cent. The OPM rose due to a decline in staff expenses by 120 bps YoY to 7.8 per cent. Ebitda growth of 52 per cent YoY took it to Rs 290 crore and all segments reported some margin expansion. Other income grew by 94 per cent YoY to Rs 72 crore, due to high cash balances. The adjusted profit after tax (PAT) was Rs 250 crore, up 70 per cent YoY.

Electrical and mobility segments saw the largest inflow of orders. Key orders bagged during the quarter include power handling systems for a spun-dyed specialty fibre and paints conglomerate, Robotics solutions for painting EV cars, smart power products for metals major and power distribution solutions for a major data centre. The management expects continuity in order inflows on the back of government spending on infrastructure projects. Increased penetration in Tier-II & III cities is paying off. The management is also guiding for net margins to cross the 10 per cent mark.

According to the company, the order pipeline continues to provide strong inflow visibility for the next couple of quarters, from potential clients in data centres, gas distribution, power distribution, renewables, heavy industries (due to green field as well as brown field expansion) etc. Services order inflows were up 37 per cent YoY, across divisions. The company is also maintaining high inventory due to possible supply chain issues although the chain seems to be normalising. If inventory can be reduced to normal pre-Covid-19 levels, that would add to margins.

Management highlighted that products manufactured in India currently use 30 per cent more energy. Clients investing in energy efficient products and trying to lower carbon footprint is one driver. New buildings and hotels are inducing ABB’s building management systems to reduce the energy footprint. Exports have a lower share since domestic growth is faster. As cash balances are deployed for growth, other income will fall. As ABB caters to 18 end-segments with different cyclicality, there will always be softness in some segments, and growth in others.

The company is very highly valued for an engineering concern but so are competitors like Siemens. The ABB stock has risen 10 per cent since results last Wednesday (May 3). Some analysts suggest ‘reduce’ purely on the basis of valuations but most are positive on the prospects. Target valuations range between Rs 3,444 (below the current market price of Rs 3,814) and Rs 4,145.