Valuation downgrades may keep ABB under pressure amid weak orders

Weak order inflows, margin strain and prolonged QCO-related friction are prompting analysts to trim estimates and flag valuation risks for ABB

ABB had steady execution through Q2FY26, but order inflows remained weak and margins were under pressure. Analysts are cutting revenue and earnings estimates and further disappointments could lead to valuation downgrades. 

A 570 basis points year-on-year (Y-o-Y) decline in the Q2 gross margin was higher than the 340 basis points decline of operating profit margin to around 15.1 per cent. The net profit margin at 12.4 per cent is also hovering at the lower end of the 12-15 per cent range in which ABB historically operates. 

The motion and electrification segments registered 9-10 per cent growth on the back of good execution, while process automation revenues were flat Y-o-Y with customers deferring spends. ABB is fighting intensifying competition, and it may have an unfavourable mix of products and there is lingering impact from the QCO (Quality Control Order) directive and more forex-related volatility. 

ABB’s order inflow was down 3 per cent Y-o-Y in Q2FY26. The major concern is the absence of large orders, which have been on a Y-o-Y decline for the last four quarters. Management says it could be another two quarters before positive demand momentum is visible. The motion segment is doing relatively better with orders up 23 per cent Y-o-Y. 

Given slow certification due to a limited number of testing labs, the friction from QCO may last a few more quarters, at least 3-4 more quarters, according to management. Certification in some categories could take until September 2026. So ABB is being forced to import, which exposes the company to cost inflation and forex volatility.

 

Commentators and management across the entire engineering segment (not only ABB) have pointed at weak private capex and uncertain geopolitical situation. The only growth areas appear to be data centres, electronics and renewables. Cement, steel, oil and gas (O&G) may lag in terms of revival.

 

Management says electrification revenues are steady. Base orders showed growth, but there were no large orders unlike in the corresponding quarter of last year when a large ~560 crore order was received. The segment margin dropped as competition eroded the ability to charge premium pricing. Motion saw good base order growth. The order book has some large system orders and long-term orders requiring 12-18 months for execution.

 

In process automation, order flow is flat due to caution on the part of customers. Profitability is being supported by optimisation efforts and higher service content (about 30 per cent) in offerings. The robotics segment recorded stable order intake, driven by automotive and electronics. Profitability is low due to unfavourable mix, and forex impact. Sluggish private capex demand is having a significant negative impact and premium pricing is difficult with intense competition.

 

Renewables is a key growth area along with battery energy storage systems (BESS) and green hydrogen. Metro expansions in various cities are contributing to base orders. There may be green shoots in cement, steel and O&G sectors. In data centres, hyperscalers are slowing, but co-location centres are seeing an uptick in demand.

 

The global parent is partnering with NVIDIA for solid-state drives in AI data centres, which makes globally cutting-edge technologies more generally available to Indian customers. ABB globally is also looking for big-ticket inorganic options which may have an effect in India. Locally, the focus remains on “bolt-on” opportunities for existing businesses.

 

Given slowing growth and margin pressures, investors are looking at valuation downgrades given that ABB is a market leader that has historically been very highly valued. Revenue growth estimates are being pulled back to mid-single digits from close to 10 per cent. Assuming that QCO pressures would continue to ease, however, there could be incremental improvement in margins.