High valuation may cap significant upside in ABB India's stock

ABB India’s performance during the January-March quarter (Q1 of CY25) was disappointing with weaker revenue booking.

 

The process automation segment reported a 19 per cent year-on-year (Y-o-Y) decline in revenue as customers deferred deliveries. This led to low earnings before interest, taxes, depreciation and amortisation (Ebitda) as well as earnings growth.

 

ABB India follows the January-December accounting year.

 

Order inflow was stable at ₹3,750 crore with 4 per cent Y-o-Y growth in inflows, taking the order book to ₹9,960 crore (up 11 per cent Y-o-Y).

 

The uncertain global macro may lead to near-term challenges.

 

ABB’s Q1CY25 revenue at ₹3,160 crore (up 3 per cent) was impacted by lower revenue booking in the process automation and electrification segments.

 

The robotics and motion business’s revenue stood at ₹1,240 crore (up 11 per cent Y-o-Y).

 

For the electrification products business, it was ₹1,360 crore (up 5 per cent) and for process automation, it was ₹580 crore (down 19 per cent).

 

ABB is expanding reach in Tier-II and below, and expects the momentum to continue. Key end-markets include industrial, data centres, metros & railways, renewables, waste & wastewater, automotive, warehouse & logistics, building & infra.

 

Gross margin improved 150 basis points (bps) and stood at 41.7 per cent. It was supported by good revenue mix, softer commodity prices, increased localisation, supply chain optimisation, and improved capacity utilisation.

 

Ebitda stood at ₹580 crore (up 3 per cent Y-o-Y), in line with Street estimates. Ebitda margin was 18.5 per cent (up 10 bps).

 

Services and export revenue also led to margin improvement.

 

ABB’s order inflow of ₹3,750 crore in Q1 of CY25 was led by the robotics segment (up 114 per cent).

 

Muted ordering was seen in the process automation segment (down 16 per cent).

 

Order backlog of ₹9,960 crore is about 0.8x of trailing 12 months’ revenue. Inquiry level remains healthy across sectors.

 

The company sees a break-up of revenues into products (73 per cent), projects (13 per cent) and services (14 per cent). The segment contribution was — electrification 42 per cent, motion 34 per cent, process automation 19 per cent and robotics 5 per cent.

 

Orders for ABB India grew by 4 per cent and for ABB Global by 1 per cent in Q1.

 

Large orders consisted of propulsion equipment in traction motors.

 

Data centres, renewables and electronics have seen the highest growth, while there is moderate growth in automotive, water, wastewater, pharma, healthcare, building and infrastructure.

 

Low growth segments include marine & ports, metals & mining, power distribution, pulp and paper, and cement.

 

ABB India believes it is stabilising at a base order run-rate of ₹3,500 crore per quarter and about 45 per cent of the volumes come from low-volume segments.

 

The management believes that services revenue should rise to 15 per cent of overall sales compared to the current contribution of 12-13 per cent.

 

Export orders grew 40 per cent in Q1CY25. Guidance is for 12–15 per cent PAT margin on a sustainable basis.

 

ABB continues targeting 23 market segments with its portfolio of 18 divisions, and penetration to Tier II, III cities and below.

 

Increasing share of long-cycle business may compress margins.

 

The management indicated delays in finalisation of large orders. While public capital expenditure (capex) is sustaining, recovery in private capex may be a growth trigger.

 

ABB holds onto its leadership position. But the delay in finalisation of large-ticket orders in the process automation and electrification segment is a concern.

 

Analysts must monitor this and downgrade revenues and EPS expectations accordingly. The stock is very highly valued at over 60x price-to-earnings ratio.

 

According to Bloomberg, 14 of the 21 analysts polled in May are bullish on the stock; three are bearish and the remaining four neutral.

 

Their average one-year target price is ₹6,166. The stock, which gained 0.85 per cent on Tuesday to close at ₹5,636, is up 3.5 per cent post results on May 9 (post market hours).