Strong outlook, sector re-rating to support ABB stock after Q2 results

ABB declared strong second quarter of financial year 2023-24 (Q2FY24) results with strong revenue growth and expanding operating profit margins. 

The management, banking on visible green shoots in the economy, guided to better order inflows. Sectors like food and beverage, data centres, warehouse logistics, rail and metros, electronics and renewables are driving growth with interest in process automation. Motion and electrification have also maintained strong order-inflow momentum and the company is expanding its presence in Tier-II and –III cities.
 

ABB is a key beneficiary of the pickup in the capex cycle. The margins could moderate from July-Sep 2023 quarter levels due to normalising of forex and commodity-related gains. The company can rely on the increasing service mix, benign commodity prices and technology leadership to support margins. The sector is also seeing positive valuation re-rating at the market. ABB also has strong support from its MNC parents and increasing localisation.
 

The revenue growth accelerated to 31 per cent year-on-year (Y-o-Y) (22 per cent Y-o-Y each in the last two quarters) with revenue at Rs 2,770 crore. The motion business revenue stood at Rs 980 crore (11 per cent increase Y-o-Y); electrification products business at Rs 1,040 crore (18 per cent increase Y-o-Y); process automation at Rs 680 crore (93 per cent increase Y-o-Y); and robotics at Rs 120 crore (105 per cent increase Y-o-Y). 
 

Robotics & discrete automation nearly doubled revenue, while electrification and motion saw double-digit revenue growth.

The operating profit margin is at a multi-quarter high of 15.8 per cent, up 580 basis points (bps) Y-o-Y and 190 bps quarter-on-quarter (Q-o-Q) driven by operating leverage. The gross margin came in at a normal range at 39.2 per cent (increase of 130bps Y-o-Y and 10bps Q-o-Q), but strong revenue growth-led operating leverage helped operating profit margins expand. Margin expansion was visible except in robotics & discrete automation.
 

The net profit (adjusted for continuing businesses) grew by 79 per cent Y-o-Y to Rs 362 crore. Increased service-revenue share at 16 per cent for Q2FY24 (vs 12-13 per cent earlier normalised) and better cost to raw material differential also helped margin expansion. The order inflows were Rs 3,000 crore, up 14 per cent Y-o-Y with a notably high growth in electrification from base orders and renewable energy. 
 

Total order book stands at around Rs 8,000 crore, which is approximately 80 per cent of estimated FY24 revenues and the company is confident of smooth execution.  
 

Management guidance highlighted that project and process automation has gained traction with industries such as metals and mining, and oil showing interest. Orders booked when raw material prices were higher has also led to margin expansion. In the last three quarters, large orders have picked up, particularly in process automation, but also in other divisions. Base orders from Tier-II and –III cities have also contributed to the inflow. Now segments like F&B, data centres and electronics are consistently contributing more than earlier.
 

 Exports amounted to 10 per cent of revenue and 11 per cent of orders with export revenue growth at 13 per cent Y-o-Y.

The company itself has always traded at high valuations (price-to-earnings of 65 times) as do MNC – subsidiary peers like Siemens, and there are signs the capital goods sector could see positive re-rating in general. There’s been some profit booking since the results were declared.