Strong Q1, bullish guidance indicate encouraging prospects for ABB

Most analysts positive on the stock, but rich valuations mean little room for disappointment

After a strong first quarter, (Jan-Mar, 2022 is Q1 for the company), ABB India has bullish guidance for both domestic and export markets. While demand seems to have held up despite inflation and the company has been able to pass on some costs, the monetary tightening which has just started could have a negative effect. The management seems confident about maintaining a 10 per cent margin for PBT (profit before tax) and of improving Net profit margins from current levels of 7.4 per cent. There are stronger export prospects. The domestic market is also picking for the company, which is present across the electricity value chain from core sector to electronics and green solutions. However, a conservative analyst would assume that earnings growth would downgrade slightly since supply chain disruption is also a possibility alongside high inflation and tighter monetary policy.

Revenues are up 20 per cent YoY at Rs 1,968 crore, (versus Rs 1,629 crore). At EBITDA of Rs 188 (Rs 132 crore YoY), the operating profit margin (OPM) is around 9.5 per cent which is a solid improvement over 8.1 per cent YoY. Adjusted for exceptional items PAT is at Rs 148 crore, which is up 74 per cent over Rs 85 crore YoY. Sequentially revenues are down from Rs 2,101 crore in Q4 (Oct-Dec 2021) and PAT is down from Rs 153 crore. But EBITDA is up marginally and the EBITDA margin is up around 70 basis points QoQ.

The emerging high-growth sectors include Data Centres, electronics, F&B and Auto, Auto Ancillaries and Electric Vehicles while there are signs of project-related capex in steel and cement. The company’s large and well-organised distributor network is standing it in good stead with sales via distributor channels contributing roughly one-third of revenues and better penetration of Tier 2/3. The company has strong free cash-flows and is effectively debt-free. Order flow increased by 26 per cent YoY with order book hitting Rs 5,200 crore. The divestment of the turbocharger division led to an inflow of Rs 290 crore (which is an extraordinary item going to the PAT). Export orders are most promising for the electrification and motion verticals while robotics is expected to generate domestic demand due to low penetration.

The stock is richly valued – it has always been due to its parentage and its strong balance sheet. In the past year, it has generated 64 per cent return but only 2 per cent return in the last month. However, this has beaten the relevant market segment since Midcaps have a negative 8 per cent return in the last month.

At the current price of Rs 2,251, it could have a moderate upside. Various analysts have Buy/Hold/Accumulate ratings with 12-month targets ranging between Rs 2,300, Rs 2,412, Rs 2,577 and Rs 2,900 with only one major brokerage (HDFC Securities) seeing a downside with a recommendation of Reduce and a target of Rs 2,035.