21 March 2014
Update | Sector: Capital Goods
ABB
BSE Sensex
21,754
S&P CNX
6,493
CMP: INR785
TP: INR720
Neutral
Insights from ABB Group
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
ABB IN
211.9
829/448
27/32/21
170.6
2.8
Strategic initiatives driving profitable growth
We analyzed the recent performance trends of ABB Group and also the
management comments to gain an understanding on the strategic initiatives,
particularly in the emerging markets context. The intent was to understand
and comprehend the context of these from ABB India’s perspective.
ABB Group: Several Strategic initiatives to drive profitability
Financial Snapshot (INR b)
Y/E DEC
2013 2014E 2015E
Net Sales
EBITDA
Adj PAT
Adj EPS (INR)
EPS Gr (%)
BV/Sh (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div. Yield (%)
94.0
6.2
35.9
0.4
55.2
5.9
25.8
0.8
38.3
5.4
20.1
1.2
77.2
4.6
1.7
8.3
28.7
6.7
7.4
40.9
82.6
6.5
3.0
14.2
70.3
10.9
10.8
40.0
92.7
8.2
4.3
20.5
44.2
145.0
14.7
14.1
40.0
126.4 134.0
Cost rationalization
has been made an important part of the organizational
DNA, with further USD1.2b of cost out (4% of COGS) in 2013.
Increased
focus on service portfolio
has been identified as a key building
block for improved profitability. Service business contributes ~19-20% of
ABB Group’s CY13 revenues, and target is to capture 40% of the installed
base (vs 25% currently).
Reorienting the
Projects business
and attempt is to improve the portfolio
quality in terms of right commercial discipline, risk mitigation, etc.
ABB India: Exports / Services are key drivers; ‘In Country-For Country’
an important initiative started showing results
Shareholding pattern (%)
Dec-13 Sep-13 Dec-12
Promoter
Foreign
Others
75.0
4.3
8.4
75.0
12.3
4.2
8.5
75.0
12.9
3.5
8.6
Domestic Inst 12.3
Stock Performance (1-year)
Exports from India have increased from INR5b in 2010 to INR9b in 2012 and
likely to increase to INR15b in 2015. Also, contribution of service business in
revenues has increased from 10% in 2010 to 12% in 2012 and target is 18%
in 2015. Both these businesses entail improved margins, with management
in the past stating that the margins on exports are better than domestic;
and service segment enjoying high double digit margins.
Material and operational cost rationalization
is an important focus area;
and these initiatives have led to a sharp decline in RM costs from ~74-75%
of revenues in CY10/11 to 70% in CY13. There exists room for further
rationalization and the journey till date is just 50% of the targets.
'In Country, For Country'
aims to make the product more competitive and
relevant.
Design-to-cost
is an important initiative globally, which aims at
understanding the cost base that can be allowed and then design products
towards that. In India, 18+ of such projects are under implementation; and
there have been few successes already.
Valuation and view:
We believe ABB could be one of the important
beneficiaries given the increased share of products (~65% of revenues), which
are largely beneficiaries in ‘early to mid cycle’. ABB is also exposed to several
important trends. Current earnings are impacted by legacy projects and
negative operating leverage in products; and are thus not a reflection of the
long term potential. Maintain
Neutral.
Satyam Agarwal
(AgarwalS@MotilalOswal.com); +91 22 3982 5410
Nirav Vasa
(Nirav.Vasa@MotilalOswal.com); +91 22 3982 5422
Investors are advised to refer through disclosures made at the end of the Research Report.