ABB Rec PAT fell for the 11th quarter in a row to R57.7crore by 6%y-o-y on increasing price pressure in T&D space from Siemens, Areva, CRG, Chinese and Korean players, continued costs on exit from rural discom business and depleting visibility (backlog 1.1x sales).
Order backlog fell 5% y-o-y as inflows were flat on delay in conclusion of large orders and improved execution (sales +22%y-o-y). We raised our CY11-13E sales by 3% to factor-in acquisition of ABB Global Industries and Services from parent but cut EPS by 3% for CY12E on higher funding / fixed costs. We raise PO to R575 (545) on roll-forward.
ABB 1Q11 execution surprised with sales + 22% y-o-y while 158bps fall in margins on 249bps rise in material cost led by copper cost pressures led Rec PAT to fall 6% y-o-y.
While reported PAT grew by 9x on R2crore of exchange gain (vs loss of R54.4crore in Q1 2010). Sales was up led by 24%y-o-y growth in projects business (54% of sales) ? power systems +50% y-o-y and process automation +15% y-o-y vs products business (46% of sales) 12%y-o-y ?power product 2% y-o-y and automation & low voltage products 11%y-o-y. ABB had one of the worst Q1CY11 results among our E&C universe. ABB?s slowed growth is a de-rating trigger for the stock. At PE of 20x of 1-year forward EPS, we derive 12-month fair value of R575 implying 36% downside.
We believe that ABB?s slowing growth, increasing competition and expensive valuation are core thesis of our Underperform rating on stock. Also its most profitable, automation business has slowed on fall in private capex. The structural drivers of ABB are: a) India?s plan to expand its national power transmission grid, with inter-regional grid capacity of 37.2GW and b) industrial capex focused on automation. Adoption of ultra HVDC lines by FY11 is a material opportunity for a world leader like ABB.
?BofAML
