Electrification major major ABB India posted a 69% rise in consolidated net profit to Rs 203 crore in the September quarter, aided by higher revenues and a one-off gain.
However, we believe this should be comfortably made up in coming quarters as order flow rose 42% y-o-y in 9MCY22 and 38% in Q3CY22. Margins expanded due to higher capacity utilisation, vendor sourcing efficiencies and softening of commodity prices. Data centre, Electronics, Warehouse & Logistics are high growth areas. Maintain Buy with a PT of Rs 3,775 (v/s Rs 3,400) as we rollover to CY24E.
Q3 order flow driven entirely by base orders: Data centres, Steel, Cement, Power distribution, F&B and railways contributed to Q3CY22 order flow. Presentation had a slide dedicated to Data Centres, which the management believes has very strong potential as global players are entering the market and 5G is being rolled out. Further policy push for localising data is also expected. Overall order outlook remains robust with no material plateauing of orders being seen at this point in time.
Margin commentary — optimistic: Management mentioned softening of commodity prices is helping margins already with some more benefits likely to accrue ahead. Faster delivery schedules ensures back-to-back vendor agreements are executed and limits the inflationary impact. Demand is healthy and customers are open to price rises. As this normalises ahead and revenue growth momentum continues, operating leverage should kick in and ensure higher EPS CAGR.
Energy-efficiency on top of clients’ mind: Management has earlier mentioned that cost and ESG focus is driving mid-sized organisations also, apart from the large ones, towards saving energy. ABB’s motors and switchgears are geared to meet this requirement. Penetration in tier II and III cities is also contributing to orders. Focus is on educating electricians, architects, and engineers on this product portfolio. Automation market is continuing its recovery. Our earnings CAGR remains robust at 38% in CY22-24E and PT of Rs 3,775 values ABB at 55x PE CY24E vs June’24E earlier. Downside risk: (i) Sharp scale-down in exports by the parent (ii) Cost focus reducing.