Analyst Corner: ABB likely to have scope to grow its market share

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Published: February 14, 2020 5:00:34 AM

4QCY19 performance was much below our and consensus estimates as it did not take into account (1) change in policy related to booked actuarial gains in employee expense (now evenly over all quarters from CY2019), (2) change in revenue recognition policy (now spread more evenly across quarters from CY2019) and (3) up-fronting of anticipated cost overruns in select legacy projects in the industrial automation segment.

EBITDA margin improvement was driven by a reduction in unallocable expenses

CY2020 would be a year that would test the ability of an agile ABB to grow share in a market providing select pockets of growth. Challenge to grow bottom line would come from keen competition, constrained order backlog having some portion of low-margin legacy projects and some potential disruption of supply chain due to demerger of power business. We build in the miss in 4QCY19 results and cut estimates by 14% and lower fair value by 8% to Rs 900 on roll-forward to March 2022E.
CY2019 was a good year for ABB with a 9/16% y-o-y growth in revenues/EBITDA.

EBITDA margin improvement was driven by a reduction in unallocable expenses and would have been more if not for marked reduction in margin for industrial automation segment in 2H. Static depreciation added to the growth in EBITDA to yield a 29% y-o-y growth in PBT. Base order inflows were up a healthy 9% though limited quantum of large orders booked led to a modest yoy decline in order backlog.

4QCY19 performance was much below our and consensus estimates as it did not take into account (1) change in policy related to booked actuarial gains in employee expense (now evenly over all quarters from CY2019), (2) change in revenue recognition policy (now spread more evenly across quarters from CY2019) and (3) up-fronting of anticipated cost overruns in select legacy projects in the industrial automation segment.

Overall, ABB considers the domestic market to be large enough to provide opportunities to grow market share with select pockets where such market share gain can be significant. It also shared optimism on account of increasing capacity utilisation in cement and O&G sectors growth momentum seen in other select segments of infrastructure (housing, railways, renewables, airports, metros). It also shared optimism on its digitisation offering gaining relevance based on meaningful benefits that its customers are deriving from the same. On exports, the management does not envisage acceleration in growth over the near term, and would follow aims of stability, profitability and then growth.

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