Maintain ‘sell’ on ABB with target price at Rs 1,230

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Published: October 28, 2017 3:32:54 AM

The revenue decline in Q3CY17 was transitory on account of GST-led disruption. Such deferred businesses would likely be recovered in the coming few quarters. Continued margin improvement and resilient base orders are a big positive in our view.

GST, post GST-implementation, EBITDA, NPAs, capex, T&D utilities, exports, railwaysGST-related confusions led the customers to defer dispatches and order finalisations.

The revenue decline in Q3CY17 was transitory on account of GST-led disruption. Such deferred businesses would likely be recovered in the coming few quarters. Continued margin improvement and resilient base orders are a big positive in our view. Railways, renewables, T&D utilities, exports and services will remain the focus areas for the company. We incorporate the near-term challenges and cut estimates by 2-7%. Roll over to Sep 2019E yields a target price of Rs 1,230. Q3CY17 was the first quarter post GST-implementation. GST-related confusions led the customers to defer dispatches and order finalisations. Such an impact would be transitory in nature and the revenues deferred now would be recovered in the coming quarters. However, the renegotiation of contracts with certain customers, especially the public sector customers in power grids segment, would be a time-consuming process and could postpone normalisation of financials to the next calendar year.

Despite the impact of GST and generally weak private capex, ABB has managed to maintain base orders that indicate the resilience of the company’s offerings. Brownfield investments for modest expansion and other efficiency improvement projects have been driving such orders for the past several quarters. Consumption-oriented industries such as F&B and paints are showing signs of uptick while heavy industries remain stressed by NPAs. Railways, renewables and T&D utilities will remain the growth areas; digitalisation is showing increasing traction as well. ABB’s continued focus on internal efficiency improvements has yielded positive results by posting 7% EBITDA margin in 9MCY17, up 40 bps y-o-y, largely led by control on raw material costs. Design innovations to suit local requirements and local manufacturing of various products have helped the company keep costs under control.

We believe that such an approach has positioned the company to benefit significantly once the upcycle starts and operating leverage benefits kick in. The management targets 7-8% margins in the near term. Q3CY17 revenues were down 7% y-o-y due to GST-led disruption and the impact has been termed transitory by the management, likely to normalize in the coming quarters. We incorporate such deferment of revenues into our estimates. We also revise CY2017 margin downward incorporating what we have seen in 9MCY17 so far. Accordingly, estimates for CY2017 are revised downward by 7% while broadly retaining CY2018 estimates. We roll over to Sep 2019E and increase target price to Rs1,230. Retain SELL.

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