ABB India’s Q1FY15 PAT (adjusted for higher D&A expenses) grew 16% year-on-year; though missed HSBCe (estimate) and consensus expectation by 19% and 13% ,respectively. Weaker than expected earnings was primarily on account of low top-line growth (flat y-o-y; 8% below HSBCe). Ebitda (earnings before interest, tax, depreciation and amortisation) increased by 14% y-o-y as Ebitda margin improved by 110 basis points y-o-y to 8.0%, largely in-line with our expectation.
Depreciation expenses grew 54% y-o-y as the company had to book R84.3m higher D&A (depreciation & amortisation) expenses pursuant to revised assumptions of useful life of tangible fixed assets. Reported profit after tax grew 5% y-o-y and came 26% below HSBCe. Q1 order inflows declined by 6% y-o-y as delayed investment decisions on industry capex weighed on large orders, more than offsetting strong momentum in short cycle and base orders.
ABB India’s Q1 top-line performance (flat y-o-y) and order inflow (down 6% y-o-y) were below our expectations. More importantly, the top-line weakness was rather broad based with all the segments except for Discrete Automation and Motion reporting a fall in revenue. We believe this largely reflects delayed industrial recovery further aggravated by the company’s selective order picking strategy. We expect earnings growth led by a combination of top line growth and margin recovery. A delayed industrial recovery puts this hypothesis at risk, posing downside risks to our FY16 earnings estimates (4% below consensus).
Retain Reduce rating and R752 TP (target price): We forecast ABB India to post 41% earnings CAGR over FY14-17e driven by both top-line growth and margin expansion from a low base. Current March-16 PE (price-to-earnings multiple) of 78.1x more than fairly values this strong earnings growth. We expect this valuation multiple to significantly de-rate to our target March 16 PE of 41.9x (1 SD—standard deviation–above last cycle average) which we believe fairly values earnings and RoE (return on equity) recovery prospects.