We attended the analyst meeting hosted by ABB to discuss its full-year numbers. The outlook continues to remain challenging for the T&D space.
Order inflow growth continues to remain an issue: Order inflow growth has been on a declining trend since 2Q08, with order inflow showing 11–13% growth in two quarters before showing -37% y-o-y growth in 4Q08.
Automation segment under greater pressure: Given the decline in industrial capex, the power segment is expected to compensate for an order inflow slowdown in the automation segment. We expect order inflows from utilities and state electricity boards post elections.
Pressure should subside from 3Q09 onward: Given the high base effect, we expect order inflow growth to remain under pressure until 2Q09.
Company to concentrate on margins rather than growth: Rather than bidding for lower-margin projects to spur growth, the company is looking to concentrate on high-value projects.
It also recently pulled out of a few rural electrification projects for the same reason. However, we believe that this new strategy is driven by a lack of orders in the market and not by choice.
Slowdown in industrial capex to hurt margins: The automation segment (40% of revenues), which is more profitable than the power segment, could experience stress, which could have a negative impact on margins. We are building in a 140bp decline in margins in CY09 and stable margins in CY10.
Given the slowdown in order inflows, we have built in 15% annual revenue growth for the next couple of years, in line with CY08 revenue growth. However, this growth is contingent on orders from state utilities coming through.
Cut-down in capex and capacity additions: Given the slowdown in demand, ABB has reduced its capex forecast for CY09 to Rs700–800m from investing Rs1,400–1,500 million in CY07 and CY08. Meanwhile, the company is also experiencing some stress on the working capital cycle.
We remain NEUTRAL on the stock purely on a valuation perspective. The stock is trading at 13.6x CY09E earnings, which is at a 10% discount to the lowest multiple in the last five years.
However, we do not expect any significant pick-up in the business environment in the next couple of quarters or until the time orders from central and state utilities start coming in.
Our 12-month price target is Rs402 based on a PER methodology.