ABB India’s management indicated that while order intake in power segment is likely to be healthy, automation business is expected to witness slowdown.
In CY08, segments like Iron and Steel, Cement and Aluminium contributed to bulk of the growth in the automation segment, where the demand outlook is weak.
We believe that automation products is the weakest link for ABB India (CY08: 23% of Revenues and 26% of EBIT) as it has the shortest order book (0.3x) and given the diverse business profile, capacity and resources need to be constantly adjusted depending on market conditions.
We expect share of revenues of automation business to decline from 42% in CY08 to 40% in CY09 and 36% in CY10; and share in EBIT to decline from 48% in CY08 to 42% in CY09 and 36% in CY10.
Given the change in composition towards power business in CY09 / CY10, we expect EBIT margins to decline from 10.7% in CY08 to 10.1% in CY09 and 9.4% in CY10.
Working capital has witnessed deterioration and stands at 17% of revenues in CY08, v/s 8% in CY07. Also, net cash level has declined from Rs6.4b in December 2007 to Rs2.8b in December 2008.
We are downgrading our earnings estimates for CY09 by 3.5% and CY10 by 6.7% to factor in the business headwinds.
We expect revenues of Rs74 billion in CY09 (up 7.8% y-o-y) and Rs74 billion in CY10 (up 0.2% y-o-y), and we factor in margin impact of 129bp during CY08-10E.
We expect ABB India to report earnings of Rs24.5/share in CY09 and Rs23.4/share in CY10. The stock is trading at PER of 14.8x CY09 and 15.5x CY10.
Maintain NEUTRAL stance with price target of Rs368/share.