The process automation and power products businesses are expected to see a massive slowdown in order intake due to their higher exposure to process industries, realty and the infrastructure sector.
The shift in orders to power projects, which have longer execution cycles and lower margins, should also lower the overall execution rate and profit margin.
The company may face working capital woes despite its conservative approach in its capital structure by holding a low leverage and net cash position. Exposure to rural electrification/APDRP projects would demand better operational efficiency and cash collection.
The 11th Plan outlay (Rs1,407 billion) with the Power Grid’s share of Rs550 billion and PSU/SEB spending would be catalysts for growth as the sector grapples with the industrial capex slowdown.
We initiate coverage of ABB, with a SELL recommendation and a target of Rs426, based on 14x CY09e earnings. Rising concerns on working capital amidst order intake slowdown indicate tough times ahead.
Our target is based on 14x CY09e EPS of Rs30. The target multiple is at a 40% premium to the average multiple of 10x for the sector. ABB commands this premium due to its low leverage and net cash position.