The global slowdown is taking its toll on ABB Limited (India). During Q3’08, the company’s order inflows grew by only 13.2% y-o-y, its second slowest growth in the last 11 quarters.
Currently, ABB’s order backlog stands at Rs71.1 billion, just 1.09x its trailing 12-month revenue.
Going forward, we expect order inflows to remain soft on the back of a slowing economy and a cut in capital expenditure in sectors such as steel, cement, metal & mining, and oil & gas, which bring in major business for the company.
Also, the rising liquidity problem being faced across the industries is likely to result in the deferment of the capital expenditure plans.
However, we expect the power segment to register better growth than the other sectors. With a majority of ABB’s orders coming from this sector, the decline in order inflows will be restricted by the growth in the Power sector
EBITDA margin in Q3’08 went down 210 bps, led by an increase in the raw material costs.
Though the recent meltdown in the commodity markets should push up the EBITDA margin, we believe that the company will pass on the benefit of falling raw material prices to the consumers. EBITDA margins are expected to remain under pressure in the upcoming quarters.
The stock has fallen 50.5% since our last report and currently trades at a forward P/E of 18.6x and 21.0x on its CY08 and CY09 estimated earnings, respectively.
We have valued the Company by using the DCF methodology, assuming a WACC of 14.1% and a terminal growth rate of 5%.
Our valuation suggests a target price of Rs437 over a 12-month horizon. Considering the slowdown in the order inflows and our valuation, we believe ABB’s stock is fairly valued at current levels. Hence, we downgrade our rating from Buy to HOLD.