ABB Limited is the Indian subsidiary of the Switzerland-based ABB Group, which is one of the world’s leading Power and Automation engineering companies.
The company operates through five business divisions, viz. Power Systems, Power Products, Process Automation, Automation Products and Robotics.
The economic slowdown has worsened the outlook for the entire capital goods sector. Post a strong GDP growth of more than 9% recorded by India for three consecutive years, growth estimates for the current year has been revised downwards in the range of 6.5-7.0%.
Notably, ABB’s fortune is highly leveraged to the domestic capex cycle deriving around 94% of its revenues from the Indian markets.
In addition, the automation segment that contributes around 38% and 29% of the company’s revenues and order backlog respectively is expected to be hit the hardest in wake of the current economic slowdown.
The end user customers for this segment i.e. steel, cement and oil and gas sectors, etc. all have been hit badly in the global meltdown with the commodity prices having crashed over the past few months.
The power related segments continue to be key revenue drivers for the company accounting for around 62% and 71% of its total revenues and order backlog, respectively.
Pertinently, the Power Sector capex is relatively resilient with majority of the projects being envisaged by the Central and State sector utilities.
However, major concern for the Transmission & Distribution (T&D) Sector is the capacity addition delays, which would adversely impact growth prospects of the T&D equipment suppliers.
Historically, India has a poor track record with only around 50-60% of planned capacity addition during several previous Five-year Plans. In the current Plan too, more than 50% of the projects are running behind schedule.
Outlook and valuation
We estimate the company to post moderate CAGR of 15.3% and 12.0% in topline and bottomline over CY2007-10E, respectively.
At Rs489, the stock is quoting at a P/E of 17.0x CY2009E EPS and EV/EBITDA of 10.5x CY2009E EBITDA, which is expensive.
Amidst an unfavourable broader economic environment, high private sector exposure, slowing growth and a sector wide de-rating, we have arrived at a Fair Target P/E multiple of 14x for the company.
We initiate coverage on the stock with a SELL rating and target price of Rs403.