ABB stock had a stellar run, but there may be speed breakers ahead

ABB India Ltd’s shares have been on a roll
ABB India Ltd’s shares have been on a roll

Summary

In Q2 2023, ABB’s order inflows rose 10% year-on-year to 3,044 crore despite a high base, and order book stood at 7,727 crore.

ABB India Ltd’s shares have been on a roll, appreciating by a whopping 68% so far this calendar year. A good part of investors’ optimism stems from the company’s order inflow trajectory, which has been decent in the recent past.

On Wednesday, the company said it has entered into a memorandum of understanding (MoU) with Tata Steel Ltd for jointly exploring technologies to help reduce the carbon footprint of steel production. Given the emphasis on de-carbonisation globally, this MoU should further aid the outlook for ABB’s orders, said analysts. In August, ABB bagged an order from Reliance Life Sciences to deploy automation and control solutions for their new biosimilars and plasma proteins manufacturing facilities in Nashik, Maharashtra.

Graphic: Mint
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Graphic: Mint

In Q2 2023, ABB’s order inflows rose 10% year-on-year to 3,044 crore despite a high base, and order book stood at 7,727 crore. ABB’s financial year is from January to December. Despite high competition, the company is eyeing double-digit growth in quarterly order flows, going ahead. Exports are likely to remain at 12-15% of overall sales as domestic demand is expected to be strong, the management said.

Increased thrust on industrial and infrastructure capital expenditure should come as a shot in the arm for ABB’s earnings growth. “We maintain infra + industrial capex should see 16% CAGR in FY23-26E, versus 6% in FY11-20. Strong ordering outlook should ensure ABB’s execution remains in double-digits and earnings per share CAGR 40%+ in CY22-25E," said a Jefferies India report dated 5 September. CAGR is the compound annual growth rate.

Further, ABB continues to improve its penetration by venturing into tier-2 and tier-3 cities where growth is likely to be broad-based. The management is also exploring inorganic expansion opportunities.

For now, investors have been rewarded handsomely this year for these ongoing measures that can give ABB’s business a fillip. That said, valuations are rich. “Improved product mix aiding margins and robust orders have led to revision in CY23/24 earnings estimates for ABB India," said Amit Anwani, analyst at Prabhudas Lilladher. However, he cautions that market seems to be factoring in best case scenario for capital goods companies including ABB India. “At current market price, the stock is trading at a price-to-earnings multiple of 72 times for CY24 and is not cheap. So, a near-term correction is not entirely ruled out for ABB," he said.

To conclude, a key risk is plateauing of base orders, mainly short-cycle ones, which are margin lucrative. This could hurt ABB’s near-term revenue growth visibility.

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