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Spark Capital: ABB 4QCY12 Results Review - No near term improvement in sight, Maintain Sell




Spark Capital Advisors(India) Private Limited


25 Feb 2013





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No near term improvement in sight, Maintain Sell ABB Ltd (ABB) reported a revenue of Rs. 20.5bn in 4QCY12 (5.4% yoy de-growth). EBITDA margin of 1.8% (yoy decrease of 60bps) was below our expectation of 6.5% due to margin pressure across segments and repositioning costs in the power systems segment. De-growth during 4QCY12 was due to delays in shipment in the power systems segment on the back of payment issues. Service and exports segments (>20% yoy growth) registered healthy growth, but we expect overall revenue growth to remain muted due to weak order book position (1.0x CY14E book-to-bill). Order inflow during the quarter stood at Rs. 15.8bn, de-growing by 26% yoy on the back of weak order inflow momentum from traditional segments (steel, cement, etc). While the management is optimistic of securing orders from new sectors like solar, data centers and energy efficiency solutions, growth in order inflow is not expected to pick up pace in a hurry due to delays in projects in the power sector and weak industrial capex. Considering the muted demand environment and delays in payments, the management is laying more emphasis on payment recovery and margin improvement over growth. At 34.0x CY14E earnings, the stock continues to remain expensive. With no significant improvement in operational performance in sight, we reiterate our Sell rating on the stock. Highlights of the quarter’s performance and outlook Shipment delays keep execution pace muted – Weak pace of execution (5.4% yoy de-growth) was primarily due to 18.1% de-growth in the power systems segment which was on the back of shipment delays due to client side payment issues. Execution delays continue to plague both power and automation segments owing to which we expect revenue growth to be muted at 6% over the next two years Power systems repositioning charges dent margins – Margin pressure continued to prevail with both power systems and process automation segments continuing to register losses. Repositioning costs in the power systems segment resulted in ~Rs. 600mn of charges during the quarter. While the management is aiming at improving margins through process improvement and internal cost efficiencies, we expect EBITDA margin to remain well below historical levels going forward at 5.7% and 7.2% in CY13E and CY14E respectively Weak demand form traditional sectors drag order inflow – Large orders from traditional sectors (steel and cement) have remained elusive leading to order inflow de-growth of 26% yoy in 4QCY12. While the management is focusing on new segments (solar, data centers, etc) to improve order inflow, overall growth in inflows is unlikely to improve significantly in the near future

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