Strong inflow growth, renewable/railways key drivers October 28, 2016 Kunal Sheth kunalsheth@plindia.com +91 22 66322257 Samir Bendre samirbendre@plindia.com +91 22 66322256 Rating Accumulate Price Rs1,063 Target Price Rs1,249 Implied Upside 17.5% Sensex 27,916 Nifty 8,615 (Prices as on October 27, 2016) Trading data Market Cap. (Rs bn) 225.3 Shares o/s (m) 212.0 3M Avg. Daily value (Rs m) 58.7 Major shareholders Promoters 75.00% Foreign 4.50% Domestic Inst. 12.37% Public & Other 8.13% Stock Performance (%) 1M 6M 12M Absolute (8.1) (16.1) (16.6) Relative (7.0) (23.3) (19.0) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2016 15.5 13.2 17.0 2017 21.7 18.3 18.8 Price Performance (RIC: ABB.BO, BB: ABB IN) (Rs) 1,600 1,400 1,200 1,000 800 600 400 200 0 Oct 15 Dec 15 Source: Bloomberg Feb 16 Apr 16 Jun 16 Aug 16 Oct 16 Beat in PAT led by lower interest cost: ABB reported sales below our and street estimates at Rs20.5bn (PLe: Rs21.4bn), up 4.4% YoY. Sale of Discrete Automation and Motion, Process Automation were up by 3.5% and 22% respectively while sales of Electrification Products and Power Grids were down by 5.6% and 2.2% respectively. Service and exports revenue continue to be strong (15%+ growth YoY) as customers focused on efficiency and productivity of existing operations. EBITDA was down 6.5% YoY at Rs1.4bn (PLe: Rs1.8bn), EBITDA margin came in at 7.1%, down by 82bps YoY (PLe: 8.5%). Interest cost dipped by 29% YoY to Rs178mn leading to PAT growth of 38% YoY to Rs 811mn (PLe: Rs776m). Renewable and services business drive inflow: Order inflow for Q3CY16 stood at Rs29.6bn, up 29.5% YoY. Order book at end of quarter stood at Rs86.7bn, up by 5% YoY. ABB highlighted while base orders remained solid, the company witnessed improved traction in large orders (mainly railways). Utilities remained cautious and mostly continued to spend on upgradation of technology (products like dry type transformers, gas insulated switchgears and substation packages). Renewables/railways/exports/services continues to be key growth drivers in near term. ABB has doubled capacity for solar inventors in Bangalore factory and looking to introduce new product line of higher efficiency. Outlook and Valuation: The stock is trading at 49xCY17E earnings. We believe ABB has consolidated its position over the last few years in terms of capacity and localization and is ready to benefit from market upturn. The company continues to focus on introduction of new products and tailor the technology to meet Indian requirement. We expect stock to deliver 24% earnings CAGR over CY15 17E. We cut the earnings by ~13% for CY16E&17E to factor in lower margins. We Maintain Accumulate with TP of Rs1249 (Previous Rs1403). Key financials (Y/e December) 2014 2015 2016E 2017E Revenues (Rs m) 77,333 81,403 88,606 98,997 Growth (%) 0.1 5.3 8.8 11.7 EBITDA (Rs m) 5,557 7,125 7,088 9,405 PAT (Rs m) 2,285 2,999 3,284 4,604 EPS (Rs) 10.8 14.2 15.5 21.7 Growth (%) 32.8 31.2 9.5 40.2 Net DPS (Rs) 2.7 3.5 3.9 5.4 Profitability & Valuation 2014 2015 2016E 2017E EBITDA margin (%) 7.2 8.8 8.0 9.5 RoE (%) 8.6 10.4 10.9 14.1 RoCE (%) 9.4 10.7 11.5 15.0 EV / sales (x) 2.9 2.8 2.5 2.3 EV / EBITDA (x) 40.8 31.6 31.8 23.8 PE (x) 98.6 75.1 68.6 48.9 P / BV (x) 8.1 7.6 7.3 6.5 Net dividend yield (%) 0.3 0.3 0.4 0.5 Source: Company Data; PL Research Q3CY16 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q3CY16 Result Overview (Rs m) Y/e March Q3CY16 Q3CY15 YoY gr. (%) Q2CY16 9MCY16 9MCY15 YoY gr. (%) Net Sales 20,550 19,690 4.4 21,015 61,568 57,152 7.7 Expenditure Raw Material 13,497 12,847 5.1 13,741 40,071 37,404 7.1 % of Net Sales 65.7 65.2 65.4 65.1 65.4 Personnel Cost 1,890 1,876 0.8 2,056 5,815 5,544 4.9 % of Net Sales 9.2 9.5 9.8 9.4 9.7 Others 3,707 3,410 8.7 3,518 11,035 9,711 13.6 % of Net Sales 18.0 17.3 16.7 17.9 17.0 Total Expenditure 19,094 18,132 5.3 19,315 56,921 52,658 8.1 EBITDA 1,456 1,557 (6.5) 1,701 4,648 4,494 3.4 Margin (%) 7.1 7.9 8.1 7.5 7.9 Other income 366 5 44 557 23 2,366.4 Depreciation 406 359 13.0 357 1,121 1,156 (3.0) EBIT 1,416 1,204 17.7 1,388 4,084 3,360 21.5 Interest 178 250 (28.7) 180 564 704 (19.9) PBT 1,238 954 29.8 1,208 3,520 2,656 32.5 Total Taxes 427 366 16.7 434 1,225 951 28.8 ETR (%) 34.5 38.4 35.9 34.8 35.8 Reported PAT 811 587 38.0 774 2,295 1,705 34.6 Source: Company Data, PL Research October 28, 2016 2
Exhibit 2: Segmental Break up (Rs m) Y/e March Q3CY16 Q3CY15 YoY gr. (%) Q2CY16 9MCY16 9MCY15 YoY gr. (%) Sales Discrete Automation and Motion 5,243 5,064 3.5 5,293 11,430 9,435 21.1 % to total 24.6 24.2 24.2 26.9 23.8 Electrification Products 3,934 4,169 (5.6) 4,165 8,700 7,587 14.7 % to total 18.5 19.9 19.0 20.5 19.1 Process Automation 3,582 2,937 22.0 3,209 5,844 6,224 (6.1) % to total 16.8 14.1 14.6 13.7 15.7 Power Grids 8,542 8,731 (2.2) 9,242 16,532 16,454 0.5 % to total 40.1 41.8 42.2 38.9 41.4 Total 21,301 20,901 1.9 21,909 42,506 39,700 7.1 PBIT Discrete Automation and Motion 406 443 (8.4) 306 862 779 10.7 Margin % 7.7 8.7 5.8 7.5 8.3 Electrification Products 475 489 (2.9) 580 1,264 866 46.0 Margin % 12.1 11.7 13.9 14.5 11.4 Process Automation 348 306 13.5 295 543 628 (13.6) Margin % 9.7 10.4 9.2 9.3 10.1 Power Grids 257 536 (52.1) 622 966 528 83.0 Margin % 3.0 6.1 6.7 5.8 3.2 Total 1,486 1,775 (16.3) 1,803 3,635 2,801 29.8 Source: Company Data, PL Research October 28, 2016 3
Income Statement (Rs m) Net Revenue 77,333 81,403 88,606 98,997 Raw Material Expenses 52,429 53,000 61,581 68,803 Gross Profit 24,904 28,403 27,025 30,194 Employee Cost 7,052 7,499 7,088 7,920 Other Expenses 12,295 13,779 12,848 12,870 EBITDA 5,557 7,125 7,088 9,405 Depr. & Amortization 1,128 1,598 1,560 1,890 Net Interest 1,050 912 1,152 1,287 Other Income 173 130 600 350 Profit before Tax 3,552 4,746 4,976 6,577 Total Tax 1,267 1,747 1,692 1,973 Profit after Tax 2,285 2,999 3,284 4,604 Ex Od items / Min. Int. Adj. PAT 2,285 2,999 3,284 4,604 Avg. Shares O/S (m) 211.9 211.9 211.9 211.9 EPS (Rs.) 10.8 14.2 15.5 21.7 Cash Flow Abstract (Rs m) C/F from Operations 4,496 6,655 3,605 6,149 C/F from Investing (869) (2,680) (3,004) (3,000) C/F from Financing (3,959) 596 (4,113) (2,087) Inc. / Dec. in Cash (332) 4,572 (3,512) 1,062 Opening Cash 3,149 2,817 7,389 3,877 Closing Cash 2,817 7,389 3,877 4,938 FCFF 2,422 379 1,818 1,862 FCFE (65) 2,623 (398) 1,862 Key Financial Metrics Growth Revenue (%) 0.1 5.3 8.8 11.7 EBITDA (%) 18.3 28.2 (0.5) 32.7 PAT (%) 32.8 31.2 9.5 40.2 EPS (%) 32.8 31.2 9.5 40.2 Profitability EBITDA Margin (%) 7.2 8.8 8.0 9.5 PAT Margin (%) 3.0 3.7 3.7 4.7 RoCE (%) 9.4 10.7 11.5 15.0 RoE (%) 8.6 10.4 10.9 14.1 Balance Sheet Net Debt : Equity 0.1 Net Wrkng Cap. (days) Valuation PER (x) 98.6 75.1 68.6 48.9 P / B (x) 8.1 7.6 7.3 6.5 EV / EBITDA (x) 40.8 31.6 31.8 23.8 EV / Sales (x) 2.9 2.8 2.5 2.3 Earnings Quality Eff. Tax Rate 35.7 36.8 34.0 30.0 Other Inc / PBT 4.9 2.7 12.1 5.3 Eff. Depr. Rate (%) 6.3 7.6 6.5 7.0 FCFE / PAT (2.9) 87.5 (12.1) 40.4 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 27,747 29,794 30,747 34,563 Total Debt 3,756 6,000 3,784 3,784 Other Liabilities Total Liabilities 31,503 35,794 34,531 38,347 Net Fixed Assets 13,160 14,242 15,682 16,792 Goodwill 1,554 67 Investments 165 164 168 168 Net Current Assets 17,244 21,938 20,105 22,799 Cash & Equivalents 2,260 5,736 3,877 4,938 Other Current Assets 51,325 54,205 59,390 66,355 Current Liabilities 36,341 38,003 43,162 48,494 Other Assets (618) (617) (1,597) (1,597) Total Assets 31,504 35,794 34,359 38,163 Quarterly Financials (Rs m) Y/e December Q4CY15 Q1CY16 Q2CY16 Q3CY16 Net Revenue 24,251 20,003 21,015 20,550 EBITDA 2,632 1,491 1,701 1,456 % of revenue 10.9 7.5 8.1 7.1 Depr. & Amortization 442 359 357 406 Net Interest 207 206 180 178 Other Income 108 148 44 366 Profit before Tax 2,090 1,074 1,208 1,238 Total Tax 796 364 434 427 Profit after Tax 1,294 710 774 811 Adj. PAT 1,294 710 774 811 Source: Company Data, PL Research. October 28, 2016 4
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