ABB India (ABB IN) Bottom cycle valuation despite stable outlook

INSTITUTIONAL EQUITY RESEARCH ABB India (ABB IN) Bottom cycle valuation despite stable outlook INDIA CAPITAL GOODS Quarterly Update Top takeaways from 2QCY18 ABB's 2QCY18 PAT (Rs 1bn, +36% yoy) was 12% below our/consensus estimates due to lower than expected other income as revenues and EBITDA were largely inline. Revenues (Rs 27.1bn) grew +21% yoy, led by domestic sales (85% of sales, +26%) on execution of its HVDC and railways orders. Gross margins contracted 265bps yoy (33.5% vs. 36.2%) due to higher share of lowmargins project revenue, INR depreciation, and rise in commodity prices. However, EBITDA margins expanded 65bps yoy to 7.2%, led by operating leverage benefits. Order inflows (Rs 24.7bn) grew 7% yoy supported by base orders with strong exports (+68%) and services (+52%). Order book (Rs 107bn, 11%) was 1.1x TTM sales. Key highlights: Revenue was supported by growth in Power Grids (39% of sales, +41%) and Robotics & Motion (23% of sales, +34%). Segmentally, profitability was driven by power grids (+46% yoy) and robotics & automation (+65%) on strong execution/margins and industrial automation (+21%) led by margins; electrification products declined by 11%. Conference call takeaways Orders were supported by robotic & motion (+25%), industrial automation (+25%), and electrification products (+13%) while power grid orders declined by 10%. In industry, management expects a revival in the private capex cycle in 2019. Consumerled sectors (automobile and F&B), efficiency improvement/technology up gradation in steel, cement, and oil & gas will drive growth in the short/medium term. In infra and transportation, orders in the medium term will be driven by railways (rolling stock and electrification), metro rails, airports, smart cities, water and data centres. 11% decline in 2Q18 orderbook is partly attributable to a Rs 6.7bn (6% of 1Q orderbook) adjustment (cut), which was not adequately explained by the management. Outlook and valuation: ABB s stock price has corrected by 30% in the past six months, despite it showing consistent earnings and cash flow growth in the past five quarters. In our view, the major overhang on the stock is the expected slowdown in power T&D (> 50% of orderbook). However, in the medium term, a pickup in orders from hydrocarbon, continued growth in railway, metro, exports, and its service businesses should partly offset lower orders in T&D. In addition, a government heavy orderbook that offers price variation, coupled with growing contribution from relatively higher margins business lines, such as exports (15% of sales) and services (13% of sales), should help negate the impact of high raw material costs. Finally, as bulk of the capex is behind us, cash flow generation should also be robust at Rs 14bn (6% of market cap) over CY18 20 with ROIC improving to 25% in CY20 from 16% in CY17. Valuations at 34x CY20 PE look fair even after consensus earnings for CY18/19 have been cut by 14%/24% in the past 18 months. We see limited downside to current valuations, so we upgrade our rating to Neutral (from Sell) with a revised target of Rs 1,100 (Rs 1,000 earlier) based on 35x June 2020 earnings. Downside risk: slowdown in power T&D is a notable risk that will continue to determine stock performance. 20 July 2018 NEUTRAL (Upgrade) CMP RS 1135/ TARGET RS 1100 ( 3%) COMPANY DATA O/S SHARES (MN) : 212 MARKET CAP (RSBN) : 252 MARKET CAP (USDBN) : 3.7 52 WK HI/LO (RS) : 1744 / 1123 LIQUIDITY 3M (USDMN) : 1.5 PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Jun 18 Mar 18 Dec 17 PROMOTERS : 75.0 75.0 75.0 FII / NRI : 3.2 3.2 3.1 FI / MF : 13.4 13.5 13.7 NON PRO : 1.7 1.6 1.4 PUBLIC & OTHERS : 6.7 6.7 6.8 KEY FINANCIALS Rs bn CY17 CY18E CY19E Net Sales 90.87 109.29 118.03 EBIDTA 7.36 9.66 10.74 Net Profit 4.14 5.44 6.15 EPS, Rs 19.6 25.7 29.0 PER, x 58.0 44.2 39.1 EV/EBIDTA, x 31.5 23.9 21.0 ROE, % 12.0 14.2 14.4 Total debt/equity (%) 16.9 14.9 10.5 CHANGE IN ESTIMATES _Revised Est. % Revision Rs bn CY18E CY19E CY18E CY19E Revenue 109.29 118.03 4.2% 7.1% EBITDA 9.66 10.74 1.9% 2.7% Core PAT 5.44 6.15 4.7% 4.6% EPS (Rs) 25.7 29.0 4.7% 4.6% Jonas Bhutta (+ 9122 6246 4119) jbhutta@phillipcapital.in Vikram Rawat (+ 9122 6246 4120) vrawat@phillipcapital.in (Rs bn) Q2CY18 Q2CY17 Change yoy vs. expectations Comments Order book 1,07,170 1,20,940 11% 7% Partly due to a Rs 6.7bn (6%) adjustment Order inflow 24,740 23,020 7% 2% Supported by base orders with exports (+68%) and services (+52%) Sales 27,127 22,333 21% 2% Execution of HVDC and railways orders Gross margin (%) 33.5% 36.2% 265 bps 46 bps Due to higher project sales, INR depreciation, and rise in commodity EBITDA 1,959 1,473 33% 5% prices EBITDA margin (%) 7.2% 6.6% 63 bps 55 bps Supported by operating leverage benefits Recurring PAT 1,022 751 36% 12% Impacted by lower other income Reported PAT 1,022 751 36% 12% Recurring EPS (Rs) 4.8 3.5 36% 12% Page 1 PHILLIPCAPITAL INDIA RESEARCH

ABB INDIA QUARTERLY UPDATE ABB India: Quarterly results Rs Mn Q2CY18 Q2CY17 Change yoy Net Sales 27,127 22,333 21.5% Cost of materials 18,030 14,253 27% % of sales 66.5% 63.8% 265 bps Gross profit 9,098 8,081 12.6% Gross margins (%) 33.5% 36.2% 265 bps Employee cost 2,231 2,168 2.9% % of sales 8.2% 9.7% 148 bps Other expenses 4,908 4,440 10.5% % of sales 18.1% 19.9% 179 bps EBITDA 1,959 1,473 33.0% EBITDA margins (%) 7.2% 6.6% 63 bps Depreciation 356 383 7.1% EBIT 1,603 1,090 47.1% EBIT margins (%) 5.9% 4.9% 103 bps Interest 232 231 0.6% Other Income 236 326 27.7% PBT 1,607 1,185 35.6% Tax 586 435 34.7% Tax rate (%) 36.4% 36.7% 23 bps Recurring PAT 1,022 751 36.1% PAT margin (%) 3.8% 3.4% 40 bps Reported PAT 1,022 751 36.1% Recurring EPS (Rs) 4.8 3.5 36.1% ABB India: Segment results (Rs mn) Q2CY18 Q2CY17 Change yoy Sales Electrification Products 6,461 6,447 0% Robotics & motion 6,152 4,590 34% Industrial Automation 3,768 3,506 7% Power Grids 10,606 7,513 41% Segment Total 26,986 22,056 22% Add: Unallocated 884 2,400 63% Less: Inter segment (743) (745) 0% Less: Excise duty (1,378) 100% Net sales 27,127 22,333 21% EBIT Electrification Products 576 646 11% Robotics & motion 507 307 65% Industrial Automation 382 316 21% Power Grids 1,098 753 46% Segment EBIT 2,562 2,022 27% Un allocable expenses, net (723) (606) 19% Interest expense (232) (231) 1% PBT 1,607 1,185 36% EBIT Margin (%) Electrification Products 8.9% 10.0% 110 bps Robotics & motion 8.2% 6.7% 154 bps Industrial Automation 10.1% 9.0% 112 bps Power Grids 10.3% 10.0% 32 bps Segment EBIT Margin 9.5% 9.2% 33 bps Source: Company, PhillipCapital India Research Estimates Page 2 PHILLIPCAPITAL INDIA RESEARCH

ABB INDIA QUARTERLY UPDATE ABB India: Balance sheet (Rs mn) Q2CY18 Q4CY17 Q2CY17 Equity capital 424 424 424 Reserves and surplus 36,678 35,645 33,110 Networth 37,101 36,069 33,534 Borrowings 6,307 6,041 6,000 Deferred tax liability, net (1,151) (1,173) (1,262) Capital Employed 42,258 40,937 38,272 Fixed assets, net 13,746 13,351 13,028 Investments 2,634 2,706 2,663 Inventories 13,124 11,536 10,525 Receivables 29,256 27,878 28,265 Cash & bank balances 13,293 14,917 13,355 Other assets, loans & advances 19,825 17,320 11,712 Current assets 75,497 71,650 63,857 Trade payables 30,278 27,131 21,300 Other liabilities 15,791 16,067 16,597 Provisions 3,551 3,572 3,379 Current liabilities 49,620 46,770 41,276 Net current asset 25,878 24,880 22,581 Capital Deployed 42,257 40,937 38,272 Balance sheet analysis Gross debt 6,307 6,041 6,000 Cash & investments 15,927 17,623 16,018 Net debt / (cash incl. Investments) (9,620) (11,581) (10,018) Net working capital ex cash 12,584 9,963 9,226 NWC ex cash % of sales 13% 11% 10% NWC ex cash days 46 40 38 Inventory days 48 46 43 Receivable days 107 112 115 Other assets, L&A days 73 70 48 Gross working capital days 228 228 206 Trade payable days 111 109 87 Other liability days 58 65 68 Provisions days 13 14 14 Current liability days 182 188 168 NWC ex cash days 46 40 38 Source: Company, PhillipCapital India Research Estimates Page 3 PHILLIPCAPITAL INDIA RESEARCH

ABB INDIA QUARTERLY UPDATE Financials Income Statement Y/E Dec, Rs mn CY17 CY18e CY19e CY20e Net sales 90,873 1,09,288 1,18,032 1,26,837 Growth, % 5 20 8 7 Total income 90,873 1,09,288 1,18,032 1,26,837 Raw material expenses 58,906 72,002 77,311 83,078 Other Operating expenses 16,644 18,760 20,317 21,072 EBITDA (Core) 7,361 9,657 10,737 12,150 Growth, % 6.0 31.2 11.2 13.2 Margin, % 8.1 8.8 9.1 9.6 Depreciation 1,580 1,479 1,752 1,944 EBIT 5,781 8,179 8,985 10,206 Growth, % 6.4 41.5 9.9 13.6 Margin, % 6.4 7.5 7.6 8.0 Interest paid 773 895 699 673 Other Non Operating Income 1,128 1,023 1,100 1,278 Pre tax profit 6,054 8,307 9,386 10,811 Tax provided 1,992 2,866 3,238 3,730 Net Profit 4,063 5,441 6,148 7,081 Net Profit (adjusted) 4,144 5,441 6,148 7,081 Growth, % 16.2 31.3 13.0 15.2 Wtd avg shares (m) 212 212 212 212 Balance Sheet Y/E Dec, Rs mn CY17 CY18e CY19e CY20e Cash & bank 14,917 16,073 19,431 25,563 Debtors 27,878 32,936 34,924 36,835 Inventory 11,536 13,903 14,716 15,586 Loans & advances 462 462 462 462 Other current assets 16,858 20,539 22,331 24,320 Total current assets 71,650 83,913 91,865 1,02,766 Investments 2,706 2,706 2,706 2,706 Gross fixed assets 15,251 17,251 19,251 21,251 Less: Depreciation 3,064 4,543 6,295 8,239 Add: Capital WIP 1,165 1,165 1,165 1,165 Net fixed assets 13,351 13,873 14,120 14,176 Total assets 88,881 1,01,665 1,09,865 1,20,822 Current liabilities 43,156 51,105 55,555 60,451 Provisions 3,572 4,173 4,458 4,746 Total current liabilities 46,728 55,278 60,014 65,197 Non current liabilities 6,084 6,000 4,721 5,073 Total liabilities 52,812 61,278 64,735 70,270 Paid up capital 424 424 424 424 Reserves & surplus 35,645 39,962 44,706 50,128 Shareholders equity 36,069 40,386 45,130 50,551 Total equity & liabilities 88,881 1,01,665 1,09,865 1,20,822 Source: Company, PhillipCapital India Research Estimates Cash Flow Y/E Dec, Rs mn CY17 CY18e CY19e CY20e Pre tax profit 6,054 8,307 9,386 10,811 Depreciation 1,580 1,479 1,752 1,944 Chg in working capital 2,277 2,556 141 414 Total tax paid 1,861 2,866 3,238 3,730 Cash flow from operating activities 7,998 4,236 7,640 8,834 Capital expenditure 1,704 2,000 2,000 2,000 Chg in investments 2,543 0 0 0 Cash flow from investing activities 3,287 977 900 722 Free cash flow 4,711 3,259 6,740 8,112 Debt raised/(repaid) 83 84 1,279 352 Dividend (incl. tax) 1,123 1,404 1,660 1,787 Other financing activities 648 614 443 545 Cash flow from financing activities 1,689 2,102 3,382 1,981 Net chg in cash 3,023 1,157 3,358 6,132 Valuation Ratios Y/E Dec CY17 CY18e CY19e CY20e Per Share data EPS (INR) 19.6 25.7 29.0 33.4 Growth, % 16.2 31.3 13.0 15.2 Book NAV/share (INR) 170.2 190.6 213.0 238.6 FDEPS (INR) 19.6 25.7 29.0 33.4 CEPS (INR) 27.4 32.7 37.3 42.6 CFPS (INR) 32.7 15.8 32.8 38.5 DPS (INR) 4.4 5.5 6.5 7.0 Return ratios Return on assets (%) 5.5 6.3 6.2 6.5 Return on equity (%) 12.0 14.2 14.4 14.8 Return on capital employed (%) 11.9 14.0 14.1 14.6 Turnover ratios Asset turnover (x) 3.2 3.8 3.8 4.1 Sales/Total assets (x) 1.1 1.1 1.1 1.1 Sales/Net FA (x) 6.8 8.0 8.4 9.0 Working capital/sales (x) 0.1 0.2 0.1 0.1 Fixed capital/sales (x) 0.1 0.1 0.1 0.1 Working capital days 55 56 52 48 Liquidity ratios Current ratio (x) 1.7 1.6 1.7 1.7 Quick ratio (x) 1.4 1.4 1.4 1.4 Interest cover (x) 7.5 9.1 12.9 15.2 Dividend cover (x) 4.4 4.7 4.5 4.8 Total debt/equity (%) 16.9 14.9 10.5 10.0 Net debt/equity (%) (24.5) (24.9) (32.6) (40.5) Valuation PER (x) 58.0 44.2 39.1 34.0 Price/Book (x) 6.7 6.0 5.3 4.8 Yield (%) 0.4 0.5 0.6 0.6 EV/Net sales (x) 2.5 2.1 1.9 1.7 EV/EBITDA (x) 31.5 23.9 21.0 18.1 EV/EBIT (x) 40.1 28.2 25.1 21.6 Page 4 PHILLIPCAPITAL INDIA RESEARCH

ABB INDIA COMPANY UPDATE Stock Price, Price Target and Rating History 1800 1600 S (TP 915) S (TP 970) S (TP 1030) S (TP 1100) 1400 1200 S (TP 672) S (TP 750) S (TP 760) S (TP 795) S (TP 780) S (TP 890) S (TP 1100) 1000 800 600 400 200 0 J 15 S 15 O 15 D 15 J 16 M 16 S (TP J 16 J 16 S 16 O 16 D 16 J 17 F 17 A 17 M 17 J 17 A 17 O 17 N 17 J 18 F 18 A 18 M 18 J 18 760) Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL 15% > to < +15% Target price is less than +15% but more than 15% SELL <= 15% Target price is less than or equal to 15%. Page 5 PHILLIPCAPITAL INDIA RESEARCH

ABB INDIA COMPANY UPDATE RESEARCH Automobiles Dhawal Doshi Nitesh Sharma, CFA Agro Chemicals Varun Vijayan Banking, NBFCs Manish Agarwalla Pradeep Agrawal, Sujal Kumar Consumer Naveen Kulkarni, CFA, FRM Preeyam Tolia, Vishal Gutka MANAGEMENT Vineet Bhatnagar (Managing Director) Kinshuk Bharti Tiwari (Head Institutional Equity) Jignesh Shah (Head Equity Derivatives) Midcaps Deepak Agarwal Akshay Mokashe Pharma & Specialty Chem Surya Patra Mehul Sheth, Rishita Raja Retail & Real Estate Vishal Gutka Dhaval Somaiya Strategy Naveen Kulkarni, CFA, FRM Neeraj Chadawar REGIONAL MEMBER COMPANIES INDIA PhillipCapital (India) Private Limited www.phillipcapital.in SINGAPORE Phillip Securities Pte Ltd www.phillip.com.sg JAPAN Phillip Securities Japan, Ltd www.phillip.co.jp THAILAND Phillip Securities (Thailand) Public Co. Ltd. www.phillip.co.th UNITED STATES Phillip Futures Inc. Cement Vaibhav Agarwal Engineering, Capital Goods Jonas Bhutta Vikram Rawat Economics Anjali Verma Raag Haria IT Services Vibhor Singhal Shyamal Dhruve Infrastructure Vibhor Singhal Deepika Bhandari Logistics, Transportation & Midcap Vikram Suryavanshi Media Naveen Kulkarni, CFA, FRM Vishal Gutka Metals Dhawal Doshi Vipul Agrawal Telecom Naveen Kulkarni, CFA, FRM Technicals Subodh Gupta, CMT Production Manager Ganesh Deorukhkar Editor Roshan Sony Sr. Manager Equities Support Rosie Ferns SALES & DISTRIBUTION Kishor Binwal Bhavin Shah Ashka Gulati Archan Vyas Sales Trader Dilesh Doshi Execution Mayur Shah CORPORATE COMMUNICATIONS Zarine Damania MALAYSIA Phillip Capital Management Sdn Bhd www.poems.com.my INDONESIA PT Phillip Securities Indonesia www.phillip.co.id FRANCE King & Shaxson Capital Ltd. www.kingandshaxson.com AUSTRALIA PhillipCapital Australia www.phillipcapital.com.au HONG KONG Phillip Securities (HK) Ltd www.phillip.com.hk CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. www.phillip.com.cn UNITED KINGDOM King & Shaxson Ltd. www.kingandshaxson.com SRI LANKA Asha Phillip Securities Limited www.ashaphillip.net/home.htm Page 6 PHILLIPCAPITAL INDIA RESEARCH

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