Stock Market Result Update on ABB India for 2QCY2011

Stock Market Result Update on ABB India for 2QCY2011 with a Sell recommendation and a Target Price of `578 (12 months).

ABB India (ABB) reported mixed set of results for 2QCY2011. The company outperformed on the top-line front but disappointed on the earnings estimate due to lower-than-expected margin. The company reported strong growth of 17.0% yoy in its top line to `1,713cr, which was higher by 1.8% from our expectation of `1,683cr. However, weak operational performance (margin pressures) dented the company’s overall profitability – PAT remained flat with 1.1% yoy growth to `39cr. We maintain our Sell view on the stock.

Steady growth; earnings recovery yet to gain momentum: Aided by higher execution, ABB’s revenue grew by 17% yoy to `1,713cr (`1,463cr). Growth was driven by balanced performance across most of the operating divisions. However, margin recovery remained back-ended compared to the previous year, which witnessed cost overruns in RE projects. OPM slightly improved by 44bp yoy to 5%; however, it was well below our estimate of 8%. Interest cost rose by 55% yoy to `7cr (`4cr), partly offset by higher other income at `7cr (`5cr). Depreciation more than doubled compared to 1QCY2011 at `26cr (`12cr). Consequently, PAT was considerably impacted, registering flat growth of 1.1% yoy to `39cr.

Outlook and valuation: At the current valuation of 37.3x CY2012E EPS, the stock is highly expensive compared to its peers such as Crompton Greaves (9.7x FY2013E EPS) and Areva T&D (19x CY2012E EPS). Going ahead, even a meaningful earnings recovery would do little to justify such expensive valuation. Hence, we continue to maintain our Sell view with a revised target price of `578 (`637), assigning a multiple of 27x CY2012 EPS.