Stock Market Result Update on ABB India for 3QCY2011

Stock Market Result Update on ABB India for 3QCY2011 with a SELL recommendation and a Target Price of `469 (12 months).

ABB India’s (ABB) 3QCY2011 results exceeded ours and street’s estimate on the top-line front. However, the company’s earnings disappointed on the bottom-line front and were significantly below street’s as well as our earnings estimate (down by ~50.5%). At current levels, ABB’s stock is trading at rich valuations (40.5x CY2012E EPS), despite numerous headwinds faced by the company/sector. Further, we do not expect much positive development on news flows as well in near future. Hence, we continue to maintain our Sell view on the stock.

Numbers post growth mainly on account of low base: Aided by strong execution, ABB’s revenue grew by 29.2% yoy to `1,744cr (`1,349cr), 13.4% higher than our estimate of `1,538cr. The upside in revenue was facilitated by all the business divisions. EBITDAM improved by 127bp yoy to 3.8%; however, it was well below our estimate of 6.0%. Notably, EBITDAM contracted by ~120bp on a qoq basis, despite nil provisioning for RE projects, which indicates that cost pressures weigh heavily on the margin. Nonetheless, PAT grew by 92.6% yoy albeit on a low base to `22.2cr, however it was 50.5% below our (below street) estimate of `44.8cr.

Outlook and valuation: At the CMP, the stock trades at 40.5x its CY2012E P/E, which is highly expensive compared to its peers such as Crompton Greaves (11.0x its FY2013E P/E) and Areva T&D (18.9x its CY2012E P/E). Such high valuations are unjustifiably expensive given the current state of the power sector and various headwinds faced by the company on the operating front (such as execution of existing low-margin orders and cut-thought pricing for new orders) Hence, we continue to maintain our Sell view with a revised target price of `469 (earlier `578), assigning a multiple of 27.0x its CY2012E P/E.