Why ABB's good fourth quarter numbers may not boost its share price

While global slowdown may limit growth and margins may have peaked, analysts are divided with target prices ranging between Rs 2,820 and Rs 3,370

ABB India reported a good October-December quarter performance (this is Q4, CY22 in the company’s financial reporting year) with revenue up 15.5 per cent year-on-year (YoY) and a big expansion of EBITDA margin of over 600 basis points. The order book increased 21 per cent YoY with new orders of Rs 2,340 crore. The company also has a big cash reserve of Rs 3,600 crore, which it is considering deploying in acquisitions.

Sales grew 15.5 per cent YoY to Rs 2,430 crore, including stronger activity in Tier-3 and Tier-4 cities. The motion segment revenue grew 23.1 per cent YoY to Rs 940 crore; Electrification grew 11.9 per cent YoY to Rs 950 crore; Process Automation grew 8.5 per cent YoY to Rs 510 crore and Robotics grew 15.4 per cent YoY to Rs 62.8 crore.

The EBITDA rose 96.7 per cent YoY to Rs 360 crore with EBITDA margins expanding by 620 basis points to 15 per cent. This expansion was on the back of better gross margin in the mix, better capacity utilisation and an improving supply chain.

Profit after tax (PAT) grew 92 per cent YoY to Rs 310 crore, with better operational performance boosted by lower effective tax rate. Management guidance indicated that around Rs 2,000 crore of cash balances was earmarked for mergers and acquisitions of small/ medium firms related to digitalisation, value-added services, etc.

The outstanding Order Book was over Rs 6,700 crore with the biggest expansion seen in Robotics where order flow increased by over 200 per cent. Almost 50 per cent of orders are coming from Tier 3 and Tier 4. One note of caution is that management stated that some customers are directly ordering with overseas group entities, which may lead to slowdowns. There was also the deferral of railway orders which are expected to resume in the coming quarters.

While there’s consensus that volume growth rates can be maintained, analysts are divided on recommendations. The company has always been highly valued (close to 90x of current PE) and that could limit the upside since the results and growth rates are fairly predictable.

Also, the current EBITDA and PAT margins may have peaked or come near the peak in the medium-term. Export growth (exports currently contribute 12 per cent) is also likely to be flat given global slowdown so it’s basically a domestic play with a focus on rural/ semi-urban areas given the Tier 3 and Tier 4 growth rates.

The market has responded positively to the results – and in a more generic way, there’s bullish action across the engineering and capital goods sector. The current market price is around Rs 3,100. Conservative valuations would indicate a fair-value of around Rs 2,820, which is why some analysts are recommending “reduce”. Other valuations place fair-value at around Rs 3,275, Rs 3,350 and Rs 3,370. This is a narrow range both on the upside and downside. The company has fair growth prospects and it is in an upcycle.