Sell ABB, target price Rs 766: Emkay Global

Emkay Global has given a sell rating to ABB with a 12-month target price of Rs 766.

ABB India posted weaker-than-expected Q1CY20 results on worse-than-expected impact on revenues from the Covid-19 lockdown. Revenues were down 17.7 per cent year on year, led by a 14- 24 per cent decline in its key segments leading to overall weak numbers. Order growth was also affected and stood at 10 per cent year on year, thus leaving Rs 44.4 billion as order backlog which is 0.65 times of CY20E revenues. Challenging ordering environment ahead makes us now even more skeptical of medium-term growth prospects for the company. While ABB has a strong competitive positioning in its industrial footprint, it has been vulnerable to business cyclicality, and macro headwinds and capex problems in the postCovid environment will get further accentuated across sectors, in our view.

The brokerage continues to value ABB on discounted cash flow, assigning a target price of Rs 766 (36 times CY21E P/E) from Rs791 earlier.

Investment Rationale

Over the years, investors have been ascribing super-normal valuations to ABB India. The brokerage believes that investors remain anchored to a hope of recovery in industrial capex driven by capex-intensive sectors such as power, metals and hydrocarbons just like in the 2004-11 upcycle. In its view, even pre-Covid this was an unrealistic ask and gets further pushed back now. At CMP, the stock trades at 40 times CY21E EPS and remains the most expensive stock in its ECG coverage universe.

Key upside risk to the brokerage call is a sharp capex revival.

Financials

For the quarter ended September 30, 2019, the company reported consolidated sales of Rs 1723.76 crore, up 0.89 per cent from last quarter sales of Rs 1708.58 crore. The company reported net profit after tax of Rs 135.28 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 75 per cent stake in the company as of December 31, 2019, while FIIs held 3.31 per cent, DIIs 11.61 per cent and public and others 10.08 per cent.