ABB Ltd

Q1CY12 Result Update

CMP: Rs. 706.6

May 16, 2012

ABB is a global provider of power transmission and distribution (T&D) products and automation technologies to utility and industry customers. It is a 75% subsidiary of ABB, the Swiss-Swedish electrical engineering company. Its businesses are divided into five segments: Power products, Power Systems, Discrete Automation and Motion, Low Voltage Products and Process Automation. For Q1CY12, ABB reported a lackadaisical performance compared to the corresponding quarter last year. Net Sales was down 0.5% yo-y to Rs 1,773 cr, operating margins down to 5.4% from 5.7% and net profits down 20% y-o-y to Rs 47.6 cr. Operating margins were affected by forex loss of Rs 32.8 cr. Orders booked were down 3.7% to Rs 1,632 cr. Orders backlog is still steady at 1.3x of companys last trailing four quarters though de-growth in order inflows remain a concern. However, some positives include turnaround in the Power Systems business with PBIT margins at 5% after reporting losses since last eight quarters, lower raw material cost as percentage costs to sales which are sustainable due to higher localization and continued capex planned by company (Rs 2.5 bn).

Key highlights of the results:

Particulars (Rs cr) Orders booked Order backlog Net Sales Other Operating Income Total Income from operations Total Expenditure Raw Material Traded Goods Employee cost Other expenses EBIDTA Depreciation EBIT Interest Other Income PBT Tax PAT Equity EPS OPM % NPM % Tax rate Q1CY12 1632 9028 1773.04 17.27 1790.3 1692.8 1091.93 65.69 148.93 386.24 97.5 22.34 75.2 5.4 1.86 71.6 24 47.6 42.38 2.2 5.4% 2.7% 33.5% Q1CY11 1695 8329 1781.3 14.66 1796.0 1694.3 1153.02 78.8 125.3 337.22 101.6 14.41 87.2 4 4.54 87.8 28.2 59.6 42.38 2.8 5.7% 3.3% 32.1% % chg -3.7% 8.4% -0.5% 17.8% -0.3% -0.1% -5.3% -16.6% 18.9% 14.5% -4.0% 55.0% -13.8% 35.0% -59.0% -18.4% -14.9% -20.0% -0.2 -0.2% Q4CY11 2209.0 9128.8 2169.6 30.2 2199.9 2091.8 1535.6 99.7 154.7 301.9 108.0 12.5 95.6 12.9 1.4 84.0 19.9 64.1 42.4 3.0 4.9% 2.9% 23.7% % chg -26.1% -1.1% -18.3% -42.9% -18.6% -19.1% -28.9% -34.1% -3.7% 27.9% -9.7% 79.4% -21.4% -58.2% 37.8% -14.7% 20.6% -25.7% -0.3 CY11 8188.8 9128.8 7370.3 78.7 7449.0 7087.2 5158.4 320.2 586.8 1021.9 361.8 79.5 282.2 30.7 16.2 267.7 83.2 184.5 42.4 8.7 4.9% 2.5% 31.1% CY10 6349.6 8436.2 6287.1 72.2 6359.3 6203.4 4504.1 298.1 490.1 911.1 156.0 51.7 104.3 17.4 13.3 100.2 37 63.2 42.4 3.0 2.5% 1.0% 36.9% % chg 29.0% 8.2% 17.2% 9.0% 17.1% 14.2% 14.5% 7.4% 19.7% 12.2% 131.9% 54.0% 170.6% 76.4% 21.6% 167.1% 124.9% 191.8% 1.9

(Source: Company, HDFC Sec)

Order inflows for the first quarter were down 3.7% y-o-y and by 11.4% q-o-q to Rs 1,632 cr. This is despite double-digit growth in power (systems and products) and low voltage products, implying sharp decline in ordering for process automation (flat ordering in discrete automation). The present order backlog of Rs 9028 cr is 1.3x companys TTM Net Sales of Rs 7362 cr.

(Source: Company, HDFC Sec)

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Growth in Net Sales was disappointing - down 0.5% y-o-y to Rs 1,773 cr due to timing issues of certain project deliveries (affecting process automation and power systems), delays in certain projects as clients are not intending to prolong schedules and conservative stand by company on execution of certain projects lacking adequate cash flows from clients. The only growth registered was by power products segment, which grew 4.1% y-o-y and low voltage products by 11.5%. Other operating revenue grew 17.8% y-o-y to Rs 17.27 cr. Operating margins have fallen to 5.4% from 5.7% in Q1CY11 though up from 4.9% in Q4CY11. Raw material as a percentage cost to sales has come down to 61.6% in Q1CY12 from 64.7% in Q1CY11 and 70.8% in Q4CY11 as company goes for higher localization. This is likely to be sustained in the coming quarters as well. Other expenses have gone up to 21.8% from 18.9% in Q1CY11 and 13.9% in Q4CY11 on account of forex loss of Rs 32.8 cr in Q1CY12. In Q1CY11, company had recorded a forex gain of Rs 2.9 cr which was included in Other Operating income. Employee expenses also have gone up to 8.4% in Q1CY12 compared to 7% in Q1CY11 and 7.1% in Q4CY11 respectively because of salary impact of Rs 7 cr for Baldor acquisition. Technology transfer has increased royalty payments to 4.5% of CY12 sales (CY11 OPM of 5%) vs. 1.5% in CY06. However, the management. believes royalties will normalize over next 3 years. Q1CY12 61.6% 3.7% 8.4% 21.8% Q1CY11 64.7% 4.4% 7.0% 18.9% Q4CY11 70.8% 4.6% 7.1% 13.9% CY11 70.0% 4.3% 8.0% 13.9% CY10 71.6% 4.7% 7.8% 14.5%

Cost as a % of net sales Raw Material Traded Goods Employee cost Other expenses

(Source: Company, HDFC Sec)

Depreciation charges have gone up by 55% y-o-y and 79.4% q-o-q to Rs 22.3 cr. Interest charges stood at Rs 5.4 cr compared to Rs 4 cr in Q1CY11 but has come down from Rs 12.9 cr in Q4CY11. PAT for the quarter is down 20% y-o-y and 25.7% q-o-q to Rs 47.6 cr. The quarter saw significant growth in exports (~10% of sales) driven by Middle East and Africa, particularly in Power segment. Services business (~10% of sales) has also shown strong performance and this continues to be an important focus area. ABB is investing Rs2.5 bn in setting up a manufacturing facility in Vadodara. The facility would support production of gas insulated switchgears, distribution transformers, motors (upto 10 MW rating from present limit of 2.5 MW) and (4) medium voltage line (doubling capacity to 24 mn poles).

Segmental Analysis: Power Systems:

Power Systems offers turnkey systems and services for power transmission and distribution grids, and for power plants. Substations and substation automation systems are key areas. Additional highlights include flexible alternating current transmission systems (FACTS), high-voltage direct current (HVDC) systems and network management systems. In power generation, Power Systems offers the instrumentation, control and electrification of power plants. Power systems Revenue PBIT PBIT % Capital employed Q1CY12 568.9 28.2 5.0% 353.1 Q1CY11 572.3 1.7 0.3% 414.9 % chg -0.6% 1548.5% -14.9% Q4CY11 731.4 -1.4 -0.2% 441.7 % chg -22.2% NC -20.1% CY11 2362.4 -83.1 -3.5% 441.7 CY10 1826.7 -110.5 -6.0% 386.2 % chg 29.3% NC 14.4%

(Rs in cr; Source: Company, HDFC Sec)

This segment reported almost flat sales of Rs 568.9 cr in Q1CY12 compared to last year. At PBIT level, margins have improved significantly to 5% from 0.3% in Q1CY11. The exit from Rural electrification business has helped the company. Pending orders of Rs 25 cr in the RE business may get eventually closed in coming quarters.

Power Products:
Power Products are the key components to transmit and distribute electricity. The division incorporates ABB's manufacturing network for transformers, switchgear, circuit breakers, cables and associated equipment. It also offers all the services needed to ensure products' performance and extend their lifespan. Power products Revenue PBIT PBIT % Capital employed Q1CY12 458.0 10.7 2.3% 705.1 Q1CY11 440.0 21.5 4.9% 679.3 % chg 4.1% -50.0% 3.8% Q4CY11 595.2 39.9 6.7% 679.3 % chg -23.0% -73.1% 3.8% CY11 2000.8 99.8 5.0% 679.3 CY10 1815.5 81.9 4.5% 584.9 % chg 10.2% 21.9% 16.1%

(Rs in cr; Source: Company, HDFC Sec)

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One of the two segments to have posted revenue growth over corresponding quarter year (the other being Low Voltage Products); Power Products segment grew by 4.1% y-o-y to Rs 458 cr. PBIT margins have halved from 4.9% to 2.3% in Q1CY12 leading to 50% decline in PBIT to Rs 10.7 cr.

Process Automation:
ABBs Process Automation division delivers integrated automation solutions for control, plant optimization, and industry-specific application knowledge and services to help process industry customers worldwide improve their energy efficiency and meet their critical business needs in the areas of operational profitability, capital productivity, risk management and global responsibility. These industries include oil and gas, power, chemicals and pharmaceuticals, pulp and paper, metals, minerals, cement, marine and turbo charging. Key customer benefits include improved asset productivity and energy savings. Process Automation Revenue PBIT PBIT % Capital employed Q1CY12 303.9 8.3 2.7% 414.6 Q1CY11 329.8 21.7 6.6% 329.2 % chg -7.9% -61.6% 25.9% Q4CY11 425.5 -5.4 -1.3% 360.4 % chg -28.6% -255.4% 15.0% CY11 1321.9 37.7 2.9% 360.4 CY10 1188.7 81.6 6.9% 295.9 % chg 11.2% -53.8% 21.8%

(Rs in cr; Source: Company, HDFC Sec)

The process automation segment posted 7.9% y-o-y drop in revenues to Rs 303.9 cr led by weak cement, steel orders. PBIT margins have come down to 2.7% from 6.6% in Q1CY12 while PBIT has dropped to Rs 8.3 cr.

Discrete Automation & Motion:

This division provides products, solutions and related services that increase industrial productivity and energy efficiency. Its motors, generators, drives, programmable logic controllers (PLCs), power electronics and robotics provide power, motion and control for a wide range of automation applications. The drives market in India is ~ 1500 cr in which ABB has a market share of more than 30%. Motor market is about Rs 3000 cr in which the company has a market share of ~20%. Discrete Automation& Motion Revenue PBIT PBIT % Capital employed Q1CY12 414.1 43.2 10.4% 284.1 Q1CY11 417.4 50.9 12.2% 253.1 % chg -0.8% -15.0% 12.2% Q4CY11 527.1 77.9 14.8% 208.4 % chg -21.5% -44.5% 36.4% CY11 1799.3 206.6 11.5% 208.4 CY10 1592.9 132.1 8.3% 200.5 % chg 13.0% 56.4% 3.9%

(Rs in cr; Source: Company, HDFC Sec)

Revenues for this segment have been stagnant at Rs 414.1 cr. PBIT margins too have deteriorated to 10.4% from 12.2% in Q1CY11 leading to decline in profits of 15% for the segment at Rs 43.2 cr.

Low Voltage Products:

The low voltage products division manufacturers low voltage circuit breakers, switches, control products, wiring accessories, enclosures and cable systems to protect people, installations and electronic equipment from electrical overload. The division further makes KNX systems that integrate and automate a buildings electrical installations, ventilation systems and security and data communication networks. Low Voltage Products Revenue PBIT PBIT % Capital employed Q1CY12 144.7 8.2 5.7% 223.3 Q1CY11 129.7 10.4 8.0% 137.9 % chg 11.5% -21.5% 61.9% Q4CY11 144.9 8.3 5.7% 201.4 % chg -0.2% -0.8% 10.9% CY11 539.9 34.1 6.3% 201.4 CY10 448.6 1.8 0.4% 125.7 % chg 20.4% 1786.2% 60.2%

(Rs in cr; Source: Company, HDFC Sec)

The low voltage segment posted growth of 11.5% y-o-y to Rs 144.7 cr. However, PBIT margins have declined to 5.7% from 8% y-o-y while profit growth has declined 21.5% to Rs 8.2 cr.

Concerns
Slowdown in industrial capex may put a dampener on companys growth in revenues and order book Volatility in raw material costs and execution delays impact operating margins adversely Execution risk Increasing competition from local & foreign players. Potential delay in power sector reforms/capex Exchange rate volatility risk

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Conclusion:
ABB, the parent is a worldwide leader in power transmission and distribution and process automation space. ABB India is 75% subsidiary of ABB with focus on power T&D and automation space. Given that Indias power capex is spread out and a multi-year theme, ABB is likely to sustain through in the long run with its strong balance sheet and technological leadership. At present, the power theme is off-track with delays and postponements due to high cost of capital, inflation pressures, uncertain macro environment and competition pressures. ABB has to also to deal with prequalification norms relaxation by PGCIL to allow nonequipment manufacturers to participate in turnkey substation jobs. The competition in the T&D space is intensifying and hence it is a difficult operating environment for the company. Several EPC contractors have entered the T&D space and they are pulling down the prices. Chinese competition is continuing. Management stated that though India remains a highly competitive market, prices have begun to stabilize. For the first quarter of its calendar year Q1CY12, ABB reported a lackadaisical performance compared to the corresponding quarter last year. Q1CY11 had bolstered up some positive outlook for CY11 whereas Q1CY12 fails to do so. Net Sales was down 0.5% y-o-y to Rs 1,773 cr, operating margins down to 5.4% from 5.7% and net profits down 20% y-o-y to Rs 47.6 cr. ABBs historical margins of 8-10% seem to be an uphill task for the company in the present scenario and may take some to achieve. Orders booked were down 3.7% to Rs 1,632 cr. Orders backlog is still steady at 1.3x of companys last trailing four quarters though de-growth in order inflows remain a concern. We are maintaining our CY12 estimates and expect margins to be at the lower end with weak profitability on orders booked in a difficult environment though the situation/performance could improve in second half of CY12. Margin recovery is the key which given the intensified competition, increasing pricing pressure and rising input costs is getting difficult for the company to attain at present. Order book of the company is healthy but the order mix is likely to keep margins on the lower side. With only Rs 25 cr of pending Rural electrification orders, its negative impact on margins has come down and is a thing of the past. Other positives are the higher capital expenditure (Rs 2.5 bn) planned and lower raw material cost (as % cost to sales) in Q1CY12 from higher localization and therefore sustainable in nature. In our Q4CY11 Result Update dated February 28, 2012 we had stated that the stock could trade in the Rs 593 Rs 745 (43x-54x th CY12E EPS) band for the next quarter. Post the issue of the report, the stock made a low of Rs 713.1 on 10 May 2012 and a high of nd Rs 812.2 on 2 May 2012. Most capital goods stocks, including some of ABBs closest peers, are trading at significant discount to their historical average PE band. Historical buyback price of Rs 900 and expectation of delisting is providing support to the stock price. We think that the stock could trade in the Rs 662 Rs 800 (48x-58x CY12E EPS) band for the next quarter. The high P/E multiple are a factor of i) in anticipation of corporate action by the parent (buyback, delisting etc) ii) low floating stock iii) street discounting CY12 and CY13 numbers which it feels can be a great improvement over CY11 numbers.

Financials
Particulars (Rs in cr) Sales EBIDTA EBIDTA (%) PAT PAT (%) EPS PE CY09 6237.2 583 9.3% 354.6 5.7% 16.7 43.1 CY10 6359.3 156 2.5% 63.2 1.0% 3 240.3 CY11(A) 7449.0 361.8 4.9% 184.5 2.5% 8.7 82.9 CY12 (E) 8611.3 533.9 6.2% 292.1 3.4% 13.8 52.2

(*Quick Estimates, A-Actual, Source: Company, HDFC Sec)

Analyst: Siji A. Philip Capital Goods, Power & Mid Caps Email: siji.philip@hdfcsec.com RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 3075 3450 Corporate Office
HDFC Securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients only and not for any other category of clients, including, but not limited to, Institutional Clients

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