ABB –Buy- Anand Rathi
Losses in power systems and in marked-to-market derivative contracts hit ABB’s 1Q profitability. Year-on-year, sales rose a modest 5%, while net profit, adjusted for exceptionals, slid 8%. The Rs8,700 crore orderbook assures revenue, orders in the industry sector picking up strongly.
We maintain BUY on the strong orderbook (Rs8,700 crore, up 24% y-o-y), likely recovery in power systems and infra-driven capital expenditure.
Though Power Systems’ revenue declined, the strong growth in automation and flat growth in Power products helped revenue rise a modest 5% y-o-y. Operating margin slipped 327bp y-o-y due to the rise in raw material costs (10% y-o-y) and in employee costs, while ‘other expenses’ declined. The cost of quitting RE and overruns in projects resulted in lower operating profit.
The company booked a Rs695 million loss on the fair marked-to-market valuation of derivative contracts. Adjusted for exceptionals, y-o-y profit-before-tax declined 25% to Rs907m, while profit-after-tax slipped 8% to Rs721 million.
Our December 2010 target price of Rs1,020 is 30x CY11e EPS. Slow recovery in the Systems business, weak order inflows and commodity prices are key risks.
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