“Certain bright spots in the industrial horizon included some movement in stalled projects, traction in the renewable energy market, make in India policy initiatives, and the investment to revamp and upgrade the railways by the Indian government.” – ABB’s AR15. ABB’s cost focus should lead to sharp operating leverage as revenue recovery kicks in. Remain positive with a revised TP of Rs 1,700 v/s Rs 1,450 (roll-over to CY17E).
ABB has discussed cost focus in its calls and annual reports. Management focus on material and vendor costs has yielded results with CY15 160 bps y-o-y gross margin expansion. Additional cushion from fixed cost savings should pan out in the next 12-18 months. CY15 gross block addition has been negligible and current 4x asset turn vs 9.7x peak points to leverage potential. Working capital has stabilised at 19-20% of sales. Lower Debtor days has been offset by drop in contractee advances.
ABB’s exports have dropped y-o-y in CY15, post the 26% CAGR seen during CY10-14. Management has indicated on its calls that timing issues and elections in different countries have had a role to play. We believe this is an aberration and exports should recover as trend in incremental outsourcing to India operations from the parent should recover.
Global CEO in a recent interview discussed India operations being a manufacturing base for South Asia. Base orders have risen 10% y-o-y in CY15, while overall order flow is up 2% y-o-y. Renewable energy continues to be a big driver with inverter sales more than doubling from 450 MW to 1,200 MW in CY15.
