Citigroup is bullish on http://indiaearnings.moneycontrol.com/sub_india/comp_results.php?sc_did=ABB - ABB and has recommended buy rating on the company raising the target price to Rs 1266 from Rs 1103.20. Research firm expect earnings CAGR of 49% (from 42% earlier) over CY06-09E with RoEs at the 37% level, driven by sales CAGR of 42%.

Citigroup report on ABB:

Raise target price to Rs 1,266:

We are raising our target price to Rs 1,266 (from Rs 1,103.2 earlier) on the back of a 7-17% earnings revision over CY06- 09E. We now expect earnings CAGR of 49% (from 42% earlier) over CY06-09E with RoEs at the 37% level, driven by sales CAGR of 42%.

30% premium to BHEL:

Our target price is based on a P/E of 30x FY09E at a 30% premium to BHEL given: 1) EPS CAGR of 49%; 2) RoEs of 37%; 3) Access to parent technology; and 4) ABB India’s importance in the ABB Group.

Power opportunity: Stronger for longer:

India needs investments to the tune of USD 246 billion in the power sector in the XIth Plan (FY08-12). Of this, 41.8% pertains to T&D and RE that ABB can address. Further, with generation targets set at 82.2GW in the XIIth Plan (FY13-17) vis-à-vis 78.6GW in the Xth Plan, this opportunity will only grow bigger.

Can ABB India match ABB China?:

ABB China grew sales at a CAGR of 33% over a 7-year period between CY98 to CY05. ABB India may find it possible to repeat this feat in India given India is the fastest growing T&D market in the world, a fact corroborated by both ABB an Areva.

Increasing importance in the ABB group:

India is not only a promising domestic market, where ABB is well-positioned as a market leader in power and automation technologies, but also a key regional and global resource base because of lower costs and higher productivity. ABB India is now a 1) global sourcing hub; 2) global R&D centre; and 3) regional excellence centre.

New target price of Rs 1,266

We are raising our target price to Rs 1,266 (from 1103.2 earlier) on the back of a 7-17% earnings revision over CY07E-09E. Our target price is based on 30x FY09E (same as earlier), which is a 30% premium to BHEL. Our argument about why ABB should trade at a premium to BHEL (BHEL.BO – Rs 1,806.15; 1L) remains the same:

1) Business and Financial Perspective

ABB is the best play on the India’s T&D capex, in our view, and we believe the T&D capex cycle will be stronger for longer.

ABB has a significant presence in the automation space, which is being driven by an unprecedented corporate capex wave.

Access to the parent (a global leader in power and automation technology) implies ABB has no technological constraints and does not have to worry about getting a technology partner for new products, as has been the case with BHEL in its tie-ups with Alstom and Siemens for super critical technology and with GE for advanced class gas turbines.

ABB India is now increasingly important in the ABB group scheme of things because it is a: 1) global sourcing hub; 2) global R&D centre; and 3) regional
excellence centre.

Higher RoEs without leverage and stronger earnings CAGR vis-à-vis peers.

2) Trading Perspective

ABB has traded at average premium of 50%+ to BHEL for the past three years. The premium actually narrowed in CY03-06 compared to CY99-03, as BHEL has re-rated significantly in the past three years.

ABB has also traded at an average premium of 85%+ to the BSE Sensex over the past three years.

Raising our earnings estimates

We are raising our earnings estimates for ABB by 7%, 14% and 17% for CY07E, CY08E and CY09E respectively on the back of:

• 53% YoY growth in sales, 111bps EBITDA margin expansion and 58% YoY growth in PAT in the 1HCY07.
• Our higher sales number is on strong order booking (OB at the end of 1HCY07 was Rs46.4bn up 48% YoY) and strong order inflow outlook.

As we factor in some amount of operating leverage kicking in we have increased our EBITDA margins assumptions by 70-120bps over CY07E-09E We now expect an EPS CAGR of 49% (vis-à-vis 42% previously) over CY06-09E with RoE at the 37-40% levels.

And If I recollect correctly SUZLON was termed as second stretched stocks in regard to valuation on the same survey!

all n all ... it is worth holding this gem for long term .. isnt it?

Good one PKB Dada!

Indian industry has so far been low on automation compared to global standards. Is this changing?

Indian industry, on the whole, is characterised by low level of automation awareness and adoption. Likewise, even the power sector, in order to be more efficient, needs to leverage technologies such as SCADA, Energy Management Systems and utility automation, across the value chain, to a far greater extent.

Even where automation exists in Indian industry, it is at a lower technology threshold compared to world standards. The total automation market in China, for instance, is 8-10 times larger than in India. Based on a historical perspective, automation has been looked upon more as a shop-floor tool than a ‘business performance enabler’.

There are, of course, a few exceptions. For instance, some of our steel plants, refineries, petrochemical plants and food and pharma units have adopted high-end automation technologies.

The manufacturing sector’s growth will, however, depend upon a multitude of factors, one of the most important being leveraging of automation technologies. Indian industry has also long believed that its ‘cost advantage’ lies in lower labour costs but this attitude is fast changing.

How do you view the industrial capex in India at present? Which sectors have shown greater momentum?

We have seen acceleration in industrial growth, led by core sectors such as iron and steel, cement, pulp and paper, construction, oil, gas and petrochemicals. Capacity and productivity focus are driving investments, as Indian industry gears up to meet rising domestic consumption needs and, at the same time, strive for global competitiveness. The pick-up in our automation business reflects this, with several key orders from the metals, cement, pulp and paper and construction sectors being received for integrated electrical and automation solutions.

Are you positive about the country achieving its target in the power segment in the Eleventh Plan even as the earlier ones have shown slippages?

In the Eleventh Plan, India is planning to add over 78,500 MW of generation capacity and this is certainly an ambitious aspiration, given that we have not added more than 22,500 MW in any previous Plan period. Of course, some of the trends are encouraging. The sector has now been opened up and private participation is on the rise. Several UMPP (Ultra Mega Power Projects) are on the anvil.

Coal availability has been eased to some extent as thermal power continues to be our mainstay. At the same time, hydel power, alternative energy sources and even captive power development are increasingly gaining attention. Given the decent start so far and the projects in the pipeline, even an average addition of 10,000 MW per annum (around 50,000 MW during the full Plan) would be a laudable achievement.

The rural electrification programme, Rajiv Gandhi Grameen Vidhyutikaran Yojana (RGGVY scheme), and the revitalised APDRP (Accelerated Power Development and Reform Programme) continue to drive the Government’s promised Power to All by 2012 vision.

From a transmission and distribution perspective, building a national transmission network, enhanced system efficiencies, grid reliability and T&D loss reduction continue to be the key priorities even as utilities increasingly leverage the latest technologies on offer to bring technical and operational efficiencies as well as financial viability to their operations.

A delay in Indian power reforms could slow down the sector in which you operate. As you derive much of your revenue from the domestic market, what strategies are you adopting?

ABB in India has strength in power and automation technologies and this gives us a wide operating window. In terms of our portfolio, we do three types of business — projects, products and services. Here, in terms of projects versus products and services, we had an 80:20 mix a few years ago.

Our portfolio realignment strategy has been extremely successful. The growth of our standard products business, through market penetration, and range expansion have yielded good results. Service business growth is also on track.

In fact, products and services together are contributing nearly 50 per cent of the volumes. Meanwhile projects continue to be the mainstay as ABB caters to its utility and industry customers through turnkey solutions, power and automation technologies. Basically this now gives us three strong legs instead of one!

To generate incremental growth and support our traditional businesses, we have introduced several new verticals and revenue streams that provide both power and automation solutions in sectors such as water, ports, railways, asset management services, etc.

While we focus on top-line growth, we shall maintain our focus on operational efficiencies and managing growth in a profitable and sustainable way. Going forward, we shall continue to increase ‘depth’ and ‘breadth’ and at the same time, strengthen our resource base and sharpen our delivery systems.

Could you comment on ABB India’s growing role in the region as a global resource base?

Besides serving the needs of the domestic market, ABB is also increasingly leveraging India as a key resource base in line with its global footprint approach, be it projects, products, services, R&D or engineering. India has been assigned the global factory role for several products such as High and Medium Voltage circuit breakers, magnetic actuators, etc, and also supplies many components and sub-assemblies.

India has also been designated as the hub for the South Asia-Pacific region and we have a key role to play in the region. ABB technologies and products are universal to the extent that the company no longer believes in Made in India, China or US but adopt a Made in ABB philosophy.

What are the capital investment plans for ABB India?

To meet growing power and industrial sector demand, capacity and range expansion programmes are under way across locations. ABB India has just completed a comprehensive investment programme for capacity and range expansion, to the tune of around $100 million and has subsequently announced another $50-60 million investment to be completed by the end of 2008. However, based on business needs we can even invest more, as required, as long as the returns justify it. In a nutshell, ‘we don’t cap capex’!

Many new products and verticals have been added to support the growth of existing business in the quest to constantly add new revenue streams for incremental growth. Several new manufacturing units have also been set up in the last two years in Bangalore, Vadodara, and Nashik and more recently a Low Voltage Distribution Electricals Unit at Haridwar. Capacity expansion is also under way across businesses and locations with plans for further enhancement.