The Hindu Business Line : ABB: Buy

A sizeable opportunity in the transmission and distribution business; a robust order-book, which has risen more than two fold over the past three years; a likely improvement in profitability due to better pricing; an increasingly important role as a global sourcing base; and plans to further expand capacity and widen its product line are all likely to improve valuation.

Several buy recommendations are outstanding on the stock over the past two years at prices between Rs 300 and Rs 760 (the latest call was in October 2004).

We continue to remain bullish on the stock, which has appreciated 65 per cent since our last call.

ABB's growth story gathered further momentum with a surge in order flows from domestic and overseas markets and the $100-million investment plan announced for India by its parent to be completed by 2006.

Gains are likely to be moderate, but attractive, considering the present price levels.

On a conservative basis, a topline growth of about 30 per cent appears likely in CY-05 if one takes into account the quantum of order backlog and the likely increase in the contribution to revenues of standard products and exports.

The stock trades at price-earnings multiple of 20 times its expected earnings for CY-06.

The improving profile of its revenues and earnings, healthy cash flows, and the technological support offered by its parent justify the stock's premium valuation. The key trends are likely to be:

Margins are likely to expand as the share of products and services, which offer higher profitability compared to turnkey projects, in revenues widen in line with the trends over the past four years.

Rising input costs, especially of metals, have dampened margins over the past year. A substantial part of the orders booked in 2004 as well those that are likely to be bagged in the next few quarters would be priced to factor in higher input costs.

There has been a spurt in exports over the past three years. With orders flowing from several geographies due to ABB's cost advantages and technological edge, this trend is likely to continue.

Its export targets that once appeared ambitious now appear within reach. As ABB's parent faces pricing pressures at the global level, it is likely to increase outsourcing of products and services from India.

Export revenues could also be bolstered by ABB emerging as the designated sourcing base for the steel and cement industries. In this backdrop, exports, which still account for less than 15 per cent of revenues and orders, have a substantial upward potential.

The scaling up of investments in the transmission and distribution sector over the next five years is positive for its power technology division, as ABB has products that address requirements at every stage of the supply chain.

The buoyancy in industrial growth, a rising trend in industrial investments across sectors directed at improving operational efficiencies, and capacity expansion plans, are bound to drive demand for its automation technology business; The foray into retailing of electrical products, which is a small contributor to revenues, has growth potential, given ABB's brand equity.

A possible decline in tax outgo as its investment plans get implemented.

The possibility of a further increase in metal prices that could affect profitability and a slower-than-expected pace of investments in the power transmission and distribution sector are principal risks to the recommendation.

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