The Hindu Business Line : ABB: Buy

INVESTORS with a two-to-three-year perspective may add the ABB stock to their portfolio, as it is likely to reap benefits from imminent investments in the power sector and buoyancy in industrial investment and growth.

ABB is also likely to derive benefits from enhanced outsourcing for the parent company's global network and the completion over the next year of an investment programme to expand and upgrade its facilities in India.

Investors could especially make use of any declines in the stock price linked to the broad market trends to accumulate the stock.

We have several `buy' recommendations outstanding on the stock at price points ranging between Rs 300 and Rs 1,260, with the latest call in February this year. Going forward, we expect the stock to deliver more moderate returns. It is, however, likely to be one of the superior plays in the large-cap space.

ABB is likely to be a prime beneficiary of investments in the power sector, especially in transmission and distribution. A widening array of products and services over the next few years with support from the global parent is likely to enable ABB to capitalise on emerging opportunities in the industrial sector. Its order book continues to show robust growth on what is now a high base, courtesy the rapid expansion over the past few years. The order book accumulation must also be seen in the context of reduction in execution time and, therefore, a faster pace of conversion of orders into revenues.

A high degree of clarity in revenue and earnings growth and the likelihood of modest improvements in operating margins, as metal prices have softened, are also positive factors. Given the pace of order book growth, we expect ABB to sustain a growth of between 20 per cent and 30 per cent over the next couple of years.

The stock trades at a price-earnings multiple of about 30 times its likely earnings for next year. This is at the upper end of the valuation enjoyed by the stock in recent years. With Siemens and BHEL, ABB is likely to remain the preferred plays in the power equipment business and such valuation levels are likely to be sustained. The principal risk to our recommendation is a sharp slump in order book levels; this prospect does, however, appear unlikely given the macro environment now. Buy with a long-term perspective.

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