JM Financial Services

CMP: ₹1,309.65

Target: ₹1,500

ABB is a holding company. The company’s segments include electrification products, robotics and motion, industrial automation, power grids, and corporate and others. The electrification products segment manufactures and sells products and services including low and medium-voltage switchgear, breakers, switches and control products.

ABB India started trading ex-APPSIL (Power Grids business). In our view, the continuing operations should command a premium owing to its better growth and margin profile, while lower risk and volatility in orders.

We assign a PE of 50x 1-year forward to the continuing operations versus 30x for discontinued operations due to a) superior growth profile being present in high growth areas like industrial automation, electric vehicles, transportation and renewable energy (although solar inverter business will be hived off later); b) increase in share of short cycle business (product/services at 93 per cent of sales) is likely to enable better cost management and improve RoIC profile; c) margin corridor of India product business is much lower than parent company, providing headroom for margin expansion over next 3-5years; and d) the stock is still trading at a steep discount to its historical multiple.

We maintain ‘buy’ rating with revised target price of ₹1,500 (50x CY21E EPS) for continuing operations.

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