17 October 2013
The InSites
Exports & Services are key growth drivers
Intent to get back to previous margin corridor
We visited the Medium Voltage (MV) switchgear plant of ABB India at Nashik
and also interacted with the senior management team, as part of the Analyst
Meet. The management remains cautiously optimistic on the growth, while
exports and services will be important drivers. The intent is to get back to
the previous margin corridor, given the various initiatives. The key takeaways
of the interactions are:
Cautiously Optimistic on growth; Medium term revenues to be driven by
emerging segments:
The management remains 'Cautiously Optimistic' on
the medium-term growth possibilities. While the large infrastructure and
industrial projects are yet to show any signs of revival, the medium term
revenues will be driven by new growth segments (like Urbanization, Grid
Reliability and inter-connectivity, Renewable energy and Energy Efficiency).
Key sectors likely to witness increased investments in 2014 (vs 2013) include:
i) Oil and Gas, including upstream where ABB is positioned as the #1 player
ABB Nashik plant
globally 2) Mining and ABB is a large player in underground mining 3) Power
T&D with grid reliability and distribution being important driver s 4) Solar
Background of Nashik Medium Voltage (MV)
Plant
(ABB entered this business in 2010 and commissioned 225MW in 2012 / 300MW
ABB India's Nashik plant was
ytd in 2013 5) Railways.
established in 1978 and is situated
Exports and Service are important growth drivers, with better margin profiles:
For ABB, exports have increased from INR5b in 2010 to INR9b in 2012 and is
likely to increase to INR15b in 2015. Also, the contribution of service business
in revenues have increased from 10% in 2010 to 12% in 2012 and target is 18%
in 2015. Both these businesses entail improved margins (CY12 EBIDTA 4.5%),
with management stating that the margins on exports are better than
domestic; and service segment enjoying high double digit margins.
Intent to get back to the previous margin corridor; Cost rationalization, supply
chain optimization important initiatives:
The management stated the
intention to get back to the previous margin corridor (EBIDTA margins during
1999 - 2009 stood at 8.9-12.9%), vs 4.5% in CY12. This is being attempted
through various initiatives including i) increased contribution from exports
and services ii) Cost rationalization and Supply chain optimization iii)
Reorientation of the project business and iv) possible operating leverage in
the products business, given that capacity commissioning has led to poor
fixed cost absorption. 'In Country, For Country' is an important initiative that
aims to make the product more competitive and relevant.
Valuation and view:
We believe ABB could be one of the important beneficiary
of ongoing power sector reforms, and is also exposed to several important
trends. The current earnings are impacted by poor performance of projects
business (partly legacy projects) and negative operating leverage in products;
and are thus not a reflection of the long term potential. Maintain
Neutral.
Satyam Agarwal
(AgarwalS@MotilalOswal.com); +91 22 3982 5410
Nirav Vasa
(Nirav.Vasa@MotilalOswal.com); +91 22 3982 5422
Investors are advised to refer through disclosures made at the end of the Research Report.
on 12 acres in the Satpur Industrial
estate. It houses the Medium Voltage
(MV) switchgear division and key
products include SF6 Circuit Breakers
(CB), Vacuum CB, SafeLink CB (Ring
Main Units), AIS Switchgears, etc.
In 2004, a
Technology Centre
was
established
for
MV
power
technologies, with focus on the
development of outdoor MV products
(1 to 40 kV) for the global market and
localization of indoor and outdoor
MV products for Asian markets.
Today, Nashik is a
Global Feeder
Factory
for SafeLink SF6 CB (designed
and developed at Nashik); and
Breakers (MV outdoor live tank CB and
magnetic actuators). In Jan 2013, MV
products
training center
was
established in Nashik, to provide
hands-on training to customers and
employees.
Manufacturing of a CB involves
different
sections
including:
Machining, Fabrication, Plating,
Painting, Breaker Assembly and
Testing. The SafeLink CB comprises
of ABB vacuum interrupters, a circuit
breaker and EL2 actuators.
ABB India
Takeaways from site visits
1

The InSites
Cautiously Optimistic on growth; Medium term revenues to be driven by
emerging segments
The management remains 'Cautiously Optimistic' on the growth possibilities.
While the large infrastructure and industrial projects are yet to show any signs of
revival, the medium term revenues will be driven by new growth segments, which
are acting as a strong buffer in a constrained environment. For ABB, products
business revenues has increased from INR36b in CY09 to INR46b in CY12. This is
largely given introduction of new products like solar inverters, LV Products, wind
generators, railways, etc and is commendable.
The key medium term growth segments are: 1)
Urbanization
(addressable market
size of
INR200b
in next 5 years) and comprises of Tier 2 metro rails, Dedicated
Freight Corridor, Buildings, Data Centres, etc 2)
Grid reliability and inter-
connectivity (INR230b)
and key drivers are HVDC, SVC and Wide Area Monitoring
Systems, Distribution Franchisees (efforts to minimize T&D losses), Power Factor
Regulations (to improve transmission efficiency), etc 3)
Renewable energy
(INR180b)
and key drivers are Grid Connected solar (Phase 2 of JNNSM being
launched), wind (showing signs of recovery post re-introduction of GBI), etc 4)
Energy Efficiency (INR60b)
given regulations like Perform Achieve Trade and need
for process optimizations and Power Factor corrections.
Key sectors likely to witness increased investments in 2014 (vs 2013) include: 1)
Oil and Gas
is witnessing a clear uptick, and investments have also gained traction
in upstream segment vs predominantly downstream in the past; ABB is positioned
as the #1 player in upstream oil and gas globally given the ability to combine
offerings in Electrical and Automation systems 2)
Mining
has also started to show
traction and the momentum should accelerate; and ABB is a large player in
underground mining globally 3)
Power T&D
is showing resilience in 2013 and should
witness growth in 2014, with grid reliability and distribution being important
drivers 4)
Solar
continues to witness strong momentum and ABB is strongly
positioned in grid connected inverters, compact sub-stations; acquisition of
PowerOne globally has expanded portfolio to rooftop and commercial converters;
ABB India entered this business in 2010 and commissioned 225MW in 2012 / 300MW
ytd in 2013 5)
Railways
continues to attract lot of attention and priority; but
execution remains a challenge.
Product revenues have increased given new introductions (INR B) ABB: New product launches
Wind Generators
Solar Inverters
Water
Data Centres
Railways
Wiring accessories
Services
Solar Pump Drive
Sync Motor and Drive
~1,200 generators upto 2.3MW
Capacity of ~500MW+
Order for flow meters
Important Growth area
5,000kva converters for Electric
Locos
Like 3X3 gang box and ceiling rose
Now contributes 10% of revenues
Re-engineered in India
Voted Europe Automation product
of 2011
Source: Company, MOSL, Industry
17 October 2013
2

The InSites
Exports and Service are important growth drivers, with better margin profiles
For ABB, exports have increased from INR5b in 2010 to INR9b in 2012 and is likely
to increase to INR15b in 2015. Also, the contribution of service business in revenues
have increased from 10% in 2010 to 12% in 2012 and target is 18% in 2015. Both
these businesses entail improved margins (CY12 EBIDTA 4.5%), with management
stating that the margins on exports are better than domestic; and service segment
enjoying high double digit margins.
Key products driving growth in exports include: HV Breakers, MV Switchgears,
Transformers, Substations, MCBs, LV Systems, Plant Automation, etc; and key
geographies include Europe, America, Middle East, South Asia and Africa. Service
business drivers include: Spares and consumables, Maintenance and Repairs,
Engineering and Consulting, Extension upgrades and Retrofits, End of life services,
Training, etc. The existing installed base of ABB in India is being targeted for
ramping up the service business, including Value Added Services (for instance
energy efficiency, etc).
Intent to get back to the previous margin corridor; Cost rationalization and
Supply chain optimization are important initiatives
The management stated the intention to get back to the previous margin corridor
(EBIDTA margins during 1999 - 2009 stood at 8.9-12.9%), vs 4.5% in CY12. This is
being attempted through various initiatives including i) increased contribution
from exports and services ii) Cost rationalization and Supply chain optimization
iii) Reorientation of the project business and iv) possible operating leverage in
the products business, given that capacity commissioning has led to poor fixed
cost absorption.
In Country, For Country
is an important initiative that aims to
make the product more competitive and relevant: by optimizing the design to
suit local requirements, or reducing the manufacturing costs by increased
localization / improved supply chain, etc.
Material and operational cost rationalization
is an important focus area; and these
initiatives have led to a sharp decline in RM costs from ~74-75% of revenues in
CY10/11 to ~70% currently. The management stated that there exists room for
further rationalization and the journey till date is ~50% of the targets. Composition
of cost reduction achieved till date includes: Better negotiations 41%, Alternate
sourcing 24%, Higher Localization 23%, Design optimization 12%, etc. Thus, the
savings are widely spread and thus the trends should be more sustainable.
In
product business,
ABB has commissioned factories in LV Products / Discrete
automation, etc which led to poor fixed cost absorption. ABB has invested INR10b
over CY07-12 in green field capacity, leading to near 3x increase in Gross fixed
assets. Finished Goods imports have declined from INR2.6b in CY08 to INR1.6b in
CY12, indicating higher localization. We believe that the product margins bouncing
back to ~10% corridor is largely a function of the operating leverage, as ABB's cost
structure is leveraged to economic cycle: During CY00-07, staff cost declined from
13% of revenues to 5%, while SG&A expenses declined from 13% to 9%. Since
then, both these have increased by ~700-900bp impacting margins.
Project business should show signs of revival in profitability given the strategy
reorientation:
Higher share of manufactured products (vs just being a procurement
agency which increases the risk profile), Preference for cash over revenues (and
17 October 2013
3

The InSites
focus on projects where clearances are in-place; and dispatch of materials post
visibility of cash flows) and Better risk return profiling (including for instance
compensation for project delays for factors beyond control, etc). The management
stated that the gap between the bid margins and realized margins have narrowed,
which is commendable. For the existing projects, as per the accounting policy, all
the possible losses are provided for given the delayed execution, but ABB
continues to be in negotiations and some parts could be recovered. Also, execution
delays impacts cost absorption particularly in project business.
Royalty payments stood at 3.5% of revenues in CY12, and the management believes
that these levels are fair given the technology and related support.
Royalty payments have increased meaningfully (INR m)
ABB India: Purchases and sales with group companies,
mix getting favourable
In Country, For Country: Important Initiative; China leading the way, but India not far behind
Source: ABB global presentation in 2011
17 October 2013
4

The InSites
ABB: Segmental Analysis (INR m)
1QCY11
Discrete Automation and Motion
Revenue
4,174
Growth YoY (%)
5.4
EBIT
509
EBIT Margin (%)
12.2
Low Voltage Products
Revenue
Growth YoY (%)
EBIT
EBIT Margin (%)
Process Automation
Revenue
Growth YoY (%)
EBIT
EBIT Margin (%)
Power Products
Revenue
Growth YoY (%)
EBIT
EBIT Margin (%)
Power Systems
Revenue
Growth YoY (%)
EBIT
EBIT Margin (%)
2QCY11
4,211
15.4
320
7.6
3QCY11
4,344
26.1
459
10.6
4QCY11
5,271
8.0
779
14.8
1QCY12
4,141
-0.8
432
10.4
2QCY12
4,506
7.0
576
12.8
3QCY12
4,172
-4.0
303
7.3
4QCY12
4,934
-6.4
646
13.1
1QCY13
4,420
6.8
332
7.5
2QCY13
4,084
-9.4
253
6.2
1,297
33.3
104
8.0
1,275
23.3
125
9.8
1,391
33.8
29
2.1
1,449
0.7
83
5.7
1,447
11.5
82
5.7
1,505
18.1
73
4.9
1,539
10.7
126
8.2
1,683
16.1
115
6.8
1,414
-2.3
54
3.8
1,563
3.9
253
16.2
3,298
15.1
217
6.6
2,937
30.0
150
5.1
2,781
27.5
64
2.3
4,255
-7.1
-54
(1.3)
3,039
-7.9
83
2.7
3,294
12.1
-84
(2.5)
3,138
12.9
-143
(4.6)
4,098
-3.7
-9
(0.2)
2,803
-7.8
179
6.4
3,211
-2.5
102
3.2
4,400
1.9
214
4.9
4,688
5.6
220
4.7
4,976
24.6
164
3.3
5,952
10.1
399
6.7
4,580
4.1
107
2.3
5,278
12.6
293
5.5
5,151
3.5
436
8.5
5,844
-1.8
549
9.4
4,420
-3.5
220
5.0
5,250
-0.5
450
8.6
5,723
49.6
17
0.3
5,077
21.7
-35
(0.7)
5,452
39.1
23
0.4
7,314
15.2
-14
(0.2)
5,689
-0.6
282
5.0
5,688
12.0
285
5.0
5,055
-7.3
-83
(1.6)
5,990
7,519
5,035
-18.1
32.2
-11.5
-629
299
284
(10.5)
4.0
5.6
Source: Company, MOSL
17 October 2013
5

The InSites
Financials and Valuation
Income Statement
Y/E December
Net Sales
Change (%)
Raw Materials
Staff Cost
Other Mfg. Expenses
Selling Expenses
Admin. & Other Exp.
EBITDA
% of Net Sales
Depreciation
Interest
Other Income
PBT
Tax
Rate (%)
PAT
Adjusted PAT
Change (%)
2010
63,593
2.0
26,166
4,901
22,455
7,309
1,202
1,560
2.5
517
174
133
1,002
370
36.9
632
632
-82.2
2011
74,490
17.1
30,921
5,868
23,764
5,552
5,020
3,365
4.5
795
307
415
2,678
832
31.1
1,846
1,846
192.0
2012
75,650
1.6
31,718
6,196
23,344
5,517
5,511
3,365
4.4
941
432
71
2,062
688
33.4
1,374
1,374
-25.5
2013E
76,906
1.7
31,911
6,506
22,869
5,774
5,145
4,700
6.1
1,097
1,050
74
2,627
881
33.5
1,747
1,747
27.1
(INR Million)
2014E
82,344
7.1
34,187
6,831
23,768
6,390
5,493
5,675
6.9
1,224
1,000
78
3,528
1,094
31.0
2,435
2,435
39.4
Balance Sheet
Y/E December
Share Capital
Reserves
Net Worth
Loans
Net Deffered Tax Liability
Capital Employed
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Investments
Curr. Assets
Inventory
Debtors
Cash & Bank Balance
Loans & Advances
Current Liab. & Prov.
Creditors
Other Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2010
424
23,813
24,237
0
-46
24,191
9,977
2,318
7,660
577
168
49,262
6,979
29,260
5,871
7,153
33,476
31,175
454
1,846
15,786
24,191
2011
424
24,921
25,345
0
-224
25,121
14,618
2,935
11,683
744
506
49,701
9,256
30,825
2,559
7,062
37,514
35,241
0
2,273
12,187
25,121
2012
424
25,557
25,981
3,277
-148
29,109
15,855
3,783
12,072
1,170
524
50,699
9,204
32,644
767
8,085
35,356
32,949
0
2,407
15,343
29,109
2013E
424
26,497
26,921
7,500
-148
34,273
17,894
4,880
13,014
1,170
524
52,036
9,117
32,670
1,869
8,380
32,472
30,146
0
2,326
19,564
34,273
(INR Million)
2014E
424
28,088
28,512
7,125
-148
35,489
19,781
6,104
13,677
1,170
524
55,025
9,768
34,594
1,850
8,814
34,907
32,436
0
2,471
20,118
35,489
17 October 2013
6

The InSites
Financials and Valuation
Ratios
Y/E December
Basic (INR)
EPS
Growth
Cash EPS
Book Value
DPS
Payout (incl. Div.Tax)
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios
Debtors (Days)
Inventory (Days)
Creditors. (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2010
3.0
-82.2
5.4
114.4
2.3
78.4
2011
8.7
192.0
12.5
119.6
3.5
40.1
2012
6.5
-25.5
10.9
122.6
3.5
53.8
2013E
8.2
27.1
13.4
127.0
3.8
40.0
2014E
11.5
39.4
17.3
134.6
4.0
30.0
181.4
99.8
69.6
1.7
4.7
0.4
62.1
43.4
33.2
1.5
4.5
0.6
83.4
49.5
34.7
1.5
4.4
0.6
65.6
40.3
25.5
1.6
4.3
0.7
47.1
31.3
21.0
1.4
4.0
0.7
2.6
3.1
7.4
8.1
5.4
5.7
6.6
7.1
8.8
8.8
168
40
179
2.6
151
45
173
3.0
158
44
159
2.6
155
43
143
2.2
153
43
144
2.3
0.0
0.0
0.1
0.3
0.2
Cash Flow Statement
Y/E December
PBT before EO Items
Add: Depreciation
Interest
Less: Direct taxes paid
(Inc)/Dec in WC
CF from operations
(Inc)/Dec in FA
(Pur)/Sale of Investments
CF from investments
(Inc)/Dec in Net Worth
Less: Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
2010
1,002
517
174
370
1,017
2,340
-858
1
-857
-183
174
498
-854
629
5,241
5,871
2011
2,678
795
307
832
286
3,234
-4,986
-338
-5,324
-175
307
495
-977
-3,068
5,871
2,559
2012
2,062
941
432
688
-4,948
-2,201
-1,756
-18
-1,773
76
432
739
2,182
-1,792
2,559
766
2013E
2,627
1,097
1,050
881
-3,120
774
-2,039
0
-2,039
0
1,050
807
2,367
1,102
767
1,869
(INR Million)
2014E
3,528
1,224
1,000
1,094
-572
4,087
-1,888
0
-1,888
0
1,000
843
-2,218
-19
1,869
1,850
17 October 2013
7

Capital Goods
Gallery

The InSites
N O T E S
17 October 2013
9

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