ABB India: Investor interest may remain high on hopes of value discovery

Topics ABB India | IIFL Group | BSE Sensex

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Bringing a closure to the demerger of ABB India’s power grid business from other operations, the company has set December 23 as the record date for this purpose. To put it simply, all shareholders of ABB India as on that date will be considered for the purpose of allocating shares in the demerged entity – ABB’s power grid (PG) unit. For every five shares held in ABB India, investors will get a share in its PG business. At this ratio, deemed value of the PG business works to Rs 7,000 crore, which Renu Baid of IIFL Institutional Equities says may leave room for higher per-share value of the PG business upon listing.

Meanwhile, the shareholders would have to brace for a correction in stock price to adjust for the value of the remaining businesses, which Baid expects could be about Rs 270-300 a share. But, the good part is that post this adjustment, valuations of the core business may look more agreeable at 40–45x CY20 estimated earnings, as ABB India has already begun reporting earnings that exclude the PG business. Edelweiss, in a report last month, estimated ABB India’s earnings (excluding PG unit) to grow 35 per cent in CY2020 to Rs 25.6 per share.

Additionally, considering that the sale of PG unit to Hitachi may conclude by mid-CY20, it allows for another round of gains for ABB India’s shareholders as the finer details of the transaction will emerge by then.

Non-promoter holding in ABB India stock is limited to 25 per cent, with its Swedish parent being the majority owner. Yet, the minority shareholders are in for some good times. With just less than a week to go for the record date, risk-taking investors could consider taking fresh exposure to the ABB India stock. However, once the stake sale related issues are put to rest, the performance of the remaining business - electrification, robotics, motions and industrial automation and their contribution to ABB India's revenue and margin will determine the further trajectory of its stock price.

In the year so far, operating margin has risen by 220 basis points year-on-year to 7.4 per cent in September quarter. The blip, though, is with respect to the outstanding orders – which declined by 14 per cent year-on-year. This reveals that orders from private entities are also unpredictable and patchy and that more importantly, ABB India’s decision to focus on productivity accretive orders may take time to reflect in its financials. 

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