Brokerage firm Kotak Institutional Equities has upgraded the stock of ABB to a 'buy' from a 'reduce' but kept the target price unchanged at ₹3,100.
"The case for ABB exporting motors to the large Europe market is strong given (1) profitability mandate here for ABB Global, (2) shift towards common product platforms by ABB Global, (3) ABB’s 100 percent localized offering, and (4) higher utilization of India component supplier base versus Europe. This would help counter headwinds in the domestic motors and process automation business," said Kotak.
However, Kotak lowered growth assumptions for the process automation ordering assumptions given large project ordering in the key O&G segment peaking out. It said the 2 percent cut in estimates gets compensated by roll-forward to March 2025E EPS (earnings per share) based fair value (target price).
The stock has witnessed a healthy gain of about 24 percent in the last one year against a flat Sensex.
Kotak pointed out that for the motion segment, ABB sees strong growth tailwinds (rail, data centres, energy efficiency) and endeavours to sustain growth at 1.5 times market growth.
To do so in a market with set technology standards, it has shared the need for sourcing from cost-effective geographies to strengthen customer value proposition, said Kotak.
The brokerage firm said the company is also working towards simplifying its product platforms to two – standard and premium. All this sets the base for emerging economies to play a bigger role in the captive demands of the global parent.
ABB India’s sales in the LV motors division have grown a healthy 60 percent over the past four years and are comparable to ABB China’s sales. Moreover, Kotak pointed out that ABB India’s offering is 100 percent localized and has seen further improvement in productivity over the past four years.
"We also note the case for the Europe business for large motors and generators moving to emerging markets such as India where component suppliers have a higher utilisation versus those in Europe. Here too, India has been a success story given the new geography to which it supplies in the US showing good traction," said Kotak.
"Part of the growth in the motors division for ABB India came from share gains from the market leader (CG Power), which we expect to partly reverse. We also note key motor manufacturers setting capacities in India, which may put pressure on the margin in the scenario of requisite demand not panning out. Growing captive demand makes ABB India to be better-placed," Kotak added.
According to a MintGenie poll, 27 analysts on average have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.