YES Securities resumes coverage on this mutlibagger stock with 'sell' tag; see up to 18% fall

YES Securities has reinitiated coverage on ABB India, issuing a "Sell" rating and setting a target price of Rs 4,950. This decision is driven by various factors, including the exhaustion of government capital expenditure (capex) and delays in private sector investment recovery. The current economic landscape presents several challenges that could impact ABB's future performance.

Government capex, which spiked post-COVID-19 due to increased budget allocation, is now reportedly near historical highs. With central capex allocations at 22% compared to the historical range of 10-15%, YES Securities anticipates growth to not exceed high-single digits in FY27. Any reduction in allocation might result in negative growth for sectors ABB is exposed to. This creates a precarious situation for the company as it navigates these economic headwinds.

Shares of ABB India Ltd settled marginally higher on Thursday, around Rs 6,000 levels and with a total market capitalization of more than Rs 1.25 lakh crore. The stock is down nearly 33 per cent from its 52-week high at Rs 8,941.45, hit in October 2024. YES Securities' target signal another 18 per cent downside in the stock.

Private sector capex recovery shows little progress, with capacity utilisation remaining below desired thresholds. Current utilisation levels are around 75%, significantly lower than the 80-85% required for recovery. The debt-to-equity ratio is at a 25-year low, reflecting a preference for debt repayment over new investments. This cautious approach by corporates indicates a lack of confidence in market conditions, further delaying potential recovery.

YES Securities projects ABB's sales growth to decelerate into the high single-digit to low double-digit range. They forecast growth rates of 9% for CY25 and 10% for both CY26 and CY27. While sectors like Robotics & Discrete Automation may perform well, driven by demand from electronics and data centres, other sectors like Process Industries are expected to remain static. The mixed performance across segments highlights the uneven recovery anticipated in the coming years.

Operating margins for ABB have nearly tripled since 2019, reaching approximately 18%. However, YES Securities believes these margins have peaked, with factors such as pricing pressure and sustained commodity prices likely to negatively impact future performance. They predict earnings per share (EPS) growth will decelerate sharply, contrasting with the 50-150% growth observed over the past four years. This anticipated contraction in margins underscores the challenges ABB faces in maintaining its profitability.

Despite a slowdown in earnings growth, ABB's price-to-earnings (PE) multiples are significantly higher than historical levels. The company experienced a sharp re-rating post-COVID-19, but with earnings projections softening, YES Securities sees potential for a stock de-rating. This disparity between valuation and performance could lead to adjustments in investor expectations.

YES Securities' reverse discounted cash flow (DCF) model suggests that the current stock price implies a terminal growth rate of around 11%, exceeding India's long-term nominal GDP growth rate of 9.5-10%. This figure is considered unsustainable in the long term. The inflated growth expectations embedded in the stock price present a risk of correction.

Given these assessments, YES Securities has set a target price of Rs 4,950 for ABB India, reflecting a CY26 PE ratio of 50x. The decision considers the risks of a slowdown in government capex, delayed private capex recovery, and contracting margins. Investors are advised to be cautious, considering the potential for valuation adjustments.

As of the latest data, ABB India's stock is trading at a current market price (CMP) of Rs 5,924, with PE multiples of 65x, 60x, and 54x projected for CY25, CY26, and CY27, respectively. This valuation suggests a significant premium over its historical averages, posing questions about its sustainability.

YES Securities' analysis highlights concerns over valuation sustainability and growth deceleration, emphasising the need for investors to be cautious given the multiple macroeconomic challenges the company faces. The combination of high valuations and potential growth headwinds necessitates a prudent approach for stakeholders.