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On Thursday, BofA Securities analyst Amish Shah upgraded ABB India (ST:ABB:IN) stock from Underperform to Neutral, while also reducing the price target to INR5,570 from INR6,650. The adjustment reflects a recalibration of growth expectations and valuation multiples based on projected government capital expenditure and sector-specific investment trends.
Shah anticipates a deceleration in government capital expenditure, which accounts for 58% of the total, from a compound annual growth rate (CAGR) of 27% in the fiscal years 2021-2024 to 10% in 2025-2027. This expected moderation is likely to lead to a contraction in ABB India’s margins by 300 basis points, a stark contrast to the 1,052 basis points expansion experienced during the 2021-2024 upcycle. Consequently, the firm’s earnings CAGR is projected to decrease to 13.7% over 2024-2026, compared to the 64% CAGR previously recorded.
Despite the anticipated slowdown in government spending, Shah forecasts a mid-cycle capex environment bolstered by increased investments from Public Sector Undertakings (PSUs) and the private sector, which now make up 42% of total capex. This growth is expected to be driven by energy transition investments for PSUs and private sector capital expenditures in areas such as real estate, industrial projects, and emerging sectors including data centers, semiconductors, Electronic Manufacturing Services (EMS), green hydrogen, biofuels, and electric vehicle charging stations.
Following a correction in ABB India’s stock, its valuations have aligned with mid-cycle averages. Additionally, since August 2024, consensus earnings estimates for the years 2024-2026 have been reduced by 3-6%, narrowing the gap with BofA Securities’ projections. In response to these market adjustments and the closing of the earnings forecast gap, Shah has updated the stock’s multiple to reflect mid-cycle valuations at 50 times earnings and revised the price objective accordingly.
The revised price target of INR5,570, down from the previous INR6,650, is now set in conjunction with the stock’s upgrade to Neutral. This change in rating and price target by BofA Securities indicates a shift in their outlook on ABB India’s financial performance and market position in the coming years.
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