ABB India Limited analyst Q&A

We will now begin the question-and-answer session. The first question is from Renu Baid from IIFL Capital. Please go ahead.

Yes. Hi, good morning, team. Thanks for the opportunity. My first question, Sanjeev, is now it is been almost six to nine months that you have called out that business is a bit soft with respect to large orders and CY ‘25 likely to be a year of moderation. So , how are you seeing second- half of the current year panning out? Is the momentum being sustained, slowing further or improving? And in your view, what will drive back the positive investment sentiments from the private sector, especially large projects?

Our take is that, especially as Balaji explained that we do have a pipeline of orders which are yet to be converted. I think we do see something in Process Automation, but it is not a big mountain of a kind of forward log, but it is a reasonable log for us to convert. Likewise, in the Motion, Electrification, on a regular scale, I think it is a good market setup going forward. But not super strong as we have the experience in the last quarter. So, I would say on a normalized basis it is a good market , but not as strong as we have witnessed in past couple of years or three years. Now going forward --

What we can see going forward is that there is a bit of uncertainty in terms of what is going around the world. So, especially, on the private CAPEX, during these times, people become more cautious in terms of how much capital they want to commit till the clarity comes in terms of domestic market as well as for the export participation for our customers. We do believe that the government CAPEX has started picking up, but it is yet to gather pace, and I think that will be one defining factor as we go forward. And also, we will see that the new market segment and new trends which are emerging in the marketplace like energy transition and cities expanding and creating more robust power supply. Data center and recent events wherein something happened in terms of somebody was not able to kind of participate in the cloud services. I think that may lead to more digitalization services and the localization of the cloud and the data centers locally. Those trends may start emerging as well and that go positively for our business. So, I say second-half, yes, it will take time for it to come back, but I think , if I put a mid-term, which is, say, next year onwards, hoping that everything falls in place, I think we should start getting the momentum back in the marketplace. That is the expectation we have.

Sure. Secondly on the profitability of margin front, a, demand moderation and plus inflationary impact has been probably visible in some of the segments like Motion and EL. And Sridhar, in your view the QCO impact how elongated could that be in terms of readjusting for the domestic standards and getting the qualification done and probably that lingering impact of that on our margin profile?

Okay. Good question, thank you. I think this time, being six months, what we had performance, we also definitely would have also looked at the balance sheet, which have been abbreviated that has been published. So, we do have inventories which are high at this point of time, which was roughly INR 1,800 crores to INR 2,300 crores, INR 500 crores. So, we have imported quite a bit of material to meet these compliance requirements and they got probably relaxed as late as last month. And therefore, we expect that we will have to use these imported components to supply in order to gain time and also liquidate these inventories and so, they give you impact as what we see. We have in some of the products, one-year runway up to September 26th is what we need to be ready for that and in some of the products. We will come to know in the months to come. So, as we are preparing for this, we will have to be making sure that we stay committed to the deliveries, what we are given as per the customers . And therefore, we are okay to invest by importing material and using it in the consumption. So, I think in the next six months, we will have a mix which we have to do judiciously in order to ensure that we have a balance consumption between imported and the localized and also the revenue mix in terms of how we do more of manufacturing revenues an d service revenues to shore up the margins.

Sure, and the pricing impact in terms of inflation as well as weak demand, any price hike that you are taking or the market itself adjusting?

So, I have the Motion and EL leaders over here. So, the question is, are you going to pass it on to the market the price adjustments?

Yes, of course. Whatever inflation is there, the market should definitely be able to absorb it.

So, I think, Renu, what could be a bit of a challenge is that the volatility of the FOREX is something what the market may be not be so easily accepting it. Okay. So, the reason is because we have a short cycle order. The long cycle project orders definitely have a possibility of correcting it because they go by industries, by adjustments. So, that is protected. But whereas, if you look at the products which we are 70% and they are more short cycle, I think this challenge of balancing the volatility risk vis-à-vis the margins what we have committed on is going to be definitely a work to be done.

Thank you. The next question is from Mohit from ICICI Securities. Please go ahead.

Yes. Good afternoon, and thanks for the opportunity. My question is, are you anyway impacted by the tariffs announced by the U.S. on India, either on the revenue side or the cost side?

Well, I think as you can see, that 90% of our business is domestic, right, so that is where we get it. And most of our products we have quite high localized content. And that is the strategy of ABB globally, to be local for local. So, that means we are increasingly, post-COVID, deepening our supply chains locally. And that is something which is helping us. So, as such, on the kind of a tariff side, we are not exporting a very high volume into the U.S. at the moment. There are a couple of products which we do. So, we will see how that pans out. But that is not a very high mix of our overall orders and revenues at this point of time, yes.

Understood. My second question is, can you please explain the nature of hit you have taken on the Electrification side? And why , and are there a risk of further such risk? And how are you mitigating it?

So, it is a kind of a typical project topic, we have been executing a project, wherein certain corrections had to be done into the installed equipment. So, that is where the hit comes. And as far as we are concerned, we are an engineering company. We deliver engineer solutions. And all these engineer solutions need to comply with the local standards. So, at times, if there is a deviation on it, we never step back. We always correct it first. And then make sure that the customer enjoys the product how it is meant to be. So, that is the nature of it and we have already corrected those, what you call, anomalies that we detected. And in collaboration with the customer, we have that back online for our customers.

Thank you. The next question is from Bhavin Vithlani from SBI Funds Management. Please go ahead.

Hi. Good morning. Two questions. One is, what could be the impact on the exports given the tariffs that we have seen and many products that ABB is the feeder factory for the global side? The second is, on the motors business, we have seen significant increase in the competition where MNCs like WEG and Nidec have set up greenfield facilities and the larger existing ones like CG has doubled capacities. You also spoke about price realization being under pressure and more color on this would be more helpful. These are my two questions.

So, as far as tariff is concerned, I think I answered that question in my previous response. So, as I said, as far as 90% of the market is domestic and out of the 10% of the exports, only a very minor part goes into the U.S. specifically. But there is some export for that, something we do not see as a major impact. And we hope this situation like in other countries will resolve itself given the tactics of negotiation in place. So, we do not see significant impact on us at this point of time. And now when it comes to competition, I think competition is way of life. ABB is a global company. This competition in one form or the other exists in many markets globally for us. And we deal with it and we know how to play this out. And especially in domestic market, we have had a very strong run of our Motion businesses in the market, which is visible in our results post-COVID. And when there is an extraordinary performance by a c ompany, which was us, there are always competitors who get more interested in those market segments and there is much more activity. So, I think, it is a fairly normalized behavior that we see part of our portfolio, unless Sanjeev, you have something to add, Sanjeev Arora.

Definitely, Sanjeev. I think you have given the right perspective. And as far as the price realization, if I pick up that point, definitely we will have that push of increasing the price level to the market. And we have been connecting that in last quarter as well. So, coming back to the competition, that Sanjeev has explained very well. And we are expanding our base in India. And we are going into the segment specific, energy efficiency, the best of the technologies present at this point of time in the globe, with the, I would say, the local footprint. So, that we keep that forte. And the customers are also appreciating and they are actually giving that kind of credit to ABB as far as motors you are asking specifically. And that is also getting well explained in the improvement in the base load orders. So, yes, the competition is welcome. But then on other part, we are doing our stuff to stay ahead. Thank you.

Thank you. The next question is from Amit Mahawar from UBS. Please go ahead.

Yes. Hi. Sanjeev, I have two questions. First is, so last year you had a very strong base of large orders also. In second-half, can you recoup? I do not see too many large proportion orders for you. I do not see a lot of segments which otherwise would have been large orders in second-half. So, is it safe to say this is going to be a 5% or maybe 5%, 7% growth year for orders? I know we do not give guidance, but some color here. That is question number one.

So, on the traction side, I think we still have some play out in the market which we are hoping to secure going forward. So, it is not dried out, but it was not in last quarter. And we do see some good play there because the expansion by railways, metro, I think that is still quite a strong market segment. So, I think that is something we should keep back of mind. And our portfolio is pretty strong as well as pipeline is reasonable there. Now when it comes to the other market segment, as we said, yes, if you net out the large contracts which are cyclic in nature from the previous year, our base order remains pretty strong. And I think that is what counts. And also our small cycle orders, there also remains quite strong. And I think that is the nature of large contracts that you get them, they show up in your backlog and you execute over a period of time. And that is why you can see our backlog numbers are expanding. But yes, we will take the market as it comes. And typically, we do not second guess the market. We really, really deal with the market as it shows up. And I would say for the conversion point of view, for the large projects or reasonably medium- sized projects, the pipeline is reasonable at this point of time. And we are hoping to convert them in the third and fourth quarter of this year for us.

Thank you. Next question is from Atul Tiwari from JPMorgan. Please go ahead.

Yes, thanks a lot. Sir, my question is whether you are seeing increased competition from Chinese imports in any of the product segments that you are present in?

So, we did have a lull for a period of time given what happened between India and China. I think though it is not out there in open, but we do see participation from the Chinese manufacturers in the marketplace, and some of the corporates, when they are deciding, they are bringing that into the mix of buying as a possibility from Chinese players. So, yes, I think your question is in the right direction. So, Chinese players' participation with the products which are manufactured in China and imported directly by the corporate, that has come into the mix now.

And sir, which product segments this will be?

Mostly it is coming in the heavy industry or heavy equipment.

So, I mean, which of your product segments this competition is coming in, Electrification or Motion?

We have seen some of it in our Process Automation segment.

And sir, obviously, I mean, all of us know about heavy industrial overcapacity in China and the prices which are obviously totally unrealistic. So, is the same situation here, that the prices are way off the mark?

They are. I think the buyer is taking benefit of that sentiment, but I think that is not the price where we will participate just to keep the order and the revenue books going. So, we typically, as I said, we have a long experience in this area. It always comes for a period of time and then it dies itself out. So, we participate with a reasonable kind of quality in the eyes of the customer and the appreciation for the local value -added by us. And whenever we see the participation or that appreciation, we participate. But if the decision is purely based on price and which is way out of fundamental expectation, I think we do not participate.

We still let the customer know what the value proposition we have, but sometimes customers get enamored with the price level they get.

But you have not in any competition in Electrification and Motion segments till now?

No, we have not seen that in Electrification and Motion at the moment, and nor in Robotics, little bit, but not much.

Thank you. The next question is from Sameer Thakur from Ambit Capital. Please go ahead.

Hi. Thanks. So, on a high import content, I understand that the increasing import volume could impact revenue in quarters as well. And is it safe to assume that this is the bottom quarter and will we get back into that 12% to 15% PAT margin in a quarter from Q3?

So, Sameer, we do not give any guidance, but I think to answer to your question to a color to that, as I was mentioning earlier as well, so we have a topic to handle, right? So, the QCO is not a simple topic so it has its processes to go through. So, but on the other side, we have deliveries which are committed to the customers. So, we stay committed to the customers. There is a momentary impact in terms of using more of imported components to deliver to the customers. So, therefore, we will continue to have a judicious mix between using the imported materials which we have definitely stopped, assuming that we do not face any headwinds in future and also increasing the manufactured content. So, I think at this point of t ime, to answer your question, it will be a mixed bag, right? So, the earlier sort of a band which we had given 12% to15% is something which we need to work out to be there.

Thank you. Next question is from Parikshit Kandpal from HDFC Securities. Please go ahead.

Sir, my question is on the prospects pipeline. So, I know you spoke it earlier, but has it reduced or is it just timing delays? So, just wanted to understand the discretionary and non-discretionary part of that and whether it is there or whether it is getting delayed and when do you think the recovery will happen, which quarter?

So, let us give you a very quick snapshot. Balaji, do you see it is reduced or it is delayed in the Process Automation?

I would say that it is just picking up that is been a general sort of a delay in decision making and we wait for the customers to make the decision at the appropriate time and then we proceed ahead.

No. As I said earlier, so we have good prospects and I do not think it is reducing and it is a matter of just time that we get into our books.

What do you think, Ganesh, on the Electrification side?

As I said, the base enquiry is still strong, so it has not reduced. Some of the large enquiries, particularly in chemical, oil and gas segment is getting delayed, some of the decision. Some reduction which we have seen in heavy industries like cement and steel.

How do you see in Robotics, Subrata? Subrata Karmakar: It is a little bit of a time gap, but the pursuit level is very good.

There you have it.

So, this continues to remain in this quarter and looks like what the commentary is spoken by the business leaders. So, maybe towards the end of the year we will see some pick-up happening?

Let us hope so. So, I think we will meet again.

Just one question to Sridhar. On the margins earlier you have been guiding about 12% to 15%, so how do we pivot now, given that H1 is over, so do you think now we will be able to maintain the lower end of the margins?

We had a market commentary, and we had an operational topic to deal with, Parikshit . So, are we out of the QCO? Answer to that is no. We still have to deal with it in the next couple of quarters to come as well and be ready for 2026, right? So, as we navigate the next quarter, we will make a judicious mix of how we use this. But also, shore up the manufacturing revenues to be at this point, to give you a bit of a qualitative direction, quantitative direction is not possible, and we do not do it.

Okay. Sure. Thank you, team.

Thank you. The next question is from Aditya Mongia from Kotak Securities. Please go ahead.

Thank you for the opportunity. I just wanted to clarify, when we talk about base orders and large orders, are they separate topics, like certain sectors only go for large orders and those are not coming, and thus we should be seeing base orders separately? Just want to get a better sense as to whether a large or der is just a summation of bigger parts of orders, which can also be given up as base orders, and thus the trend should be seen in combination, or should one just focus on base orders separately? Thank you.

So, if you really see our portfolio construct, I think we may have explained it earlier also, they have three distinct areas. One is the MTO and MTS business, which is the made -to-order and made-to-stock, which are the made -to-stock and then these are the ones which are high -flying equipment, we make it as a regular production, and it gets generalized into the market consumption. So, that is what is a classical base order and there is a very pretty robust strength, a good strength out in the marketplace, and is a function of the demand and also the competition participation, and the price realization, and whether we want to participate in that price. But there, I think we have a very good traction, and that is a very good expanding area. Now second part, which comes, is for ETO, engineer-to-order, that we use the same product that we produce, we do value -added engineering and make more subsystems for the customers, let us say, in the energy, year -on-year kind of business, wherein we give a complete power distribution solution for industries, cities, etc.. There again, I think so, it is a small to mid-cycle order. MTO, MTS is a small cycle order. And this ETO business, again, is quite robust and it is going into the new emerging market segments. And there again, we will call it as a base -plus order. They are not the large order because they can be a single unit or it maybe these are orders where some multiple of same units are required. So, there again is a volume that happens on our shop floor. Now, the last but not the least is our systems order wherein what we do is we use our core automation technologies and electrification technology and plus third-party material to integrate a system order for a customer wherein a value-added performance-based solution is given. And typically, that is where these large orders come. And they are quite cyclic in nature and they are very dependent on large CAPEX happening either directly by the government through EPCs or end users securing them themselves. The other large order that can come is in the ETO space which is in the data center or in the MOTR, the traction business wherein suddenly a particular partner has a very large trains contract or a metro contract and they will offload a lot of volume of the technology that goes into those. So, I would say as for the base order is concerned, it is pretty robust. Volumes are not affected. A particular market segment may get affected because of the increased competition intensity. But then we choose how much we want to participate in terms of price correction. We continue to play the premium side of the market there. And ETO is quite robust. And system business is quite cyclic. And if you compare previous years, I think we had a fair mix of the systems orders as well as large orders coming from railway and traction. And relative to that, if you see the numbers, that is where I think they are kind of showing a different picture. But the base orders remain fairly robust for us at the moment.

Good point. So, base orders are a pure function of flow in the market, like how well we channelize ourselves in the market. So, more expansion of channel partners, more expansion of our integrated partners. So, it is a function of that. As well as reaching out to Tier-II, Tier-III markets. And also participating in more market segments where the machinery manufacturers are catering to those market segments. So, it is a function of channelization. It is less of a hit rate but more of channelization. I think a major part of the business comes from the channel management and I think that way we continue to get better and better. And other way how we get better there is by localizing and introducing more products in the market so that the channel partners can do more meaningful value add for their customers in the marketplace. So, that is how the base order functionality works. And when it comes to large orders, yes, that is a pure hit rate. Like, for example, I mentioned that we had a couple of opportunities we let go because of the Chinese competition wherein the price which was put on table of customer was way out of normal trend and the customers took a bite on it and we let it go. So, yes , that is where the hit rate goes down. But in favor of not mixing our books with the toxic orders which typically will not give much of value to our shareholders.

Thank you very much. Due to time constraints, we will have to take that as the last question. I would now like to hand the conference over to Mr. T. K. Sridhar for closing comments.

Thank you. It was very nice to talk to all of you once again in this quarter which was definitely a different quarter than the previous quarter since the COVID where we had always been declaring absolutely pretty strong results. And I would also say that this result what we declared given the market situation what we are in according to us is decent enough apart from the impacts what we had on the profitability which were one-offs. So, having said that, I think we would like to look forward to talk to you again in the next quarter. And thank you once again for all participating and supporting us in this particular journey and also the management team who is here. And from here, we go for the next event.

Which is the bell ringing ceremony. And I think we will do it on behalf of everybody on the call.

Yes, you have been a strong support for us in this journey of 30 years. I think from where we were to where we are today, it would not have been possible without the support of all people like you and the investors who have imposed their confidence in ABB. Thank you very much and looking forward to talk to you next time. Thank you.

TK Sridhar Chief Financial Officer and Chief Investor Relations Officer sridhar.tk@in.abb.com Sohini Mookherjea Country Communication Manager sohini.mookherjea@in.abb.com

ABB India Limited Plot No. 5 & 6, 2nd Stage, Peenya Industrial Area IV, Peenya Bangalore 560058 Karnataka CIN: L32202KA1949PLC032923

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