Hitachi Energy - A Century old MNC in a new bottle!

Stock Opportunities
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The Company

ABB Power Products offers products, systems, software, automation and service across the power value chain. In simpler terms, wherever there’s a requirement to manage power - ABB’s systems and products come into play.

The co. was formed after ABB demerged and sold its power grids business at parent level to Hitachi. A new company Hitachi ABB power grid was formed with Hitachi holding 80% and ABB holding 20% share as of now. Below links provide more details of that transaction

ABB Power Products India was the Indian power grid business of ABB India and got demerged and listed on lines of above. ABB Asea Brown Boveri Ltd. is the vehicle thru which the parent holds 75% of this indian subsidiary.

Business Analysis

Below are the major areas that the company operates and wants to extend upon : -

  1. Grid Connectivity
  2. Operational Efficiency
  3. Power Quality, Security and Sustainability
  4. Digital transformation - Basically a software system to effectively work the power mgmt hardware

The company’s diverse offerings serve customers from Energy, Industries, Mobility, Data-Centers and Smart Cities.

IMO this is a niche category and has a structural advantage as in the power grid and management systems will be a critical component for their customers, hence they will prefer going with the best expertise. ABB\Hitachi have that technology, expertise and brand pull.

The engine for growth comes from 2 levers : -

  1. Opportunities in India - Energy sector, Metro rail connectivity, Data-Centers - these are the under-penetrated sectors that provide runway for growth

  2. The Make-In-India - The parent intends to use India’s facilities for manufacturing components for its other subsidiaries. These will be exports part of the business.

Valuation

Being a spin-off and recently listed case, valuation of this co. didn’t have any of the standard templates to look upto. So, an approximate approach was to take up the valuation of ABB Hitachi deal as a reference. The deal happened at an EV/Op. EBITA of 11.2x.

At current mkt. cap of Rs. 5506 crs. the EV/Op. EBITA of Indian subsidiary comes out to be 13.3x which is reasonable in light of business quality mentioned above.

Another approach is to look from purely qualitative view where this co. has the scope and growth runway to easily become 60-70k mkt cap in 15-20 yrs. Depending on execution, the investment can be accumulated gradually with current valuation being a starting point.

Disclosure : - Invested. There are a few risks associated with this investment which I’m aware of and will post subsequently. Would also like to hear valuepickr’s view esp. those associated with this sector.

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I read somewhere that Hitachi/ ABB would need to delist this part of business, hence gave it a pass and did not look further. Is that not true and no delisting in plan?

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Hi,

As part of takeover they had to go for an open offer to public shareholders for remaining 25%. The offer got very few shares tendered a miniscule < 0.01 %.

Now the co. gave reason for this as shareholders orientation and faith towards long term prospects of the company. The main reason, however, was very low premium offered over listing price.

So, it doesn’t seem that the company is interested or going for delisting.

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I think even if they delist they are pretty much the market leader in a very critical equipment sector. Barrier to entry is very high as asset owners would not compromise with relaiblity of the plants.Not sure what happens on delisting…do you mean a formation of separate entity. I used to be hitachi employee in Japan.

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When a company delists, it simply becomes a private entity. The company remains same, just that it’s shares are no longer available to public. In general, I am not interested in companies looking to or chances of delisting, as that forcefully cuts my holding period short. Company would need to offer good price for delisting to go through, but that’s not what I intend for when I invest. So, good to know if any company not interested to delist and willing to share their growth with minority public investors over long term.

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its wrong notion . delisting rules have changed and they are now more biased towards small investors. now promotor has to do reverse book built process and its not easy to delist without giving good price . recent example is vedenta , linde etc.
so delisting is not the basis of not to invest
its my personal view .
disc invested

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Notion is Not what you perceived it to be.

I did not mention that you will not get a good price if company delists. of course you will get a good price and would make good profit over short term if any company has plan to delist soon. many people invest to play that trade. What I meant is that is not my reason to invest and any company looking to delist soon is not where I intend to invest.
ABB Power products not looking to delist is a positive to me as there is no short term trade chance but a long term holding possibility. This is my personal view.

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Where did you find the delisting talks?Would be great if you can post.

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As @shardhr clarified above, as part of takeover, Hitachi had to do an open offer for remaining 25% - which looked to me as intention to delist. It seems I misread the company’s intention and took this compulsory open offer step as their intention. It was a mistake on my part. Now, it seems that they do not intend to delist. Views invited

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ABB had demerged this business saying that it wants to exit traditional business and focus on newer technologies. Can you pls elaborate that why this is niche and if this is niche then why ABB wanted to exit and did not consider this part of business as their new technologies focus? Thanks

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  1. Why this is niche : - Niche because power-grid management is a specialized system that requires setting up power equipment and corresponding software systems setup. One can buy transformers\capacitors\cooling systems etc. but setting it up on an integrated and digital platform requires specialized investment and expertise.

  2. Why ABB sold : - Manufacturing of power products was one segment of ABB’s diverse product portfolios. It was traditional manufacturing business and while they were best of the lot, manufacturing of these components is an extremely competitive and comparatively low-margin business. But yes, ABB did well here because of its brand and product mix.

  3. Why Hitachi bought : - Hitachi is a renowned player in providing industrial solutions. Now, one category of that is Power solutions. They’ve got their software and enterprise platforms for offering these solutions - e.g - LUMADA. Now, by buying ABB power components business world-wide they’ve got the capabilities to provide integrated solutions and offerings.

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Few risks associated with this business : -

  1. The co. faces payment defaults owing to quantum of order value and nature of revenue recognition in long-term contracts and development services. Recently they took a hit on P&L due to delay of more than 2 yrs on a receivable.

  2. Bagging and executing large value orders leads to lumpiness in earnings. Hence, sales growth over a past 3 or 5 yr period might not be a reliable indicator of future growth. Order book value can give a better idea of the same.

  3. Until private capex picks up, Govt. might be a major customer for them and this might increase concentration risk.

Disclosure :- Invested

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Agree, isn’t the risks above the story of most capital goods companies in India? At least the ones like ABB, Siemens and ABB power products have strong R&D and innovative tech products…
How do you compare these three (you may add any other as well say a Schneider electric etc) in terms of business risks and also upside risks in terms of product innovation. (Although not truly a risk, I call an upside a risk because I risk losing it by not knowing the factors that may lead to it). Thanks.
Disc. Have a small position, gradually nibbling.

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@Investor_No_1 : - Thanks for mentioning this. The 2 questions are re-framed now to : -

" Considering the above mentioned risks that the entire industry faces, what makes PowerIndia a better investment than others? "

" What are company specific risks for ABB Power products vis-a-vis its competitors? ( Apart from the industry risks mentioned above)

I’ll mention my answers in the further posts and meanwhile, let’s see wat other views’ other investors have regarding this.

Disclosure : Invested. And added to the position in last 30 days.

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investor presentation .

disc :invested

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Does this create opportunities for companies like ABB Power?

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IMO, not mch impact. Systems security is to be provided by the vendor anyways. The main push is that since these are niche critical systems - it is in best interest of customers to choose a reliable provider. Bt thn again thr’s an odd chance that these security breaches happen.

Analogy is that even ur best FMCG products, banking services have problems once in a while.
Therefore, net-net this has a neutral impact.

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Coming to this qtr results. thr seems to be sharp decline in PBT margins - Did anyone attended\checked concall for this?

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I had a spotty connection, but on the post results con call, they mentioned expenses on some system integration IT infra and in response to another similar question they mentioned it was due to overruns on some specific projects. Their aspiration is to go back to aroun 9% or so on this parameter.

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No i think there is some solution. Check this out https://www.hitachiabb-powergrids.com/in/en/offering/product-and-system/substation-automation--protection---control/service/modules/cyber-security