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Electrical Equipment : Looking Strong for 2017–18

The time of flat to negative organic growth rates experienced by a majority of Electrical Equipment players between 2013 and 2016 may come to an end. A majority of end-markets such as industry manufacturing (mainly factory automation including robotics), construction, utilities and infrastructure have shown signs of improvement in 2H16. This propelled leading Electrical Equipment manufacturers to a strong start of 2017 with the main players recording strong organic revenue growth. We anticipate further improvement in the quarters ahead.

Electrical Equipment companies provide a diversified portfolio of products and solutions (machine automation, manufacturing plants and industrial sites) for the manufacturing sector. In the euro area, the manufacturing Purchasing Managers Index (PMI) printed the highest level since April 2011 in May (57.0), led by New Orders (57.8). The ISM Manufacturing PMI also progressed in the US in May (+10 bps at 54.9). The Construction sector momentum also proved robust in the US in recent quarters and recent surveys point for further improvement: the Architectural Billing Index remained above 50 in April for the third consecutive month. The improving construction sector in Europe has already benefitted Schneider Electric in 1Q17. Finally, investments are picking up in the Utilities sector (renewable energy integration in the grids, ageing power plants upgrade).

Automation is another growth driver. We anticipate stronger demand from the Automobile, Food & Beverage (F&B) and Healthcare sector (tighter regulation on quality and safety). The imminent need to adopt modern technologies such as IIoT (Industrial Internet of Things), Artificial Intelligence (AI), software-as-a-service and Cloud to increase productivity and cost-rationalisation should accelerate the pace of modernisation. IDC’s (a market intelligence & advisory company) Global IoT Decision Maker Survey reports that ~31% of participants have already launched IoT solutions and that ~43% are looking for a deployment over the next year.

In our view, Rockwell Automation, Schneider Electric and ABB are the best positioned thanks to the enhancement of their digital offering through acquisitions and collaboration with leading IT companies. With the recent acquisition of B&R – an Austrian automation company with a customer base of >4 000 manufacturers – ABB will become the second largest industrial automation company right after Siemens.

Moving on to Emerging Markets, China and India are expected to remain the main growth engines for the sector. India strives to become a manufacturing giant with its ‘Make in India’ initiative encouraging MNCs to manufacture their products locally. Meanwhile, China’s ‘One Belt One Road’ (OBOR) initiative calls for further infrastructure spending. OBOR will increase economic cooperation, boost regional trade and promote social and cultural cooperation. Schneider Electric and ABB’s strong products and solutions offerings in the region should benefit the most.

On the downside, Electrical Equipment companies are exposed to rising raw material prices (copper, silver, lead and carbon steel). However, we believe leading companies such as Schneider Electric should easily be able to pass through raw material price increases to costumers. On the upside, distributors’ inventories have built-up in 1Q17 in anticipation of rising prices. In our view, this trend should continue over the coming two-three quarters adding to Electrical equipment companies’ revenues.

Overall, we believe recent market improvement should benefit both large players with a diversified portfolio (Schneider Electric and ABB) and more specialised players (Rockwell Automation). Additionally, Rockwell Automation could become an attractive target for M&A, given the robust growth outlook for the automation market.


Jyotiraditya Sharma

Equity Expert

Data & recommendations as of 12 June, 2017 close

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