India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Siemens (SIEM)
Industrials
Positive on margins, international opportunities; but industrials remains slow.
Key takeaways from analyst meet: (1) Provisions write-backs have not led margin
expansion in FY10 (net provision creation of Rs2 bn), (2) industrial inflows up 15% yoy;
not great given low base effect of FY09, (3) Flender goodwill write-off partially accounts
for difference in consol. and standalone results (Rs0.7 bn) and (4) potential prospects in
other geographies as parent may rope in Indian entity for cost competitiveness.
Net provisions up Rs2 bn; hence provision write-back-led margin expansion unlikely
Siemens management cited that the year-end provisions have increased by about Rs2 bn (rather
than a net write-back). Hence, the positive margin surprise in FY2010 (EBITDA margin up 170 bps
yoy in FY2010 and up 340 bps yoy in 4QFY10) is unlikely to have been on account of provision
write-backs. We note that net creation of Rs2 bn of provisions may be lower than normal required
provisioning on a turnover of Rs95 bn.
Industrial segment inflows up 15% yoy; not impressive given low base effect of FY2009
Siemens reported a 15% yoy growth in the industrial segment order inflows to Rs39 bn in
FY2010. We believe that this is still relatively sedate given the low base effect of FY2009—
industrials inflows had declined by about 15-17%. On a two-year basis the order inflows still
remain down versus Rs41 bn of inflows in FY2008. The industrials segment had also reported
weak results in 4QFY10 which was surprising given the strong performance in 9MFY10.
Other takeaways: Goodwill write-off in Flender, international opportunities, pricing pressure
Goodwill write-down of Flender (was amalgamated in Siemens Ltd) is likely to have led the
difference in consolidated and standalone results for full year FY2010 (~Rs0.7 bn). Losses in
Siemens Building Technologies subsidiary may have contributed to the remaining difference.
Other takeaways from the analyst meet include: (1) Potential prospects in other geographies as
parent may rope in Indian entity for cost competitiveness, (2) inter-segmental issues led the lower
building technologies margins while market downturn led the building technologies subsidiary
losses, (3) pricing pressure continues across the spectrum and (4) target of Euro1 bn in base
products appears small and far ahead in the future to be excited in the near term.
Retain estimates, target price (Rs725/share) and REDUCE rating on high valuations
We retain our estimates of Rs27.9 and Rs33.7 for y/e Sept 2011E and 2012E. We reiterate our
REDUCE rating (TP: Rs725/share) based on (1) high valuations unjustifiable given volatile nature of
performance, (2) difficulty in judging core performance with one-offs, (3) weak pricing
environment led by increased competition and (4) potential for negative surprise on margins.
Provision write-back-led margin expansion unlikely—net provisions up Rs2 bn
Siemens management cited that the year-end provisions have increased by about Rs2 bn
(rather than a net write-back). Hence, the positive margin surprise in FY2010 (September
year-ending) is unlikely to have been on account of provision write-backs. We note that net
creation of Rs2 bn of provisions may be lower than normal required provisioning on a
turnover of Rs95 bn.
Siemens reported a 170 bps EBITDA margin expansion in fiscal year-ending September 30,
2010 to 13.8% versus FY2009 margin of 12.1%. In 4QFY10, Siemens reported EBITDA
margin of 13.2%, up 340 bps yoy
Industrial sector inflows up 15%; not great considering low base effect of FY09
Siemens reported a 15% yoy growth in full-year order inflows for the industrial sector
(includes Industry Automation & Drives, Building Technologies, Industry Solutions and
Mobility). We believe that this growth rate is relatively low given the low base effect of
FY2009—had witnessed a 15-17% drop in order inflows in FY2009. In a two-year timeframe, the industrial segment business still remains down in terms of total order inflows.
Industrial segment order inflows stood at Rs39 bn in FY2010 versus Rs41 bn in FY2008
Industrial capex-related segments also reported weak results in 4QFY10
Industrial capex-related segments (viz. industry automation & drives, building technologies
and industry solutions) reported relatively weak results in 4QFY10. Industry automation and
drives segment reported a sedate 4.5% yoy revenue growth while the industry solutions
segment revenues declined by 20% on a yoy basis in 4Q y/e September 2010. This was a bit
of a surprise post the strong growth recorded by these segments in 9MFY10 (partially aided
by a low base effect).
Flender goodwill write-off may have led difference in consol. and standalone
results
Siemens management indicated that the difference in the consolidated and standalone
results for full year FY2010 may have been contributed by good will write-down of Flender.
Flender was amalgamated with Siemens Ltd in FY2010. The remaining part of the difference
might have been on account of losses in Siemens’ Building Technologies subsidiaries. SBTL
had reported a loss of Rs0.23 bn on sales of Rs2.6 bn for the y/e September 2009. Note that
Siemens had reported a standalone net profit of Rs8.3 bn in FY2010, versus a consolidated
net profit of Rs7.6 bn (difference of about Rs736 mn). At the PBT level, this difference
between the standalone and consolidated numbers is to the tune of about Rs0.5 bn.
Other takeaways: Potential international opportunities, pricing pressure
Other key takeaways from the Siemens analyst meet include:
` Potential opportunities in other geographies as parent may be compelled to rope
in Indian entity for cost competitiveness: Siemens India may get to participate in the
business done by Siemens AG in other countries and Qatar is just one example. This is not
a matter of right for Indian entity but for Siemens AG to be competitive in these markets,
the presence of Indian entity in this consortium is probably necessary. Siemens India may
get to participate in some opportunities in Africa as well incrementally.
` Pricing pressure in market continues; no specific guidance on margins though
wishes to be evaluated on longer-term business cycle: Siemens agreed to pricing
pressure prevalent in markets not just in T&D space but in other segments of business as
well. Siemens suggested that it should be evaluated over a longer-period business cycle.
Even one year is too short a period as about 70% of business is originating from longterm projects, where provisioning cycle may affect near-term results.
` Low target of Euro1 bn in FY2020E for base level products; too far out to be
excited: Siemens is building a sales target of Euro1 bn for base products level (without
expensive bells and whistles) by FY2020E. We believe that this target is relatively small
and is over a very long term to be a driver of operating performance in the medium term.
Siemens though believes that globally base level products are a market worth Euro240 bn
currently versus total Siemens addressable global market of Euro850 bn.
` Torrent order to the extent of Sugen 400 MW plant apart from Turbine set (to come for
Siemens AG) has been recognized in 4QFY10: This may have contributed about Rs8 bn or
so to order booking in 4QFY10, fully explaining the difference the order booking of Rs30
bn and usual quarterly run rate of Rs20 bn.
` Building technologies segment margins low on intersegment issues; making losses
on market slowdown: Building technologies segment (low voltage panels for industrial
use) margins are lower as it sources switchgear from other segments, so profitability of
this segment actually gets recorded in industrial automation segment. Building
technologies subsidiary (depending on retail, IT development) has been making losses as it
has been sharply hit by slowdown in the commercial real estate development sector.
` Other income too low on conservative policy: Other income too low on cash balance
of Rs18 bn at end of FY2010 (operational cash generation of Rs10 bn in FY2010) as
investment policy of this cash is very conservative. This may be a source of downside to
our estimates.
Retain earnings estimates and target price of Rs725/share; reiterate REDUCE
We have retained our earnings estimates of Rs27.9 and Rs33.7 for September year-ending
2011E and 2012E, respectively. Our target price of Rs725/share is based on 23.5X March-
12E earnings. We reiterate our REDUCE rating on the stock based on (1) high valuations
unjustifiable given volatile nature of business performance, (2) high risk of negative surprise
on margins given volatile nature of margins in the past, and (3) continued pricing pressure
across business segments.
Key upside risks arise from better-than-expected order booking, revenue growth and
margins leading to positive earnings surprise. Key downside risks arise from (1) repetition of
problems witnessed in the earlier quarters in other orders, and (2) residual dependence on
large orders that potentially yields lower margins.
No comments:
Post a Comment