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Siemens India
N: Little room left for further margin disappointment
Q3 earnings disappoint, driven by weak margins; new order
growth also remains modest in spite of weak comp
While Industry margins bear the brunt of rising costs, the
normalization in transmission margins seems structural
We lower our FY11-12e EPS by c10-11%; maintain Neutral
rating with a target price of INR985
Q3 earnings: Weak margins with muted order intake. Siemens reported a weak set of
Q3 FY11 earnings, missing our EPS estimate by c33% and consensus by c36%. The
weakness was driven primarily by a decline in EBITDA margins, c180bps y-o-y and
c570bps q-o-q, as revenue of INR27.8bn was broadly in line with expectations. The order
intake also remained relatively muted, and the company reported a modest increase in new
orders of c14% and order book of c10%, in spite of a weak comp last year.
Cost pressures broad-based, but decline in transmission margins seems structural.
The weakness in margins not only was acute in Q3 but also broad-based, with eight of 10
business units witnessing declines in margins, both sequentially and yearly. In our
opinion, while margin in the Industry segment is largely bearing the brunt of rising input
costs, which is a cyclical phenomenon, margin in the Power Transmission business, which
accounts for c44% of Siemens’s profits, is witnessing a structural decline in the face of
competition and pricing pressure. This is also evident in the results of Siemens competitor
Crompton Greaves (CROM.BO, INR160, Neutral), which has reported a similar decline
in margins. The product mix also might be hurting transmission margins, as Siemens now
is doing more of 220/400kV equipment vs. 765kV equipment.
We lower our FY11-12e EPS by c10-11%; maintain Neutral rating. While it remains
difficult to forecast quarterly margins due to the inherent volatility, we believe they are likely
to revert to c12.5% in Q4 and remain around that level going into FY12. Hence, we are
lowering our EBITDA margin estimates by c130bps to c12.4% for FY11e and by c100bps to
c12.3% for FY12e. This drives our FY11-12e EPS down by c10-11%. On our new estimates,
Siemens is trading at c33.8x FY11e PE and c29.5x FY12e PE vs the historical trading average
of c26x (12m fwd PE for the past five years). We maintain our assumptions of through-cycle
margins and target growth in our preferred EVA valuation methodology, and hence we keep
our target price unchanged at INR985. Our target price implies that 12 months from now, the
stock should be trading at a 12m fwd multiple of c27x PE on FY13e (Sept YE) EPS of
INR36.5. Our target price implies a potential return of c7.3% (ex-dividend) from the current
level, and hence, we maintain our Neutral rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Siemens India
N: Little room left for further margin disappointment
Q3 earnings disappoint, driven by weak margins; new order
growth also remains modest in spite of weak comp
While Industry margins bear the brunt of rising costs, the
normalization in transmission margins seems structural
We lower our FY11-12e EPS by c10-11%; maintain Neutral
rating with a target price of INR985
Q3 earnings: Weak margins with muted order intake. Siemens reported a weak set of
Q3 FY11 earnings, missing our EPS estimate by c33% and consensus by c36%. The
weakness was driven primarily by a decline in EBITDA margins, c180bps y-o-y and
c570bps q-o-q, as revenue of INR27.8bn was broadly in line with expectations. The order
intake also remained relatively muted, and the company reported a modest increase in new
orders of c14% and order book of c10%, in spite of a weak comp last year.
Cost pressures broad-based, but decline in transmission margins seems structural.
The weakness in margins not only was acute in Q3 but also broad-based, with eight of 10
business units witnessing declines in margins, both sequentially and yearly. In our
opinion, while margin in the Industry segment is largely bearing the brunt of rising input
costs, which is a cyclical phenomenon, margin in the Power Transmission business, which
accounts for c44% of Siemens’s profits, is witnessing a structural decline in the face of
competition and pricing pressure. This is also evident in the results of Siemens competitor
Crompton Greaves (CROM.BO, INR160, Neutral), which has reported a similar decline
in margins. The product mix also might be hurting transmission margins, as Siemens now
is doing more of 220/400kV equipment vs. 765kV equipment.
We lower our FY11-12e EPS by c10-11%; maintain Neutral rating. While it remains
difficult to forecast quarterly margins due to the inherent volatility, we believe they are likely
to revert to c12.5% in Q4 and remain around that level going into FY12. Hence, we are
lowering our EBITDA margin estimates by c130bps to c12.4% for FY11e and by c100bps to
c12.3% for FY12e. This drives our FY11-12e EPS down by c10-11%. On our new estimates,
Siemens is trading at c33.8x FY11e PE and c29.5x FY12e PE vs the historical trading average
of c26x (12m fwd PE for the past five years). We maintain our assumptions of through-cycle
margins and target growth in our preferred EVA valuation methodology, and hence we keep
our target price unchanged at INR985. Our target price implies that 12 months from now, the
stock should be trading at a 12m fwd multiple of c27x PE on FY13e (Sept YE) EPS of
INR36.5. Our target price implies a potential return of c7.3% (ex-dividend) from the current
level, and hence, we maintain our Neutral rating on the stock.
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