Siemens India (SIEM IN) Downgrade to UW: Orders likely to disappoint; HSBC Research,

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Siemens India (SIEM IN)
Downgrade to UW: Orders likely to disappoint; margins may slip
 Parent results indicate a weak demand environment; new orders in
India fall c59% y-o-y (adjusted for currency)
 Group EBIT falls c23%; India margins may disappoint as weakness
is driven by the Power Transmission business
 Siemens’ growth profile likely to deteriorate; downgrade to UW
(from N), advocate switching to Areva T&D; maintain TP of INR765
Siemens AG’s Q1 results underline the weakening outlook: Siemens AG (parent company of
Siemens India) reported a weak set of Q1 results yesterday. Most notable was the decline in order
inflows from the Asian regions, particularly from India, where the order intake declined c59%
y-o-y (adjusted for currency movement). This came in significantly below our expectation of c5%
y-o-y growth for Siemens India orders and was driven largely by the non-repetition of large
energy orders. Revenue growth in India stood exactly in line with our expectations at c8% y-o-y
(adjusted for currency), supported by execution of prior years’ large orders and continued strength
in short-cycle businesses.
Group EBIT falls c23%; India margins may disappoint: Siemens reported c23% fall in its
sector profits (EBIT), driven largely by margin erosion in the Energy business (most notably in
Power Transmission) owing to charges related to project delays. While it is difficult to gauge the
impact on the Indian business, it is possible that the weak margins reported last quarter by
Siemens India in Power Transmission business may persist in Q1 as well. As such, it seems likely
that Siemens may miss our expectation of c400bp q-o-q recovery in margins to c12.1% in Q1.
Downgrade to UW (from N); maintain TP of INR765: As we highlighted in recent notes, we
believe Siemens’ earnings growth will moderate significantly over the next couple of years, driven by
weakening sales growth and likely margin erosion. If the company reports weak Q1 results, which now
appears likely, the stock may witness significant de-rating and warrant consensus downgrades. We note
that, at c27.3x FY12e PE, Siemens remains expensive compared with peers such as Areva T&D (and
Crompton), which we believe offers a much better earnings growth profile. Hence, we downgrade our
rating to UW (from N) and advocate switching to Areva T&D (ATD IN, INR178.4, OW, TP INR205)
going into the results.