Weak demand outlook and low profitability of SIEM appears delinked with
valuations post the 15% rally (in line with Sensex) from April lows. We
downgrade the stock to UW from N; DCF-based Mar-14 PT of Rs450 (vs. Rs605
earlier) key reasons being: (1) Revenue declined by 16% in 1H, well below
expectations (see Mar-q preview) due to customer delays attributed to
unavailability of land or financing. (2) At the analyst meet, management stated
that even the short cycle business (where growth had been resilient) witnessed
deferrals by customers in a persistent high interest-rate environment. (3) Order
backlog declined 12% YoY and even Rs28bn of inflows in the Mar-q (up 52% on
a low base) were not sufficient to stem the decline. (4) Low capacity utilization in
factories contributed to sharp margin compression across segments. Post estimate
cuts, at 43x one-year forward P/E and 8% FY13E RoE, we think the stock is
expensive. Our FY13E EPS is 28% below consensus.
Uncertainty is the only constant, as headwinds prevail. Large orders from
credit-worthy customers is a key upside risk to our UW thesis. Adjusting for
cost provisions due to project delays, 1H PBIT margin was just 4.2% (2.1%
reported). Management did not give guidance or a target for near-/medium-term
profitability, although commentary was bearish.
Working capital deterioration in 1H. Working capital has deteriorated
sharply in 1HFY13 led by higher debtor days and lower current
liabilities/provisions in tune with liquidity pressures faced by customers. Cash
reduced Rs7.3bn in 1H to Rs3.44bn, the lowest level in a decade.
Sharp estimate cuts, despite building in hopes of margin recovery. Post 1H,
we cut FY13/FY14 EPS estimates by 53%/40%, well below consensus;
profitability is a grey area- in FY14 our OPM est. of 8.6%, factors in a 320bps
YoY improvement; if the current scenario persists, there is further downside
potential.
Closely-held free float may not be enough to stem downside. Like ABB Ltd
(ABB.BO, Rs521.20, UW), fundamentals are catching up with Siemens’ stock
price; related-party transactions (with MNC parent and fellow subsidiaries) are
hurting profitability. Diversification is key in a weak macro; Siemens scores
over ABB and BHEL (BHEL.BO, Rs191.30, UW), while L&T (LART.BO,
Rs1,552.05, OW) and then CG (CROM.BO, Rs93.40, N) have broader
portfolios and geographical diversification in our coverage.
��
-->
valuations post the 15% rally (in line with Sensex) from April lows. We
downgrade the stock to UW from N; DCF-based Mar-14 PT of Rs450 (vs. Rs605
earlier) key reasons being: (1) Revenue declined by 16% in 1H, well below
expectations (see Mar-q preview) due to customer delays attributed to
unavailability of land or financing. (2) At the analyst meet, management stated
that even the short cycle business (where growth had been resilient) witnessed
deferrals by customers in a persistent high interest-rate environment. (3) Order
backlog declined 12% YoY and even Rs28bn of inflows in the Mar-q (up 52% on
a low base) were not sufficient to stem the decline. (4) Low capacity utilization in
factories contributed to sharp margin compression across segments. Post estimate
cuts, at 43x one-year forward P/E and 8% FY13E RoE, we think the stock is
expensive. Our FY13E EPS is 28% below consensus.
Uncertainty is the only constant, as headwinds prevail. Large orders from
credit-worthy customers is a key upside risk to our UW thesis. Adjusting for
cost provisions due to project delays, 1H PBIT margin was just 4.2% (2.1%
reported). Management did not give guidance or a target for near-/medium-term
profitability, although commentary was bearish.
Working capital deterioration in 1H. Working capital has deteriorated
sharply in 1HFY13 led by higher debtor days and lower current
liabilities/provisions in tune with liquidity pressures faced by customers. Cash
reduced Rs7.3bn in 1H to Rs3.44bn, the lowest level in a decade.
Sharp estimate cuts, despite building in hopes of margin recovery. Post 1H,
we cut FY13/FY14 EPS estimates by 53%/40%, well below consensus;
profitability is a grey area- in FY14 our OPM est. of 8.6%, factors in a 320bps
YoY improvement; if the current scenario persists, there is further downside
potential.
Closely-held free float may not be enough to stem downside. Like ABB Ltd
(ABB.BO, Rs521.20, UW), fundamentals are catching up with Siemens’ stock
price; related-party transactions (with MNC parent and fellow subsidiaries) are
hurting profitability. Diversification is key in a weak macro; Siemens scores
over ABB and BHEL (BHEL.BO, Rs191.30, UW), while L&T (LART.BO,
Rs1,552.05, OW) and then CG (CROM.BO, Rs93.40, N) have broader
portfolios and geographical diversification in our coverage.
No comments:
Post a Comment