Siemens - Bearing the brunt of the slowdown; Sell
Terrible quarter on all fronts. Siemens reported a 7% drop in revenue to `26bn, belying our expected `28bn. While revenue contracted across verticals, the fall was the sharpest in its power business, which registered a 22% dive. This was on account of deferred deliveries at the option of customers, who were encountering issues with clearances or funding. Moreover, the short-cycle products business languished on channel partners continued to run down their inventories and deferred purchases.
EBITDA margins tank. An upward revision of project expenditure and increase in provisions for the same saw expenditure rise by `1.4bn. This resulted in the company registering a loss of `62m at the operating level, against our estimates of operating profit of `565m. We believe that problems like low capacity utilisation and marked-to-market losses on hedges for forex and commodities also contributed to the poor operating performance in the quarter. The company incurred net loss of`488m, well below our estimated `59m of PAT.
Our take. Siemens India has been struggling for some time now, in the face of intensifying competition and relatively weak demand from end-user segments. Furthermore, an inefficient cost structure brought about low levels of operational profitability and adverse import policy has resulted in a steady decline in its profits over the past several quarters. We expect it to continue to face headwinds over the next few quarters. Any deterioration in the current environment would see its profits shrink considerably and its cash flow severely constrained. At the ruling price of ~`451, the stock trades at P/E and EV/EBIDTA of 57.5x and 23.5x respectively, discounting our FY14e figures. Given the extremely rich valuations and precarious operating environment, we maintain Sell and have lowered our price objective to `290 (vs `400 previously). Risk. Large lucrative order wins could see profitability improve.
| Thanks & Regards Anand Rathi Institutional Research |
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