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Siemens (SIEM)
Industrials
Margin expansion helps beat estimates; consolidated results disappoint.
Standalone revenues of Rs30.3 bn were in line while net PAT of Rs2.6 bn was 9%
higher than estimated as margins beat expectations (likely led by forex gains). Power
T&D led the growth while industrial segments recorded weak performance.
Consolidated PAT of Rs7.6 bn (11% below estimate) was lower than the standalone
PAT, implying losses in subsidiaries. REDUCE on valuations and risks to margins.
Higher-than-expected margins (likely on forex gains) help beat PAT-level estimates
Siemens reported standalone 4QFY10 revenues of Rs30.3 bn, broadly in line with our estimates,
up 22% yoy. The company beat our PAT-level estimate by about 9% (reported a PAT of Rs2.56 bn)
on the back of higher-than-expected EBITDA margin. EBITDA margin of 13.2% (our estimate of
11.5%) was supported by low other operating expenses (Rs738 mn versus Rs2.3 bn in 3QFY10)
potentially led by forex gains (Buy Euro forward contracts would have made gains in this quarter).
Note that 4QFY10 EBIT margin at 12.2% was about 100 bps lower than 9MFY10 margin despite
the potential large forex gain during the quarter.
Power T&D leads growth, margin stabilizes; industrial capex-related segments record weak growth
The revenue growth was led by the power T&D segment, which recorded very strong growth of
74% yoy (partially aided by low base of 4QFY09 - had witnessed a 18% revenue decline). Margins
for this segment partially stabilized at 11.8% versus very high margins of 16% in 9MFY10.
However, industrial-capex related segments of Siemens recorded relatively weak performance post
strong growth in the first 9M. Industry Automation & Drives segment reported sedate 4.5% yoy
revenue growth while the Industry Solutions segment reported a 21% decline in revenue.
Weak consolidated level performance likely led by losses in Siemens Building Technologies
Siemens reported full-year consolidated profit of Rs7.57 bn versus our estimate of Rs8.5 bn.
Consolidated profit was below the standalone profit level of Rs8.3 bn, implying net losses at the
subsidiary level. We believe Siemens Building Technologies (SBTL) may have contributed to these
losses. SBTL reported a loss of Rs0.23 bn on sales of Rs2.6 bn for the y/e September 2009.
Revise earnings estimates and target price to Rs725/share; reiterate REDUCE
We revise our estimates to Rs27.9 and Rs33.7 from Rs27 and Rs31.9 for y/e Sept 2011E and
2012E and revise our TP to Rs725 (from Rs635) based on 23.5X March-12E earnings—~10%
premium to our earlier valuation. We justify the slightly higher valuation given strong indications of
traction in industrial capex activity (reflected in our recent note). We reiterate our REDUCE rating
based on (1) high valuations, and (2) potential for negative surprise on margins.
Results marginally ahead on the back of higher-than-expected margins
Siemens reported 4QFY10 (fiscal year-ends September 30) revenues of Rs30.3 bn, marginally
below our estimate of Rs31.3 bn and up 22% on a yoy basis. Higher-than-expected EBITDA
margin of 13.2% (versus our estimate of 11.5%) led to PAT of Rs2.56 bn, about 9% ahead
of our estimate of Rs2.3 bn. For the full-year ending September 30, 2010, Siemens reported
revenues of Rs93.1 bn, up 11% yoy. EBITDA margin expanded by about 170 bps yoy leading
to a 26.7% yoy growth at the EBITDA level. However, higher depreciation costs led to
relatively flat PAT on a yoy basis at Rs8.3 bn.
EBITDA margin likely aided by forex derivative gains on long Euro forward contracts
Siemens reported EBITDA margin of 13.2% in 4QFY10 about 180 bps ahead of our estimate
of 11.5% and up 340 bps yoy. The higher-than-expected EBITDA margin was primarily led
by lower other operating expenses in 4QFY10. Siemens reported very low other expenses of
Rs738 mn versus Rs2.3 bn in 3QFY10 and Rs1.3 bn in 4QFY09. Low other expenses were
potentially led by forex gains (Buy Euro forward contracts would have made gains in this
quarter), which may have been adjusted against other expenses, although notes to accounts
do not carry any details on this count. A large portion of gains on derivative contracts may
have got adjusted in the corresponding higher costs on raw materials. However, a portion of
gains originating from forward contracts that have not got settled in the fourth quarter
would have contributed to extra unadjusted gains.
Power T&D leads growth; industrial capex-related segments report weak results
Industrial capex-related segments (viz. Industry Automation & drives, building technologies
and industry solutions) reported relatively weak results. 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 - Industry
Automation and Drives segment revenues growth by 28% yoy and Industry Solutions
revenues grew by 18.5% yoy in 9MFY10. However, we note that 9MFY10 growth would
have been aided by low base effect; these segments witnessed revenue decline of 19% and
10% in 9MFY09.
Power T&D segment leads growth; margins normalize
Revenue growth in the quarter was led by the power T&D segment, which recorded strong
74% yoy revenue growth, partially aided by a low base effect of 4QFY09 (revenues had
declined by about 18%). Margins of the segment have partially normalized in this quarter.
Power T&D reported EBIT margins of 11.8% in 4QFY10 versus high margins of 16.4% in
9MFY10.
Weak consolidated results likely due to losses in Siemens Building Technologies
Siemens reported full-year consolidated profit of Rs7.57 bn versus our estimate of Rs8.5 bn.
Note that the consolidated profit was below the standalone profit level of Rs8.3 bn implying
net losses at the subsidiary level. At the PBT level, this difference between the standalone
and consolidated numbers is to the tune of about Rs0.5 bn. We believe Siemens Building
Technologies (SBTL) may have contributed to these losses. SBTL reported a loss of Rs0.23 bn
on sales of Rs2.6 bn for the y/e September 2009.
Order inflows pick up; backlog remains relatively flat on a sequential basis
Siemens reported a moderate growth in order inflows to Rs30.1 bn in 4QFY10, up about
15% on a yoy basis. The order inflow for the quarter was significantly higher (about 37%)
versus the FY2008-09 quarterly average levels of about Rs20-22 bn. The company reported
a FY2010-end backlog of Rs135.8 bn, relatively flat on a sequential basis (was Rs135.5 bn at
end-9MFY10). The order backlog was up 32% on a yoy basis primarily led by the single
large order worth Rs25 bn won in 1QFY10 form the Qatar General Electricity & Water
Corporation. The order backlog provides Siemens with a revenue visibility of about 1.2 years
based on forward four quarter revenues.
Revise earnings estimates and target price to Rs725/share; reiterate REDUCE
We have revised our earnings estimates to Rs27.9 and Rs33.7 from Rs27 and Rs31.9 for
September year-ending 2011E and 2012E, respectively, based on slightly higher revenue
growth and margin assumption. We have revised our target price to Rs725/share from
Rs635/share based on (1) earnings revision and (2) change in valuation to 23.5X March-12E
earnings from 21X earlier. We believe the slightly higher valuation is justified given strong
indications of traction in industrial capex activity (reflected in our recent industrials note
dated November 19, 2010).
We reiterate our REDUCE rating on the stock based on (1) high valuations unjustifiable given
volatile nature of business performance, and (2) high risk of negative surprise on margins
given volatile nature of margins in the past.
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 yield lower margins.
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