Siemens India-- Margin woes hurt again:: Macquarie Research,

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Siemens India
Margin woes hurt again
Event
 Siemens India reported its 3QFY11 (Sep-ending company). Revenue at
Rs27.8bn (up 24% YoY) was line in with estimate. However, adjusted net
profits at Rs1.55bn was flat YoY and much below our and  the  street’s
estimates.  We marginally reduce our FY11-12 EPS by 1-2% to factor in  a
30bps cut in the EBITDA margin. Retain Neutral with a revised target price of
Rs831 (Rs842 earlier).
Impact
 Revenue growth inline with estimates, on track to deliver 27% growth in
FY11:  Siemens reported Rs27.8bn (up 24% YoY growth) driven primarily by
automation and power segments, which grew 30% and 22% respectively.
Growth in  the  power segment is driven by the execution of Qatar T&D and
Torrent generation orders.  Siemens is well on track to deliver our full year
estimate of 27% revenue growth.
 Margin slips in all segments except automation: Siemens margin at 8.4% was
down 190bps YoY and 350bps QoQ. The dip in margins was largely due to a loss in
the  fossil fuel segment (which had  an 18% margin in 1HFY11). Volatility in
segmental margins on a quarterly basis has been high and we expect power
margins to improve in coming quarters. Automation margins held up at 7.5% (40bps
QoQ, 390bps YoY improvement) while all other segments had sharp margin
compression. In the 9MFY11 period, the margin was 11.3% (down 200bps YoY).
Marginally reducing our margin estimates by 30bps for FY11-12E from
12.4% to 12.1%.
 Order inflow holds up: Order inflow at Rs22.8bn was up 14% YoY and led to
a 10% growth in the order book at Rs150bn. Order book coverage of 1.32x
provides revenue visibility for FY12.
Earnings and target price revision
 We have reduced our FY11-12 EPS by 2% and 1% respectively due to a
reduction in our margin forecast. Our revised target price is Rs831 (from
Rs842 earlier).
Price catalyst
 12-month price target: Rs831.00 based on a PER methodology.
 Catalyst: improvement in margins and pickup in order inflow
Action and recommendation
 Earnings growth profile much superior in Siemens; we prefer it over
ABB India: Siemens has a superior earnings quality and growth profile vis-à-
vis ABB India. Margins normalising at 12-13% coupled with revenue growth of
25% would yield earnings CAGR of  30% over FY11-13.  We recommend
switching  into Siemens  from ABB (ABB IN, Rs869, Underperform, TP:
Rs488), we believe trading at an unrealistic 43x and 39x CY11E and CY12E
EPS respectively.  Retain Neutral on Siemens with a revised target price of
Rs831 (from Rs842 earlier)