Q3SY12 was dismal for Siemens (SL) in terms of operating performance but provided some respite in terms of order inflows. In Q3SY12, Net Sales was almost flattish YoY while down 25.7% QoQ to Rs2,793.5 cr. Operating performance was impacted by slower execution, delay in offtake by customers and sluggish industrial capex due to the macro uncertainty and high cost of capital. Operating margins have come down to 3.4% in Q3SY12 compared to 9% in Q3SY11 and 13% in Q2SY12. Interest cost has more than doubled to Rs5.3 cr over last year's corresponding quarter while depreciation has gone up 26.2% YoY to Rs50.6 cr. PBT was down 76.6% YoY and 88.1% QoQ to Rs53.6 cr while PAT is down 76.5% YoY and 88% QoQ to Rs36.4 cr. For M9SY12, Net Sales was up 6.5% YoY to Rs8,885.1 cr while PAT was down 38.4% YoY to Rs411.1 cr. Order inflows are up 18% YoY to Rs27 bn. Order backlog of Rs125 bn is 1x Siemens’s trailing twelve months sales.

Concerns

- Delays in power-sector reforms could affect order flows and earnings

- Regulatory uncertainties

- Decline in order inflows

- Execution delays in orders

- Margin contraction due to higher commodity prices and severe competition

- Parent hit by euro-zone recession/problems

- Currency appreciation may lead to preference for imported equipment

- Rupee depreciation could impact profitability of divisions dependent on imported raw materials/components

Outlook & Valuation

SL, 75% subsidiary of Siemens AG has businesses are spread across power, industry, transportation, healthcare, components and lighting. It has a robust business model which enables it to survive in this uncertain economic scenario and is coming up with new revenue streams to sustain in this kind of economic environment. It follows a conservative accounting policy making provisions during a period of high order inflows. Moreover, it possesses a strong Balance Sheet with good working capital cycle as compared to its peers. However the sector in which SL operates suffers from multiple headwinds that may not go away in a hurry.

Q3SY12 was dismal for SL in terms of operating performance but showed some respite in terms of order inflows. In Q3SY13, Net Sales was almost flattish YoY while down 25.7% QoQ to Rs2,793.5 cr. Operating performance was impacted by slower execution, delay in offtake by customers and sluggish industrial capex due to the macro uncertainty and high cost of capital. Operating margins have come down to 3.4% in Q3SY12 compared to 9% in Q3SY11 and 13% in Q2SY12. Interest cost has more than doubled to Rs5.3 cr over last year corresponding quarter while depreciation has gone up 26.2% YoY to Rs50.6 cr. PBT was down 76.6% YoY and 88.1% QoQ to Rs53.6 cr while PAT is down 76.5% YoY and 88% QoQ to Rs36.4 cr. For M9SY12, Net Sales was up 6.5% YoY to Rs8,885.1 cr while PAT was down 38.4% YoY to Rs411.1 cr. Order inflows are up 18% YoY to Rs27 bn. Order backlog of Rs125 bn is 1x SL’s trailing twelve months sales.

The management stated that the confidence is still low in the markets SL operates in. New orders have been deferred due to a combination of factors – coal linkages, land and environmental clearances, higher interest rates, tighter liquidity and lower investments in infrastructure sector. Margins have been affected due to higher costs and ongoing price pressures.

HDFC Securities revises their SY12 estimates downwards given the deterioration in earnings visibility of SL in the last few quarters. They expect SY12 order inflows for SL to be flattish or even come down, as structural issues in key sectors of power generation, power T&D, metals and cement will be overriding factors before a new investment cycle kicks in. Management outlook too remains muted and points to continued order deferrals and margin headwinds. It launched 10 new products in SY11 and has more than 60 such products in the pipeline. However, until product segments stabilize, margins would be lower. HDFC Securities introduces SY13 estimates and expect SY13 performance to be muted though it may still be slightly improved over SY12.

Book to bill ratio has been on a downtrend from Q1SY11 when it stood at 1.5x compared to 1.0x at present. Revenue inflows for SL are likely to remain under stress with loss in market share in the sub-station segment, slowdown in industrial capex and no large sized orders likely in the near term. Further margin & ROE erosion could be witnessed for some more quarters. However stock prices of MNCs operating in the power sector have a high delta to rate cuts.

In their Result Update dated May 02, 2012, HDFC Securities had stated that they expect Siemens to trade in the range of Rs735 – Rs859 (32.5x-38x FY13E EPS). Post the update, the stock touched at a low of Rs629.9 on 4th June 2012 and a high of Rs775 on 8th May 2012.

HDFC Securities feels investors could exit the stock on rises to Rs676 (25.5x SY13E EPS) and re-enter on dips to Rs543-570 band (20.5-21.5xSY13E EPS). Low and concentrated float in a few hands could ensure high valuations for the stock despite not so encouraging near term outlook.