Thursday, February 11, 2010


Siemens reported a substantial surprise on margins leading to strong earnings growth in its 1Q10 results. We remain Underperform on the stock while our increasing price target to Rs438 from Rs318.

Substantial margin surprise in the quarter: Siemens reported an impressive 18.0% EBITDA margin in the quarter vs a 9-11% run rate in the past 16 quarters. We spoke to the management, which commented that it might be due to advance revenue bookings in few projects and should even out in the next few quarters. The power segment (which contributes 45% to revenues) margins were the key driver up to 22.2% vs 12.1% in 1Q09.

Revenue growth in line with estimates; margins should even out: Revenue growth came in at 13%, in line with estimates. We believe Siemens may have booked advanced revenues in few power projects and margins should even out going forward. Power sector revenues grew by 11% while automation & drives grew by 18% YoY.

Valuations rich despite better outlook

Building moderately strong growth: On the back of an improving outlook, we are now building 11% and 15% revenue growth, respectively, for 2010 and 2011 for Siemens with 10.5-10.7% margins in the domestic business.

Strong order inflows on the back of 1 large Rs30bn Qatar order: Order inflows came in at Rs51.7bn (+161% YoY) driven by a large Rs29.6bn order received from Qatar Electricity. This has taken the order book up to Rs136bn (+33% YoY), which had remained stagnant for about 9 quarters now.

Order inflow momentum could improve and boost growth: We expect transmission order inflows from PGCIL (PGCIL IN, Rs113, Not rated) to start flowing in CY10 in addition to improved activity in the industrial
segment, which would support growth into 2011.

Earnings and target price revision
We are increasing our earnings estimates by 12% and 9% each for the next two years assuming higher margins vs earlier. We have increased our target price to Rs438 from Rs318 on the back of our earnings upgrade and a higher 20x multiple to its March-11 earnings vs 18x earlier.

Price catalyst
12-month price target: Rs438.00 based on a PER methodology.
Catalyst: Maintaining 11-13% margins in next few quarters.

Action and recommendation
Stock remains expensive; Switch to Crompton: We are now building in higher margins for Siemens despite it selling off its high margin IT business to its parent last year. We are also building an improved growth outlook on the back of an expected increase in order inflows on the transmission side. Despite that, the stock is trading at 32x Sep-2010E earnings and 27x Sep- 2011E earnings, and at a substantial 30-35% premium to our preferred play Crompton Greaves (CRG IN, Rs434, OP, TP:Rs509).

To read the full report: SIEMENS