>SIEMENS INDIA (MACQUARIE RESEARCH)

Event
■ Siemens reported 2Q10 earnings of Rs1.8bn, which were largely in line with our estimate of Rs1.9bn. Margins significantly surprised on the upside, which was offset by lower-than-expected revenues. We have increased our target price to Rs542 from Rs440, as we have rolled over to the average of FY11/12E; however, we still maintain an Underperform rating, as we believe the stock has already built in a sharp turnaround in growth.

Impact
■ Margins surprise, however unsustainable at these levels: EBITDA margin stood at 12.9% in 2Q10, and if we adjust for the forex loss of Rs700m, margin stood at 16%. However, this high margin is mainly due to high-yield historical projects, which are likely to be over soon. We expect the margin to stabilise at 11.5% in FY11 and FY12.

■ Pricing pressure in projects business, product margins holding on:
Management said that there are pricing pressures in the projects business due to intense competition. However, product margins are stable at the moment.

■ Clear signs in industrial capex pick-up, order inflow growth back in +ve trajectory: Order inflow in 2Q10 stood at Rs22.4bn (+20% YoY), and the order book stood at Rs134.5bn (+40% YoY). Management said that though there was a good repeat demand in the industry automation and drives business, industry solution remains soft currently.

■ HVDC/800kV PGCIL order could aid growth: If Siemens were to win the Rs60bn HVDC/800kV order from Power grid (PGCIL IN, Rs110, Not rated), it could lead to significant revenue inflows for the company. Siemens is competing with ABB for this order, which is likely to be given out in CY10.

Earnings and target price revision
■ We have increased our 9/12 FY10E and 9/12 FY11E EPS forecasts by 13% and 12%, respectively, to factor in higher EBITDA margins. We also are rolling over our valuation to the average of FY11E and FY12E 20x EPS from the average of FY10E and FY11E EPS earlier.

Price catalyst
■ 12-month price target: Rs542.00 based on a PER methodology.
■ Catalyst: Margins settling around 11–11.5%.

Action and recommendation
■ Earning growth does not justify historical multiples: The stock is trading at 27x Sep’11 and 26x Sep’12 earnings. Even after building in an upturn in order inflow, earnings growth should remain at a 15% CAGR over the FY10– 12 period, as the company faces competition from new entrants and takes longer gestation-period contracts. Earnings growth should not go back to 30% levels to justify historical multiples of 30x. We maintain an Underperform rating on the stock.

To read the full report: SIEMENS INDIA