>SIEMENS INDIA: Driven largely by margin erosion in the Energy business (most notably in Power Transmission)

■ Siemens AG’s Q1 results underline the weakening outlook: Siemens AG (parent company of Siemens India) reported a weak set of Q1 results yesterday. Most notable was the decline in order inflows from the Asian regions, particularly from India, where the order intake declined c59% y-o-y (adjusted for currency movement). This came in significantly below our expectation of c5% y-o-y growth for Siemens India orders and was driven largely by the non-repetition of large energy orders. Revenue growth in India stood exactly in line with our expectations at c8% y-o-y (adjusted for currency), supported by execution of prior years’ large orders and continued strength in short-cycle businesses.


■ Group EBIT falls c23%; India margins may disappoint: Siemens reported c23% fall in its sector profits (EBIT), driven largely by margin erosion in the Energy business (most notably in Power Transmission) owing to charges related to project delays. While it is difficult to gauge the impact on the Indian business, it is possible that the weak margins reported last quarter by Siemens India in Power Transmission business may persist in Q1 as well. As such, it seems likely that Siemens may miss our expectation of c400bp q-o-q recovery in margins to c12.1% in Q1.


■ Downgrade to UW (from N); maintain TP of INR765: As we highlighted in recent notes, we believe Siemens’ earnings growth will moderate significantly over the next couple of years, driven by weakening sales growth and likely margin erosion. If the company reports weak Q1 results, which now appears likely, the stock may witness significant de-rating and warrant consensus downgrades. We note that, at c27.3x FY12e PE, Siemens remains expensive compared with peers such as Areva T&D (and Crompton), which we believe offers a much better earnings growth profile. Hence, we downgrade our rating to UW (from N) and advocate switching to Areva T&D (ATD IN, INR178.4, OW, TP INR205) going into the results.



Risks
We highlight the key risks related to our investment case for SIEM:
Upside risks

• Significant order wins
• Better-than-expected improvement in margins
• Continued strength in short-cycle orders

To read the full report: SIEMENS INDIA

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