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Outperformance in question

STOCK REVIEW: Siemens

Priya Kansara Pandya / Mumbai October 21, 2011, 0:30 IST

Siemens has largely remained stable at the bourses since the past one year, even as its peers — ABB and Areva — have seen a decline of over 25 per cent in their share price in this period. Analysts attribute this to the company’s superior operating performance in the trailing four quarters ended June, and the open offer by the parent. However, things could change henceforth.

Analysts say the company is likely to find it tough to outperform its peers, both on financial and stock performance fronts, given the dwindling order inflows amid intense competition and severe margin pressure. These companies, which provide equipments for sectors like power T&D and industrial among others, have been facing headwinds due to slowing economic growth.

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Says Harish Bihani, analyst, Royal Bank of Scotland, “We consider it highly likely the order inflow will fall short of current consensus projections, leading to a sharp downgrade to consensus earnings and valuations. Also, a steep slowdown in private-sector capital expenditure, to which Siemens’ exposure remains high, seems to us highly likely, given the worsening economic environment.”

BETTER THAN COMPETITION
Growth (%) in trailing four quarters	Siemens	ABB	Areva
Net sales	30.0	10.0	22.0
Operating profit	57.0	-35.0	42.0
Net profit	28.0	-51.0	65.0
Order inflows	5.0	-4.4	-4.4
Order book	10.0	-1.4	0.8
Source: Companies

HEALTHY GROWTH OUTLOOK
In Rs crore	FY10	FY11E	FY12E
Net sales	9,620	12,061	14,457
Y-o-Y chg (%)	4.0	25.4	19.9
Operating profit	1,197	1,490	1,841
Y-o-Y chg (%)	21.2	24.5	23.6
Net profit	758	939	1,156
Y-o-Y chg (%)	7.5	23.9	23.1
EPS (Rs)	22.5	27.9	34.3
Y-o-Y chg (%)	7.6	24.0	22.9
E: Estimates; Siemens follows an Oct-Sept year Source: Company, Analyst reports

POSITIVES PRICED IN
In the trailing four quarters ending June, Siemens’ operating performance has been better than its peers, despite the challenges faced by the sector. As on June, its order book showed a growth of 10 per cent, while Areva managed to report a growth of one per cent and ABB a decline of 1.5 per cent. Revenue visibility (order book to sales) of 1.2 times FY11-estimated sales appears decent.

Besides the financial performance, the open offer proposal by the company’s parent, Siemens AG, to increase stake in the company to 75 per cent, has further boosted sentiment. The move reflects the parent’s growing focus on India and the management’s confidence about improved performance by the Indian subsidiary, analysts say. Also, the company is cash rich (around Rs 2,862 crore estimated in FY11 by Manish Saxena, analyst, Deutsche Bank), which is considered good in an uncertain and challenging environment.

OUTPERFORMANCE DIFFICULT TO SUSTAIN
Analysts find Siemens’ one-year forward valuation of 24 times expensive, given their target multiple of 20-24 times. More, sustaining strong financial performance in FY12 is likely to be a challenge, given the muted order inflow growth of five per cent in the trailing four quarters.

The performance in FY13 is to be keenly watched, as any attempt by the company to spruce up its order book could affect its margin profile, thanks to the intense competition prevalent in the sector. Chinese and Korean companies continue to bid aggressively in the Indian market, thereby rendering players such as Siemens uncompetitive in the transmission and distribution equipment space, points out Bihani. Adds Saxena, in his September 3 report, “We have cut order inflow assumptions by 7 and 15 per cent for FY12 and FY13, respectively, and have also reduced our revenue forecast by six and nine per cent, respectively.”

Above all, the prospect of any further open offer appears limited, as the company has reached the minimum public shareholding limit of 25 per cent, unless it wants to de-list.

Notes Bihani, “The stock’s low free float has helped it stay above its intrinsic value since last year.” However, with fundamentals and order inflows weakening, the pressure on the stock is increasing. In this backdrop, analysts are bearish on the stock. This applies to even ABB, which trades at a higher valuation of 31 times, despite a significant correction and dismal financial performance.