RESULTS REVIEW Siemens India Limited Hold Share Data Market Cap Rs. 196.1 bn Price Rs. 581.6 BSE Sensex 14,961.07 Reuters Bloomberg Avg. Volume (52 Week) SIEM.BO SIEM IN 0.2 mn 52-Week High/Low Rs. 1,142.5 / 359 Shares Outstanding Valuation Ratios (Consolidated) 337.2 mn Year to 30 Sept 2008E 2009E EPS (Rs.) 20.2 24.4 +/- (%) 13.3% 20.6% PER (x) 28.7x 23.8x EV/ Sales (x) 1.8x 1.5x EV/ EBITDA (x) 17.9x 14.8x Shareholding Pattern (%) Promoters 55 FIIs 4 Institutions 20 Public & Others 21 Relative Performance 1,200 1,000 800 600 400 200 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 SIEM Rebased BSE Index Facing order shortage In Q3 08 Siemens India Limited (SIEM) reported EBITDA margin of 14.7%, the highest amongst the previous nine quarters. However, the current order book of 1xFY07 revenue does not provide a healthy revenue visibility and continues to be a major concern. Meanwhile, the Company is setting up a transformer-manufacturing facility, which should provide impetus to the declining Power business revenue. Considering the steady demand for power, automation, industrial services, and healthcare products, we believe that SIEM should be able to bag base orders. Moreover, the management is confident of achieving the Go for 2 target of doubling its revenue by 2010, which provides us an optimistic outlook about the Company s performance. Valuation Going by the historical trend, we believe that the fourth quarter would be the strongest in terms of top-line growth. Thus, we estimate revenue to grow at a CAGR of 15% - 16% over FY07-09E. At the current market price, the stock trades at a forward P/E of 28.7x for FY08E and 23.8x for FY09E earnings. Based on our DCF valuation and assuming a WACC of 15.2% and a terminal growth rate of 5%, we believe that the stock is fairly valued and do not foresee a major upside from the current levels. Hence, we reiterate our Hold rating. Key Figures (Standalone) Quarterly data Q3'07 Q2'08 Q3'08 YoY% QoQ% 9M'07 9M'08 YoY% (Figures in Rs. mn, except per share data) Net Sales 17,823 21,424 18,097 1.5% (15.5)% 55,383 58,665 5.9% EBITDA 903 152 2,654 nm nm 3,839 4,354 13.4% Adj. Net Profit 880 17 1,694 92.4% nm 2,707 2,844 5.1% Margins(%) EBITDA 5.1% 0.7% 14.7% 6.9% 7.4% NPM 4.9% 0.1% 9.4% 4.9% 4.8% Per Share Data (Rs.) Adj. EPS 2.61 0.05 5.03 92.5% nm 8.0 8.4 5.1% Please see the end of the report for disclaimer and disclosures. -1-
Result Highlights Subdued revenue growth For the third quarter of FY08, revenues grew by only 1.5% yoy to Rs. 18.1 bn as the power sector performed below expectations and the Company hived off a few businesses that contributed 5-6% to the overall revenue. After excluding these businesses from the Q3 07 results, revenues grew by a mere 5.9% yoy in the absence of faster order execution. Cost escalation remains key risks to our earnings Though net sales grew at a subdued rate, EBITDA almost got tripled and margin went up by 960 bps yoy to 14.7%, compared with the same quarter last year. However, these numbers are not comparable to the previous year same period as the Company made considerable provision for anticipated losses in some of the old projects in Q3 07. The Company also incurred some cost escalations in the second quarter of FY08 and has also made appropriate provisions. Further, to improve the operating performance, SIEM took corrective actions such as improving supply-chain management, which reduced total expense to sales ratio to 85.9% in Q3 08, lowest in the last 9 quarters. Net profit margin stood at 9.4% The effect of higher EBITDA was limited by lower other income and reduced interest income. As a result, net profit grew by 92.4% yoy to Rs. 1.7 bn. Profitability was driven mainly by the power and industrial solutions & services businesses. Though order inflow rose 18.5% yoy to Rs. 20.1 bn, the order book fell 9% yoy to Rs. 98.5 bn due to the presence of mega orders and the orders of the hived-off businesses in the first three quarters of FY07. SIEM s current order book-to-fy07 revenue ratio stood at the same levels as in Q2 08, i.e., 1x FY07 revenue. The major contributors to the order intake were the industrial solutions & services and automation & drives businesses. Please see the end of the report for disclaimer and disclosures. -2-
Segmental Highlights The biggest contributor to the revenues, the Power segment, continued to decline and fell 14.6% yoy during the quarter. This quarter s profitability cannot be compared to the same period last year as SIEM made considerable provisions for anticipated losses in some of the old projects during Q3 07. This division s operating margin stood at 16.7%, the highest during the last nine quarters. Revenues of the automation and drives division, which contributed around 25% to the total sales, went up by 28.2% yoy and thus contributed to the overall sales growth. The segment s EBIT jumped 49.1% yoy. Transport segment is expected to increase its share in revenues Transport remained the fastest-growing segment in terms of revenue growth. The segment, which posted operating losses during the last two quarters, turned around this quarter with a positive operating margin of 4.9%. With an average 95% yoy revenue growth during the last five quarters, this segment is expected to make bigger contribution to the SIEM s revenues. Though the revenue growth rate of the industrial solutions & services division has moderated during the last four quarters on a yoy basis, its operating profit has almost doubled. Key Risks The following factors can pose a risk to our rating: Volatility in the earnings due to any fall in the order execution rate Any further appreciation of the rupee, which can hurt revenues/margins from exports Any further escalation in costs Please see the end of the report for disclaimer and disclosures. -3-
Outlook Margins expected to be at the same levels SIEM s revenue grew at a reduced pace but profitability numbers impressed for Q3 08. Management highlighted that all the businesses are doing well and are expected to achieve consistent growth in Q4 08. Historically, the fourth quarter has been the strongest in terms of revenue booking. Moreover, the Company s plan to expand capacities with increased thrust on localization is well underway. Therefore, we expect revenue to grow at a CAGR of 15% - 16% over FY07-09E. Considering the effective implementation of the corrective actions taken in Q2 08 and the effect of rising inflation, margins are expected to remain at the same levels. Moreover, we expect the near-term EPS to face the impact of the hived off businesses. Based on our DCF valuation and assuming a WACC of 15.2% and a terminal growth rate of 5%, we believe that the stock is fairly valued and do not foresee any major upside from the current levels. Hence, we reiterate our Hold rating. Key Figures (Consolidated) Year to Sep. FY05 FY06 FY07 FY08E FY09E CAGR (%) (Figures in Rs mn, except per share data) (FY07-09E) Net Sales 35,938 59,816 93,225 104,402 124,582 15.6% EBITDA 3,914 5,736 9,120 10,516 12,674 17.9% Adj. Net Profit 2,640 3,463 6,025 6,824 8,229 16.9% Margins(%) EBITDA 10.8% 9.5% 9.7% 10.0% 10.1% NPM 7.3% 5.7% 6.4% 6.5% 6.6% Per Share Data (Rs.) Adj. EPS 8.0 10.3 17.9 20.2 24.4 16.9% PER (x) 32.9x 52.2x 32.5x 28.7x 23.8x Please see the end of the report for disclaimer and disclosures. -4-
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