Siemens - Slowdown sharper than expected - Nirmal Bang

Siemens reported dismal results for 1QFY12 following project execution slowdown and a sharp fall in profitability. Net revenue fell 7.1% YoY to Rs23.9bn, as three out of its four business segments posted YoY decline. The top-line was 11%/15.1% lower than our/Bloomberg consensus estimates respectively. However, the decline in profitability was sharper than expected. EBITDA fell by 66.6% YoY to Rs1.2bn while PAT declined by 70.3% YoY to Rs707mn as the energy and healthcare segments reported operating losses. EBITDA/PAT stood at 61%/64.1%, below our estimates and 58.7%/62.6% below Bloomberg consensus estimates, respectively. As a result, we downgrade our earnings estimates for FY12E/13E by 18.9%/11.8%, respectively, to factor in project execution delay and higher-than-expected pricing pressure. We retain our Sell rating on Siemens with a revised TP of Rs567 (Rs643) based on 21xFY13E EPS.

Project execution delay hurts revenue traction: The management has attributed the decline in project execution to delay in financial closure of projects and slowdown in the decision-making process of clients. It re-affirms our view of lower aggregate demand/consumption in India hurting corporate capex. Three business segments - infrastructure & cities, energy and industry (collectively 92% of the top-line) posted 9.8%, 9.8% and 5.4% YoY fall in revenue, respectively. To factor in project execution delay, we cut our FY12E/13E revenue estimates by 5.5% and 8.8%, respectively.

Severe erosion in profitability: Escalating costs along with slippage in project execution led to a sharp fall in margins. Raw material costs as a percentage of sales increased by 600bps YoY from 71.2% in 1QFY11 to 77.2% in 1QFY12. This led to a 920bps YoY fall in operating margin to 5.1% and a 630bps YoY decline in net profit margin to 3%. Energy and healthcare segments reported operating losses while infrastructure & cities and the industry segments registered 670bps and 460bps YoY decline in operating margins, respectively. To factor in higher-than-expected pricing pressure, we cut our EBITDA estimates for FY12E/13E by 18.2%/10.6%, respectively. Consequently, our PAT estimates stand reduced by 19.1%/11.9%, respectively.

Outlook: The order intake during the quarter stood at Rs28.3bn, in line with expectation, registering a 29% YoY decline. We maintain our order inflow estimates of Rs110bn each for FY12/FY13E, resulting in a 10% YoY fall from FY11. The earnings visibility for Siemens has declined sharply over the past five quarters, with the order backlog to TTM sales ratio falling from 1.5x in 1QFY11 to 1.2x in 1QFY12. Affected by major loss of market share in the sub-station segment, slowdown in corporate capex in the industrial segment and no large-sized orders likely in the near term, we expect the earnings visibility for Siemens to remain weak.

Source : Equity Bulls

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