Siemens - 2QFY12 Results Update - Motilal Oswal

Siemens 2QFY12 performance encouraging, but headwinds persist

- Siemens India 2QFY12 results - a mixed bag: While reported financials have been above estimates; the deterioration in net working capital and decline in order intake continues to be meaningful. Reported 2QFY12 financials includes credit of INR2.1b pertaining to provisions (including INR551m for prior period), and we believe that this is not an exceptional item given the continued trend of sharp volatility in the past. In 1QFY12, energy business reported EBIT margins of -0.2%, vs 12.3% in FY11 and was impacted by provisions on certain projects; part of which would have been written back in 2Q.

- Several comforting trends: Even factoring INR2.1b provisions in 2QFY12 as exceptional, there are several comforting trends: i) Recurring PAT stands at INR1.6b (annual run-rate of INR6.5-7.0b) and is largely in-line with our FY12E of INR7.5b ii) Energy business EBIT margins in 2QFY12 stands at 18.1% (reported) and 7.5% (adjusting for INR2.1b as exceptionals). These margin levels, while are at the lower end of the expectations, indicate that competitive intensity and aggressive pricing strategies are showing some signs of bottoming out (but it is too early to conclude). Adjusted margins of 7.5% is better than -0.2% in 1QFY12 and marginally lower than 8.5% in 4QFY11.

- Working capital deteriorating due to vendor support in a sluggish market: Net working capital continues to be under strain, with 2QFY12 NWC at 61 days, up from 29 days in Sept 11 and 61 days in March 11 / 22 days in March 10. Cash balance has declined from INR14b in March 10, to INR6.1b in March 11 and INR3.9b in March 12.

- Valuation and view: At CMP of INR790, the stock quotes at PER of 35.3x FY12E and 27.2x FY13E. Maintain Neutral with price target of INR700. Valuations are demanding, and headwinds to earnings growth persists.

Source : Equity Bulls

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