Financial year 2016 earnings were below estimate led by lower-than-expected margin. Order inflow has been strong through this year and provides good revenue visibility for the next year. The company is well-placed to capture the recovery on alignment of its business interests with the government’s vision (energy management, rail and smart city solutions) and higher localisation-led improvement in competitive positioning. All these positives and much more are factored in the CMP. Risks to our estimates are on the downside.
Q4FY16 earnings below estimate
Siemens’ Q4FY16 sales at Rs 31 billion (up 11% y-o-y when adjusted for sale of Healthcare and Metals Technologies) were marginally below estimate. Good y-o-y growth in Building Technologies, Process Industries and Drives and Digital Factory were negated by weakness in other segments. Reported EBITDA margin at 7.8% was below our estimate by over 200 bps. Segmental analysis (1) reveals sharp volatility in margin across segments q-o-q and y-o-y, and (2) indicates likelihood of higher cost provisions. Lower-than-expected EBITDA led to PBT at Rs 2.6 billion, 24% below estimate. Full FY2016 numbers paint a restraint picture. This provides low confidence in margin recovery trajectory as projected by us/consensus.
Strong order inflow growth
In FY2016, the company reported order inflow (OI) of Rs 121 billion (up 19% y-o-y). The company had announced several large orders in the year such as (1) two separate orders worth Rs 2.2 billion and R1.1 billion from Power Grid Company of Bangladesh, (2) Rs 830 million order from Diesel Locomotive Works and (3) a large Rs 5.7 billion order for one of the world’s largest STATCOM projects from PGCIL. Also PGCIL order analysis indicates Siemens AG was awarded a Rs 5.7 billion order for a substation package in FY2016; a part of this order may have flowed through to Siemens India. The management has mentioned that major orders during the year came from railways and transmission projects.
Stock is very expensive
We revise our estimates downward by 7-9% for FY2017-18E (September fiscal year-end). We assign 15X multiple to the cash EPS (high cash balance post healthcare sale) and 33X to the core business EPS, which yields a September 2018E target price of R900. The stock trades at a P/E of around 42X September 2018E core EPS (ex-other income); downside risks to the estimates remain significantly higher than upside.