30 April 2013
Update |Sector: Capital Goods
CMP: INR 546
TP: INR 494
SIEMENS: Analyst Meet Takeaways; Dark clouds and the silver
(SIEM IN, Mkt Cap USD3.6b, CMP INR546, TP INR494, 10% downside, Neutral)
SIEM earnings have historically been volatile, and are impacted by multitude of
factors: A] Project business contributes to ~57% of SIEM’s revenues and margins
are a function of i) time delays, leading to cost over runs and also provisions for
liquidated damages ii) delayed offtake by customers impacting fixed cost
absorption B] Unfavorable currency movement, given that 52% of the raw
materials are imported (RM cost is 76% of revenues), and thus the sharp INR
depreciation over the past 18 months has impacted margins structurally. In
2QFY13, these trends continued to impact margins, with both energy and
industry business reporting EBIT margin loss at 1.6% / 1.8% respectively.
Margins in healthcare has also declined to 0.4% in 2QFY13 (vs ~7‐8% in FY09/10)
again impacted by the currency movements as ~55% of the sales are from
traded goods (largely imported).
Product business: The demand environment in the short cycle product business
had been relatively insulated for a long period of time. However, over last 6
months, the distribution channel has started becoming more cautious on the
demand environment and thus there are signs of inventory correction in the
chain. This has impacted near term volumes, leading to under utilization of
capacities, and hence pricing pressures. SIEM as a strategy has decided not to
under‐cut on normative pricing levels, thus leading to a magnified impact on
Rationalizing the manufacturing capacity is a key management decision, and is
being attempted gradually, given the need to balance long term growth. This
strategy, coupled with poor demand environment, has impacted the fixed cost
absorption in the interim period. Further, volatility in commodity prices and
forex, largely MTM losses, has also impacted the profitability, with 1HFY13
impact at INR700m (Commodity prices INR500m and Forex INR200m).
Project business: Profitability has been eroded with increased instances of
shelved / delayed projects, given issues like land acquisition, funding, suppliers
capacity, etc. Thus, execution for SIEM has been impacted, with customers
delaying project offtake in several cases impacting profitability: 1) Increased
project management expenses leading to poor fixed cost absorption 2)
Customers typically negotiate for any claims (warranty) and time extensions
(liquidated damages) only post project completion, leading to increased
accounting provisions in the interim period, etc. The challenge is to estimate the
project costs, which require updations every quarter, leading to increased

RM Imports at 53% of RM cost, 76% of imports from parent company
Revenue composition (FY12)
Few Positive comments / trends
Despite the earnings volatility, 2QFY13 had some positive trends: i) Order intake at
INR28b (up 52% YoY) has been near the highest historical band, excluding mega
projects ii) Recent trends of sharp decline in commodity prices and INR appreciation
are positive for near term margins, and will lead to improved contribution iii) SIEM
has continued with its policy of strict preference for cash flows vs revenues, with
NWC maintained at 61 days (vs 59 days YoY) despite a very constrained
SMART Products contribution to order intake has increased from 5% in 2010 /
10% in 2011 to 15% in 2012. Key orders received in 1HFY13 includes: INR1b
order for GIS substation; INR970m order from Bhuvaneshwar Power for SST600
steam turbines; Vandana Global
First win in induction furnace iron‐making
segment; etc. We believe that successful execution of the SMART product
strategy is critical to improve exports and correct the net forex exposure.
Ongoing optimization of manufacturing capacity:
Exports are becoming an
important driver; but the pace takes time given: 1) smoothing effect for existing
global factories will take time 2) customers need to accept products
manufactured in India and the process is generally accompanied by customer
visits, quality checks, etc. The company has taken several initiatives including
building up of the African strategy, etc which will drive long term volumes. The
pace has also been impacted by the slowdown in the global economy.
Focus on 5 point program: 1) Reduce costs: Each sector has specific targets to
cut costs; and is being achieved by adjusting manufacturing capacities,
improving focus on claim management and project management to improve
project business margins, etc. 2) Strengthen core activities: SMART products
strategy, etc 3) Strengthen go‐to market approach across all sectors: SIEM One
program, City Account Management, etc and thus smart approach to reach
customers. 4) Optimize Infrastructure: Consolidating Siemens group companies
in India (process is largely completed) 5) Reduce Complexity: Streamlining
internal processes and systems, to prepare for the next upturn.
30 April 2013

SMART products contribution to Order intake
Expect moderating trend in capex, given the need to adjust
30 April 2013

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30 April 2013