We downgrade our rating on Siemens India to ‘reduce’ (from ‘hold’) and cut the target price to R570 a share (earlier R670), valuing the stock at 30x on FY16 EPS.
While we remain positive on Siemens optimised product and cost rationalisation moves, we believe the stock does not offer any major upside in the near to medium term, given its high dependence on large-value turnkey jobs, which, we believe, will recover only gradually.
Siemens reported below-estimate revenue and PAT in Q3FY14, led by sustained weak traction in energy and industry segments. Margin at 2.2% (negative 0.2% in Q3FY13) was below estimate predominantly due R80-crore loss in the energy segment.
We believe cost overruns/provisions in some projects have impacted margins in the energy segment. The company has, in the recent past, initiated many cost-reduction measures and production-efficiency drives, but we believe given the tough macros, impact of the same will take some time to reflect.
Also, ongoing weakness in large-value projects, especially in power, metals, etc., will restrict overall revenue growth in the near to medium term. We are revising down our FY14e and FY15e earnings 30% and 9%, respectively, building in sustained weakness in industrial and energy segments. We introduce FY16 estimates and roll forward our valuations to FY16e earnings.