Dalal Street Investments

Siemens Premium Unjustified – Reduce

February 18, 2008

Siemens India’s Annual Report clearly highlights shift of revenue mix to project execution higher proportion of bought out items, also explain lower margins. Projects are being executed with high proportion of bought out components reflecting in lower margins that Siemens has reported in the y/e September 2007 (particularly in the power segment where execution of Qatar orders contributed to strong revenue growth).

Siemens’ annual report highlights that it maintains significant net sell position through forward contracts in US Dollar and Qatari Riyal to hedge its likely exports revenues in these two currencies. Significant exchange gains/losses are adjusted in other costs adding volatility to the reported operating margins in the core business.

Commissions its first power transformer factory with a capex of US$50 mn, may have revenue potential of about Rs6 bn. 1Q results highlighted sedate growth in power segment – margins expanded across segments.

Standalone revenue projection to Rs94 bn and Rs117 bn for y/e September 2008E and 2009E, respectively, from Rs105 bn and Rs132 bn earlier.EPS estimates to Rs46.5 and Rs61.4 for the y/e September 2008E and 2009E.

Investors holding the stock can REDUCE due to re-rating that will wipe off the premium that it currently commands. Low order book visibility with lower margins triggered this rating. Also Siemens India derives 20% of its revenues from IT/Software operations where USD is under tremendous pressure. 12 Month Target Rs 1,720.


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