Siemens India has bettered its peers such as ABB or Areva T&D both in terms of sales growth and order inflows over the last two quarters. Bucking the down cycle witnessed by many capital goods and engineering companies, especially in the transmission and distribution segment, the company has seen visible improvement in its order book in the last couple of quarters. Nevertheless, margin pressure resulting from competition as well as higher raw material costs can only be expected to intensify in the upcoming quarters.

Attractive offer

Give this background, the open offer made by the German parent Siemens AG at Rs 930 a share appears attractive. Shareholders can consider tendering their shares through this route. The share rallied 20 per cent after the announcement of the offer in January. At the current market price of Rs 883, the stock trades at 36 times its trailing earnings and 31 times the expected earnings for the year ending September 2011.

This is at a significant premium to even large engineering companies such as Larsen & Toubro. Healthy sales growth notwithstanding, it may not be easy for the company to sustain earnings growth at the valuations commanded. The offer price would provide an opportunity for shareholders to book some profits, given the sharp rally and the rich valuations.

The acceptance ratio under the offer is 4.4. In other words, only four shares out of every 10 tendered by shareholders would be accepted under the offer. If all the shares are tendered, the promoter's stake would rise to 75 per cent from 55.2 per cent now. According to the company's public announcement, the parent intends to expand its investments and operations in India and that a higher stake would provide flexibility in terms of strategic targets for India. That the parent intends to fund up to Rs 6233 crore for this offer speaks of its intention to focus on the Indian unit. The offer closes on April 13.

Orders flow well

At a time when its peers in the domestic T&D segment were struggling to ramp up volumes and were under pricing pressure, Siemens had a relatively smooth revival, post-2009 slowdown, in the T&D segment. Orders from Qatar Electricity and, later, a joint-order won with its parent from Torrent Power for a combined cycle power plant were some of the bulk orders that helped the company beef-up its order book.

A dip in fresh order flows was only to be expected in the December quarter (the company's first quarter for the fiscal ending September 2011), given the large base. While the order book of Rs 11,500 crore was up 11 per cent over a year ago, order inflow for the December quarter was down 24 per cent Y-o-Y. Nevertheless, inflows gained sequentially suggesting that there was no lull. Aside of the one-off large orders, projects from PGCIL could be a key factor to drive fresh inflows for Siemens in this segment.

Margin pressure

While Siemens has set the ball rolling by bagging PGCIL orders, intense competition in this space could mean compromising on profit margins. A sharp dip of close to 8 percentage points in the transmission segment EBIT margins for the December quarter suggests upcoming pressures. Among other energy sub-segments, oil and gas projects appear to be yielding good margins.

Trends in the company's industry segment remained mixed. The automation and industry solutions sub-divisions drove the segment to a modest 12 per cent growth. Merger of its building technologies subsidiary with Siemens also helped the industry segment's growth. At the EBIT level too, most of these sub-segments posted modest growth. While urban infrastructure projects could drive revenues for Siemens' transportation business, most other industry segments' growth remain uncertain, given the poor pace of capex spending by industries.

Overall, EBITDA margins for the December quarter declined by 5 percentage points to 14 per cent; nevertheless it is in line with earlier years' average. Pricing pressure and higher costs can be expected to make an impact on margins.

It may be worthwhile recollecting that Siemens has had a tryst with cost- overruns in FY-09, a phenomenon encountered by few other MNCs in the last couple of years. The slowdown in 2008, together with cost issues, has led to a steep decline in the pace of growth of many MNCs. Take the case of Siemens: Between 2004-07, the company's sales expanded at a scorching compounded annual rate 62 per cent while net profits (other than extraordinary) grew 54 per cent.

However, over the three years ending September 2010, sales grew by just 6 per cent to Rs 9,315 crore, while profit growth expanded at 15 per cent to Rs 827 crore. The current pace of growth would be more indicative of future prospects and the supernormal period of 2004-07, which was a boom time for many capital goods companies, may not repeat itself. Historical PE valuations of 35-40 times, therefore, may not hold much relevance.

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