During the recently concluded quarter, as per the accounting policy of percentage completion, the company reassessed revenues and profits arising out of a project that has been substantially completed.
Following this exercise, Siemens realized that there has been an understatement in revenues and profits and hence to that extent the company has made the upward revisions in its revenues and profits.
We believe the revisions could mainly pertain to a power transmission project being executed by the company.
Over the past few years, the company has been executing some large projects in Qatar KAHRAMAA including Rs36 billion transmission project which was won in 2006. This is reflected by the abrupt improvement in profitability in the power transmission segment.
Operating margins improved from 0.7% in Q2 FY08 to 14.7% in Q2 FY09. On a sequential basis, operating margin expanded 430 bps aided by increase in profitability due to reassessment in project profitability.
We expect margins to remain resilient in coming quarters helped by lower commodity prices and focus on profitable orders.
Order backlog for Siemens has remained flat at Rs97 billion providing visibility of 14 months based on trailing four quarters.
The drop in order inflows is the highest possibly due to higher concentration of industrial segment revenues (essentially dependent on private sector).
Order inflows likely to improve in Q3FY09 as the company has received a large Rs7.2 billion order for HVDC transmission system for supply of 2500 MW.
Siemens India limited is currently trading at 17.1x and 17.0x FY09 and FY10 earnings respectively. We maintain REDUCE on the company with a price target of Rs290.