Published on 10/12/2019 9:26:15 AM | Source: Yes Securities Ltd

Reduce Siemens Ltd For Target Rs.1,491 - Yes Securities

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Weak growth prospects in base business

Siemens (SIEM) has shared weak core business outlook for FY20. Opex for efficiency optimization was doing well till Q3FY19, but it has also slowed down since last 3-4 months which poses risk for base order inflow in our view. It does not expect large project orders soon & also not seeing any signs of a revival in private sector capex. Company see muted outlook for conventional power over medium term while renewables expected to do well. Ordering from central government has slowed down considerably while only few states have started focusing on new capex. The Company would remain selective in order bidding from state DISCOMs as it is witnessing lower profitability, working capital issues & heightened competition from equipment manufacturers, EPC companies & international players. In railways, ordering potential for signaling & electrification is huge but management remains skeptical about its fruition in near term. Export outlook is also not very exciting due to global uncertainties & trade war.

SIEM is banking on its digitalization offerings to help grow the company in absence of large projects. Its order book stood at Rs119bn (~0.9x TTM sales) & hence it would have to post strong order inflows in the next 2-3 quarters to maintain revenue and profitability growth in FY20E/FY21E. We downgrade FY21 EPS estimates by 5% to factor in lower revenue visibility and profitability assumptions. We expect SIEM to post revenue/EBITDA/PAT CAGR of 6%/6%/10% over FY19-21E respectively. Post 35% stock rally in last 3 months, SIEM is currently trading at 44x/41x to FY20E/FY21E earnings, implying rich valuations. Hence, we downgrade the stock to ‘REDUCE’ rating with a target price of Rs1,491 based on 40x FY21E earnings.


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