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Cost pressures impact margin

Siemens’ Q4FY21 revenues grew 14% YoY to Rs40bn on a low base, led by 37% YoY growth in ‘smart infrastructure’ segment to Rs12.6bn and 24% YoY growth in digital industries segment to Rs7.8bn. Order intake was up 5% YoY to Rs33.7bn during the quarter and the orderbook remained strong at Rs135bn, providing growth visibility. Cost pressures impacted the EBIDTA margin, which contracted 215bps YoY to 10.7%. Order pipeline is strong as the private sector is increasingly investing in automation and efficiency-related solutions. Factoring-in the better execution in Q4FY21, we marginally raise our earnings estimates by 4.4% and 4.5% for FY22E and FY23E, respectively. Maintain HOLD with a revised SoTPbased target price of Rs2,251 (earlier: Rs2,138).

* Healthy execution and order intake: Q4FY21 revenues witnessed healthy growth, especially in ‘smart infrastructure’ and digital industry (short-cycle orders) segments. On a full-year basis, revenues grew 31% to Rs129bn. EBITDA margin expanded 122bps to 11.3% due to 320bps and 240bps contraction in employee cost/sales and other expenditure/sales, respectively. However, growth in EBITDA was limited due to rise in commodity costs, which led to a 440bps expansion in raw material/sales.

* Cost pressures impact margins: For Q4FY21, EBIDTA margin contracted 215bps YoY to 10.7% due to increase in ‘other expenditure’ (+24% YoY) and raw material costs (+16% YoY). We believe, ‘other expenditure’ includes forex loss. Mobility/ ‘smart infrastructure’ / digital industries’ margins shrunk 450bps / 340bps / 120bps during the quarter.

* C&S Electric has booked implied loss due to impairment of goodwill: As per implied financials, during Q4FY21, subsidiary C&S Electric likely booked loss of Rs2.7bn in revenues and Rs179mn in EBIT due to impairment of goodwill.

* Maintain HOLD due to rich valuation and cost pressures: Green shoots in sectors like pharma, food & beverage, data centre, etc. will support base orders. However, given the cost pressures and rich valuations, we maintain HOLD on the stock. We value it by the SoTP methodology assigning P/E multiples to FY23E core PAT for each individual segment. Post this, we add back the cash. We have also accounted for C&S Electric separately. We arrive at an SoTP-based target price of Rs2,251 (previously: Rs2,138).

Valuation and outlook

Private sector is increasingly investing in automation and efficiency-related solutions. The impetus given to infrastructure spending by the government in Budget FY22 will snowball into strong growth opportunities in terms of demand. However, given the cost pressures and rich valuations, we maintain HOLD on the stock. Any possible third covid wave will put brakes on the overall growth momentum.

We use the SoTP valuation methodology wherein we assign P/E multiples to FY23E core PAT of various business segments and add back the cash. We value the: 1) energy segment at 40x FY22E core earnings (on good growth prospects in highmargin steam services segment and captive/cogen-related domestic orders); 2) ‘smart infrastructure’ at 60x (given improved domestic market environment – stable growth visibility on domestic market and market leadership with healthy RoEs); 3) mobility segment at 40x (on better growth prospects from enhanced metro-related ordering); 4) digital industries segment at 70x (given Siemens’ leadership in high-growth discrete and factory automation); 5) portfolio of companies at 20x ; 6) others at 20x; and 7) C&S Electric business at 20x. We add back cash of Rs55.5bn. We maintain our HOLD rating on the stock and arrive at an SoTP-based target price of Rs2,251 per share.

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