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Growth prospects remain strong, healthy...

We recently attended the analyst meet of Siemens Ltd (Siemens). The order opportunity pipeline remains healthy across segments with solar, Statcoms, power evacuation, GIS substations as TBCB gaining momentum and good traction in waste heat recovery (WHR) plants from private customers in steel, cement, chemical, fertiliser, etc. In smart infrastructure, a lot of traction is seen in data centres, hospitals, building management systems, low voltage products with fairly visible opportunity pipeline.

Revenue growth in H1FY21 was aided by short cycle products business (Smart Infrastructure and Digital Industries) primarily driven by private customers. Exports business saw a marginal increase to 21.8% for H1FY21. It was able to control discretionary expenses driven through continued efforts on optimisation of fixed costs. Order backlog was healthy at | 12677 crore.

Digital industries, smart infra, mobility to drive future growth...

For Q2FY21, overall revenue growth was driven by gas & power (energy) segment, which grew 16% to | 1191.3 crore. Smart infrastructure grew 48.5% to | 1150.1 crore, digital industries revenue grew 50.3% to | 791.7 crore while mobility revenue grew 1.3% YoY to | 258.9 crore. Siemens is witnessing increased demand short cycle products in industrial and electrical products in power transmission, digital grid and distribution systems. Digital industries are witnessing high demand from pharma, food & beverages, machine tools, etc. Mobility would be driven by capex in railways, high speed rail, metros, DFC. We believe Siemen’s growth will be driven by digital industries, mobility, smart infrastructure, which is expected to grow at ~17%, ~13%, ~17.3% CAGR, respectively, in FY21E-23E.

Segment mix, operational efficiencies to drive superior margins

For Q2FY21, EBIT margins across segments improved sequentially aided by better contribution from short cycle products and services. Gas & power reported EBIT margin of 15.1%, up 250 bps QoQ, smart infrastructure EBIT margin was at 8.6% (vs. 7.5% QoQ), mobility segment EBIT margin improved 30 bps to 11.2% on a QoQ basis while digital industries EBIT margin declined 170 bps to 8.7% QoQ. Siemens continues to focus on profits over revenue by range of rationalisation and optimisation efforts on product mix to enhance market share. EBITDA margins are expected to improve from 10.1% in FY20 to 12.2% in FY23E.

Valuation & Outlook

Overall, Siemens is expected to further strengthen its leadership position through further penetration of automation and digitisation products & services across segments, particularly in digital industries, smart infrastructure, mobility segments, driving long term growth. We revise our target price to | 2390/share (earlier | 2295) and maintain BUY rating, implying multiple of 50x FY23E EPS for core business and valuing C&S business at 2.1x FY23E sales.

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