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Hold Siemens Ltd For Target Rs.2,138

Strong order intake, margin stress impact earnings

Siemens’ Q3FY21 revenue grew 174% YoY to Rs27bn over a low base, led by 275% YoY growth under digital industries at Rs6.8bn, 179% YoY growth under smart infrastructure at Rs8.6% and 72% YoY growth under gas & power at Rs9.5bn. Despite macro headwinds, order intake grew 148% YoY/31% QoQ to Rs43.4bn during the quarter and the orderbook remained strong at Rs142bn, lending growth visibility.

Cost pressures and commodity prices have impacted the EBIDTA margin at 8.4%, lower than estimate and normalised levels. Private sector is increasingly investing in automation and efficiency-related solutions. Factoring in margin stress, we cut earnings estimates by 8% and 7% for FY21E and FY22E, respectively. We maintain HOLD with a revised SoTP-based target price of Rs2,138 (earlier: Rs2,159).

 Healthy execution and order intake: Revenues witnessed strong recovery, especially in digital industries (short-cycle orders) and ‘smart’ infrastructure segments. The order intake grew 148% YoY/31% QoQ at Rs43.4bn and the orderbook stood strong at Rs142bn (+9% YoY), lending growth visibility. We believe the company would have booked a couple of large orders in Q3FY21.

 Cost pressures impact margins: EBIDTA margin at 8.4% (down 470bps QoQ) was impacted by increase in other expenditure (+6%QoQ) and employee cost (+10% QoQ). Material cost proportion increased 500bps YoY, while reduced 150bps QoQ to 67.1%. Digital industries margin at 4.6% and smart infrastructure margin at 5.3% are lower than normalised levels implying cost pressures. We believe there would be an impact of forex loss under other expenditure.

 C&S has booked implied loss due to impairment of goodwill: As per implied financials, C&S has likely booked Rs2.1bn of revenue and EBIT loss of Rs293mn due to impairment of goodwill.

 Maintain HOLD due to rich valuation & cost pressure: Green shoots in certain sectors like pharma, food & beverages, data centres, etc. will support base orders. However, given the cost pressures and rich valuations, we maintain HOLD. We value the stock using SoTP methodology assigning multiples to FY23E core PAT for each individual segment. Post this, we add back the cash. We have also accounted for C&S and businesses separately. We arrive at an SoTP-based target price of Rs2,138 (previously: Rs2,159).

Valuation and outlook

Private sector is increasingly investing more 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. The impact of any likely third covid wave is also expected to put brakes on the overall growth momentum. We use SoTP valuation methodology wherein we assign P/E multiples to FY23E core PAT of various business segments and add back the cash.

We value 1) energy segment at 40x (good growth prospects from high-margin steam services segment and captive/cogen-related domestic orders) FY22E core earnings; 2) ‘smart’ infrastructure at 60x (given improved domestic market environment – stable growth visibility from domestic market and market leadership with healthy RoEs); 3) mobility at 40x (given better growth prospects from enhanced metro-related ordering); 4) digital industries at 70x (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 Rs52.3bn. We maintain our HOLD rating on the stock and arrive at an SoTP-based target price of Rs2,138 per share

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