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Neutral Siemens Ltd For Target Rs. 1,900

Capitalizing on short-cycle orders in uncertain times

Digitalization and automation opportunities pick up even as Projects business remains muted

* Short-cycle orders barely impacted:

Even as the second COVID wave has led to delays in ordering in the Projects business, the short-cycle business is performing well. Business across segments rebounded over Jul’20–Jan’21, following which the momentum tapered. The demand uptick after the first lockdown exceeded the management’s expectations, with some portion of the 1HFY21 growth attributable to pent-up demand. An increase in commodity prices, semi-conductor shortage, and a rise in freight costs have led to some delays in ordering and deliveries. However, the outlook across the short-cycle business is healthy as brownfield capex and opex led spending is expected to aid order inflows. On the other hand, ordering in the Utilities segment is expected to be delayed on account of the COVID-led disruption.

* Uptick in adoption of digital/automation technologies:

SIEM has executed several digital projects in 1HFY21, ranging from value chain digitalization in the Food and Beverage segment to API process simulation in the Pharmaceutical segment. As per the management, these solutions can be deployed across industries and have gained swift acceptance in the last year. SIEM believes the COVID pandemic has accelerated the popularity and implementation of digitalization by a year or two. SIEM has partnered with Ola Electric to establish the world’s largest e-vehicle facility. Moreover, it has signed an MoU with Switch Mobility (Ashok Leyland’s subsidiary) to provide e-mobility solutions.

* Data Center biz presents healthy opportunity:

SIEM believes data collection through e-commerce is a large opportunity in the country, with the large aggregators in the world looking to set up data centers in India. While the current opportunity is limited for domestic consumption, exportrelated opportunity could also play out in the future. Siemens is a significant player in this segment as the company has solutions across various domains as 60–65% of the cost to run a data center constitutes electricity charges (switchgears, substations, building management, and so on). Siemens can cater to 25–30% of the overall data center capex.

* C&S Electric acquisition to aid growth:

Siemens acquired C&S Electric primarily to address local demand and export its products across the markets where it has a presence. The management expects higher activity in this business in CY21.

* Structural cost savings to sustain:

Cost-saving measures have been applied across discretionary and structural costs, with the latter expected to sustain. The management expects some amount of discretionary costs to return as normalcy resumes (site visits, business travel, and so on). SIEM expects most of the cost initiatives to sustain and believes the cost structure would not revert to pre-COVID levels in the future.

* Valuation and view:

We increase our FY22/FY23E EPS by 4%/6% as we expect cost rationalization measures to sustain, leading to a margin uptick. We like SIEM’s product portfolio and diverse end-market exposure. The company is poised to benefit over the long term, led by the niche Industrial Automation and Digitalization businesses. However, the stock has seen a sharp re-rating. We maintain our Neutral rating with TP of INR1,900 per share (45x Mar’23E EPS). We prefer ABB over SIEM at current valuations.

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