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Neutral Siemens Ltd For Target Rs. 1,700

In-line earnings; margins surprise

Cash generation remains strong, with focus on working capital

* Siemens (SIEM)’s 2QFY21 revenue growth of ~28% YoY suggests gradual recovery – as the two-year revenue CAGR came in flat. Gross margins contracted YoY, while EBITDA doubled – aided by lower employee costs (- 11% YoY) and other expenses (-33% YoY). Adjusted for strong cuts in other expenses (7.3% of sales v/s 13.8% in 2QFY20), the margin trend seems to be under pressure and needs monitoring over the next 1–2 quarters. Other income declined 33% YoY to INR540m, despite a healthy cash balance, suggesting the impact of declining interest rates on excess cash on the balance sheet.

* Smart Infrastructure and Digital Industries witnessed a strong rebound. Order inflows stood at INR33b (up 17% YoY), with increased demand in the Power Transmission, Digital Grid, and Distribution Systems businesses. Within the Digital Industries segment, the Machine Tool and Process Automation businesses saw healthy growth. The order book stood at INR127b.

* While the pace of recovery is very gradual, re-rating of the stock has been quite steep. The ongoing second COVID wave poses a risk to execution. We cut our FY21E EPS by 9%, while we maintain our FY22/FY23E EPS estimates. We maintain our Neutral rating with TP of INR1,700 per share (42x Mar’23E EPS). We prefer ABB over SIEM at current valuations.

Margin surprise offsets minor revenue miss

* 2QFY21 highlights: Revenue grew 28% YoY to INR33.5b and was 6% below our estimate. Gross profit grew just 6% to INR10.5b as gross margins contracted to 31.4% (1QFY21: 31.7%; 2QFY20: 37.9%). EBITDA doubled to INR4.4b and was 10% ahead of our expectation, led by 11.4% YoY decline in employee costs. The EBITDA margin came in at 13.2% (+490bps YoY), far ahead of our expectation of 11.3%. Adj. PAT almost doubled to INR3.2b and was in line with our expectation.

* Owing to normalized operations and the focus on working capital, CFO was robust at INR7.3b, while FCF stood at INR6.7b.

* Segmental highlights – a) Energy: Revenue grew 16% YoY to INR11.9b. PBIT margins came in strong at 15.1%. b) Smart Infrastructure: Revenue grew 35% YoY to INR10.5b. PBIT margins came in at 9.1%. c) Mobility: Revenue was flat at INR2.3b. PBIT margins came in at 10.1%. d) Digital Industries: Revenue was up 50% YoY to INR7.9b. PBIT margins came in at 8.7%. e) Portfolio of companies: Revenue grew 40% YoY to INR1.3b. The EBIT margin stood at 9.6%.

Valuation and view

* We cut our FY21E EPS by 9%, while we maintain our FY22/FY23E EPS estimates.

* 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, re-rating of the stock has been quite steep. Adjusted for strong cuts in other expenses (7.3% of sales v/s 13.8% in 2QFY20), the margin trend seems to be under pressure. We maintain our Neutral rating with TP of INR1,700 per share (42x Mar’23E EPS). We prefer ABB over SIEM at current valuations.

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