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Margin led earnings miss; order inflows jump sharply

Rich valuations fail to recognize the increasing dependency on strong orders

* SIEM’s 3QFY21 revenue more than doubled to INR27b (like-for like two-year CAGR at -4%) and was 8% above our expectation. EBITDA margin was weaker at 8.4% v/s our estimate of 10.3%, driving earnings miss of 16% v/s our expectation.

* Key positives include strong revenue growth in key segments of Smart Infrastructure and Digital Industries. Order inflows were quite strong at INR43b, driving order book to a record high of INR143b.

* SIEM has the most diversified portfolio, with offerings across various endmarkets, which enables it to capture wider growth opportunities. However, underlying margin (adjusted for one-off cost control measures) has weakened across various segments. The stock has sharply re-rated in anticipation of a capex recovery, but fails to account for margin pressure in the business. The company needs to consistently surprise on order intake to meet revenue growth expectations. We broadly maintain our estimates and remain Neutral with a TP of INR2,050/share as we roll forward to Sep’23E EPS.

Strong growth in order book

* 3QFY21 highlights: Revenue rose 124% YoY to INR27b and was 8% ahead of our estimate. EBITDA stood at INR2.3b and was 12% below our expectation. EBITDA margin stood at 8.4% v/s our estimate of 10.3%. Adjusted PAT came in at INR1.6b and was 16% below our expectation. Order inflows were very strong at INR43.4b, leading to a strong growth in order book at INR143b (record high).

* Segmental highlights – a) Energy: Revenue increased by 72% YoY to INR9.5b and was 7% ahead of our expectation. PBIT margin came in at 8% v/s our expectation of 10%. b) Smart Infrastructure: Revenue increased by 179% YoY to INR8.6b and was 10% ahead of our expectation. PBIT margin came in at 5.3% v/s our expectation of 7%. c) Mobility: Revenue increased by 31% YoY to INR1.3b and was 28% below our expectation. PBIT margin came in at 12.1% v/s our expectation of 9%. d) Digital industries: Revenue increased multifold to INR6.8b and was 15% below our expectation. PBIT margin came in at 4.6% v/s our expectation of 6%. e) Portfolio of companies: Revenue grew 53% YoY to INR1b. The EBIT margin stood at 2.8%.

Valuation and view

* 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 and fails to acknowledge the rising dependency on strong order inflows as well as margin risks in the business.

* We broadly maintain our estimates and remain Neutral with a TP of INR2,050/share as we roll forward to Sep’23E EPS. We prefer ABB over SIEM at current valuations to play the niche theme of Industrial Automation and L&T to play the capex cycle recovery.

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