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In line revenue; weak margin leads to an earnings miss

Activity level back to pre-COVID levels

* SIEM’s 4QFY21 revenue stood in line with our estimate, driven by strong performance in key segments of Digital industries and Smart infrastructure segments. EBITDA margin was weaker at 10.7% v/s our estimate of 12.3%, driving earnings miss of 17% v/s our expectation.

* Order inflow grew 5% YoY to INR33.8b, but moderated QoQ. Strong order inflows are imperative for its future outlook, given the rich valuations of SIEM. Order book stood at INR135b (order book/revenue ratio of 1x).

* SIEM has the most diversified portfolio, with offerings across various endmarkets, which enables it to capture wider growth opportunities. Underlying margin has weakened across various key segments. The stock has sharply rerated 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 INR2,065/share.

Digital industries and Smart infrastructure drive revenue growth

* 4QFY21 highlights: Revenue grew 14% YoY to INR40b and was in line with our estimate. Two-year CAGR stood flat. EBITDA fell 5% YoY to INR4.3b and was 16% below our expectation. EBITDA margin declined by 220bp YoY to 10.7%. Adjusted PAT stood flat at INR3.2b and was 17% below our estimate.

* FY21 highlights: Revenue/EBITDA/adjusted PAT grew 31%/47%/40%. On a two-year CAGR basis, adjusted PAT declined by 3%. CFO stood strong at INR16.8b (v/s INR9.7b YoY), aided by improvement in working capital days. Despite investment in C&S electric, cash on the Balance Sheet stood strong at INR48.5b (~50% of net worth).

* Segmental highlights | a) Energy: Revenue was flat on a YoY basis and was 14% below our expectation. PBIT margin expanded by 110bp to 13.2%. b) Smart Infrastructure: Revenue grew 37% YoY to INR12.6b. However, PBIT margin contracted by 340bp YoY to 7.2%. c) Mobility: Revenue declined by 7% YoY to INR2.8b. PBIT margin declined by 450bp YoY to 9.2%. d) Digital industries: Revenue grew a strong 24% YoY to INR7.8b. PBIT margin fell 120bp YoY to 6.7%. e) Portfolio of companies: Revenue stood flat YoY to INR1.2b. PBIT margin came in at 4%.

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 INR2,065/share (core business: 42x FY24 EPS). We prefer ABB over SIEM at current valuations to play the niche theme of Industrial Automation and LT to play the capex cycle recovery.

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