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Public capex to rise; private feeble

Siemens (SIEM IN) has outpaced its past performance in the Capital Goods industry this quarter led by inflows and margin expansion. Also, government capex is set to jump in Q2FY25 while outlook for private capex seems feeble in the near-term given delays in orders. The demerger and listing of the energy business is set to be completed in CY25. Margin is likely to rise in the mobility space and digital industries (DI), led by exports and indigenization. SIEM is set to benefit from a multi-year capex cycle (both public and private capex), given its diversified portfolio, technological edge and support from the parent. But we lower our TP by 4% to INR 7,670 (from INR 8,000) on 70x September FY26E P/E, in line with the average P/E of MNCs, on delayed execution in locos and slower inflows. We reiterate Accumulate as we expect an earnings CAGR of 22% in FY24-27E and a 20% ROE in FY25E-27E.

Private sector inflows may be delayed in the near term but long-term trend positive:

Private sector capex is selective as core sectors (Metals and Automobiles) may see delays in ordering but new-age sectors (Data Centre, Renewables and Semiconductor) are picking pace in FY25. Partial slower growth will be overshadowed by a rebound in government capex in Q2FY25 as per management. In the near term, inflow enquiry seems feeble, though, long-term ordering momentum is expected to remain positive. Orderbook rose 1% QoQ to INR 488bn as of FY24 with book-to-bill at 2.2x TTM sales.

SIEM to participate in HVDC projects via VSC technology:

Large renewable energy projects are evacuated via high voltage direct current (HVDC) lines in India. There are 5-6 such large projects with an estimated cumulative worth of INR 800bn (to be tendered in the next two years). SIEM believes voltage source converters (VSC) technology to be superior to the other technologies.

Siemens Energy – Listing and demerger in CY25:

SIEM would complete the demerger and listing of Siemens Energy in CY25. Post listing, the parent entity, Siemens Energy AG, would increase its equity holding to a majority stake in the new entity. The timelines are still awaited. In FY24, inflows for Siemens Energy grew by 30% YoY to INR 88bn, revenue by 5% YoY to INR 62.8bn and EBITDA margin was 15.6% (up 280bps YoY). Also, PAT jumped 37% YoY to INR 7.1bn with margin at 11.3% (up 260bps YoY). We believe the new entity would be valued similar to Hitachi Energy and GE Vernova India.

Reiterate Accumulate; TP pared to INR 7,670:

We trim FY25E/26E EPS by 4%/5% given delay in execution of locomotive order and lower inflow momentum from private sector likely impacting SI and DI. We lower our TP by 4% to INR 7,670 (from INR 8,000) on 70x (unchanged) September FY26E P/E, in line with average P/E for MNCs, on delayed execution and slower than anticipated inflows from private sector. We reiterate Accumulate as we expect an earnings CAGR of 22% in FY24-27E and a 20% ROE in FY25-27E as we enter a multi-year capex cycle (both public and private capex). SIEM would be a key beneficiary given its diversified portfolio, technological edge and support from the parent.

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