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Gaining from strong demand and margins

SIEM’s 2QFY24 result was ahead of our estimates, aided by a strong margin performance and higher other income leading to a sharp beat on PAT. The company reported revenue/PAT growth of 18%/70% YoY in 2QFY24. Margin outperformance was driven by an improved revenue mix, pricing gains and productivity measures taken by the company. SIEM aims to maintain margins at higher levels amid a strong demand scenario, along with productivity measures. Order inflows stood at INR51.8b, down 13% QoQ, due to delays in finalization. However, the enquiry pipeline remains strong. SIEM continues to benefit from a strong demand environment, especially in transmission, data center, EV, railways, semiconductor, electronics and hydrogen. It has planned a capex of INR5b for GIS and metros to capitalize on domestic and export demand. SIEM has also approved the demerger of its energy segment into a separate entity, which will be listed by CY25-end. We raise our estimates for FY24/FY25/FY26 by 17%/18%/26% primarily to factor in higher margin. We reiterate our BUY rating with a revised TP of INR7,800 (from INR6,050), based on 65x Sep’26E EPS.

Strong beat on profitability

Revenue at INR57.5b grew by 18% YoY/19% QoQ. This was driven by robust growth of 26%/56%/16% in Smart Infra/Mobility/Digital Industries, while the Energy segment grew by 5% YoY. Gross margin expanded by ~100bp YoY to 32.5%, which, coupled with a reduction in employee costs as a percentage of sales, led to a ~250bp YoY/290bp QoQ expansion in EBITDA margin to 15.3%. Consequently, EBITDA at INR8.8b jumped 41% YoY (record high). Driven by robust other income (+175% YoY due to property sale), PAT surged 70% YoY to INR8b. Order inflows came in at INR51.8 (not comparable to 2QFY23 which had a large order worth ~INR254b). The order book stands at INR462b (+3% YoY). The company has announced capex worth INR3.33b in Goa for GIS and Clean Air GIS technologies catering to industries such as data centers, metro rail, oil & gas, steel, T&D, etc. In Aurangabad, SIEM is investing ~INR1.86b in a state-ofthe-art metro train manufacturing facility. With these two announcements, along with the earlier announcements for Power Transformers and Vacuum Interrupters, the cumulative capex has crossed INR10b.

Outlook remains strong across segments

SIEM is witnessing a strong demand environment, driven by government capex, private capex from PLI schemes, data centers, renewable spending, and semiconductor. Some government-led projects were deferred during the quarter, while a major increase in demand was seen in the transmission sector where the company can capitalize on HVDC projects too. We had highlighted this in our report on T&D opportunities (ref link) that the near-term prospect pipeline from CEA approvals jumped to INR1t.

Demerger of energy division to be completed by CY25-end

SIEM has also approved the demerger of its energy segment into a separate entity, Siemens Energy India (SEIL), which will be listed by CY25-end. This entity will have a mirror shareholding and shares will be allotted in a 1:1 ratio. Both companies will be able to execute their own strategy, with a tailored go-to-market and operational approach to leverage the full potential of the Indian and export markets. SEIL will get technology access related to its business from parent Siemens AG. The order book for the energy business stood at INR97b and revenue was INR60b as of FY23.

Leveraging facilities for export and domestic demand

SIEM is expanding facilities across GIS, metro and transformers to cater to both domestic and export demand. In the smart infrastructure division, GIS expansion will initially cater to demand for blue GIS, which will be primarily used for exports. Its C&S division is already stepping up and doing substantial exports. For the mobility division, metros and bogey factory will emerge as global hubs and will be used for exports to Australia, the Middle East and Asia. The company will also use the upcoming transformer facility for both export and domestic demand. The improving share of exports will also boost margins for SIEM.

Financial outlook

We raise our estimates for FY24/FY25/FY26 by 17%/18%/26% primarily to factor in higher margin. We expect a CAGR of 20%/29%/30% in revenue/EBITDA/PAT over FY23-26. We believe that the company is one of the beneficiaries of opportunities from investments in railways, T&D, data center and industrial activity.

Valuation and view

The stock is currently trading at a P/E of 69.3x/55.5x on FY25E/FY26E. We remain positive on SIEM, as the company is a direct play on the transmission and HVDCrelated spending over the next few years. It is also rightly positioned to capture the railway-related opportunities. We value the stock at 65x Sep’26E EPS and maintain our BUY rating with a revised TP of INR7,800 (INR6050 earlier).

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