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Transient weakness

Siemens Ltd (SIEM) in its analyst call highlighted growth opportunities from new-age technologies such as semiconductors, batteries, photo voltaic, and electric vehicles amid lower capex by the government and private sectors in 1HFY25. The company maintains its selective outlook toward HVDC projects and plans to participate in projects based on VSC technology while most upcoming HVDC projects are likely to be on LCC technology. It maintains a positive outlook on the Energy segment mainly in the T&D and Smart infrastructure segment particularly owing to a continued thrust on renewables. Though Digital Industries and Mobility segments are impacted by a weak enquiry pipeline from the private sector and delays in railway tenders, SIEM expects the current weakness to be cyclical in nature. The demerger of its energy division is on track and after that, the focus will shift to growth for non-energy divisions. We believe that selective approach for HVDC projects and weak inflow for ex-Energy segments may weigh on near term performance of SIEM. This would start recovering when private and government capex revives. We slightly lower margin estimates and reiterate BUY rating with a revised TP of INR8,000.

One-off property sale leads to strong beat on PAT in 4QFY24

SIEM reported largely in-line revenue at INR64.6b, up 11% YoY, led by Energy/Smart Infra/Mobility/Digital Industries, which reported YoY growth of 12%/8%/24%/11%. Gross margin expanded ~300bp YoY to 32.4%. This, coupled with operating leverage benefits, led to ~240bp EBITDA margin expansion to 14.5%. Consequently, EBITDA grew 34% YoY to INR9.4b, in line with our estimates. PAT at INR8.3b grew 45% YoY, much ahead of our and street estimates, primarily aided by higher other income (+95% YoY). This was on account of higher dividends from subsidiaries and gains on a property sale (INR688m). Order inflows at INR61.6b have been stable for the last four quarters, taking the order book to INR469.5b. In FY24, revenue/EBITDA/PAT grew 14%/25%/39%, while FCF grew 11% to INR13.2b. Order inflows jumped 14%, excluding the large 9,000HP locomotive order win in FY23.

Segmental performance and outlook a mixed bag

* Energy segmentrevenue rose 12% YoY with a healthy 590bp margin expansion to 17.8%, due to one-offs related to accrual release and forex adjustments. Order inflows jumped 15% YoY, pertaining to grid technologies, oil & gas and turbine segments. The outlook remains robust for India and overseas while we expect HVDC ordering to be limited for Siemens due to its focus on VSC technology versus LCC technology. The demerger is on track to be completed in CY25.

* Digital Industries segment continues to face challenges in the form of customer destocking and supply chain issues. Revenue grew 11% YoY, while margin contracted ~210bp to 9.4%. Order inflows will start picking up once weak private capex sees a broad-based revival.

* Mobility segment revenue grew 24% YoY and margins jumped ~490bp to 8.2%, aided by a favorable mix and lower R&D spends. The order pipeline is currently weak, as there are no imminent big-ticket railways orders.

* Smart Infra revenue grew 8% YoY and margin expanded ~190bp to 13.4%, led by a better mix, pricing and volumes. The company expects demand in this segment to be driven by robust traction from data centers, industrial infra, commercial buildings and power utilities.

Excl. Energy segment, order inflows currently growing at slow pace

The company’s order inflows, excluding the Energy segment, stood at INR148b in FY24 vs. INR133b in FY23 (up 11% YoY) and EBITDA margin improved 20bp YoY to 12.8%. After the demerger of its energy division, the growth and margin performance for all other segments will be important to watch out for. As per management, the performance of Digital Industries division was impacted by ongoing de-stocking by customers, particularly auto sector customers. This segment’s growth would start improving once private capex investment starts ramping up. Upside to margins in Digital Industries division would come from combined offerings to customers for factory automation, motion control, and energy efficiency solutions. Smart Infra segment’s margins would see an upside from improved volumes, driven by key areas such as electrification, building automation, grid solution, and e-mobility. Mobility segment’s performance would be driven by improvement in ordering from both domestic and exports. We expect the margin trajectory of the Mobility division to improve once locomotive delivery commences in FY25. Our estimates currently build in a 20% revenue CAGR for all segments, excluding Energy.

Emerging as an export hub with parent support

SIEM has been leveraging its parent’s support to emerge as a global manufacturing hub in the global Siemens network. This has resulted in a robust export trajectory in the past few quarters, which is also evident from improving dispatches of bogies, metros, transformers, switchgears, steam turbines and other products from its Indian facilities to cater to burgeoning global demand. The Board has approved a further investment of INR1b for power transformers, in addition to the INR3.6b investment announced previously. The additional investment will enable the company to expand the range of its offerings to include large reactors. The capacity will come online by Dec’25. Overall, for the next two to three years, the company has lined up a capex of INR11b. Accordingly, the upcoming capacities will serve both Indian and global geographies.

Financial outlook

We slightly lower our margin estimates to bake in FY24 performance and expect the company to clock a CAGR of 19%/22%/20% in revenue/EBITDA/PAT over FY24-27E.

Valuation and view

The stock is currently trading at a P/E of 81x/64x/52x on FY25E/FY26E/FY27E. We expect SIEM to benefit from expected revival in private capex, railways and higher exports as SIEM emerges as a manufacturing hub for the parent for exports going forward. We value the stock at 70x two-year forward EPS and maintain our BUY rating with a revised TP of INR8,000 (INR8,500 earlier).

Key risks and concerns

1) Slowdown in order inflows from key government-focused segments such as transmission and railways; 2) Aggression in bids to procure large-sized projects would adversely impact margins; 3) Related-party transactions with parent group entities at lower-than-market valuations

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