Maintain REDUCE on Siemens - Headwinds remain - HDFC Securities

Mr. Parikshit D Kandpal, Institutional Research Anayst, HDFC Securities

Siemens (Q2FY20): Headwinds remain. Maintain REDUCE
(TP Rs 1,104, CMP Rs 1,045, MCap Rs 372bn)

We maintain REDUCE on Siemens India Ltd. (SIL) with a TP of Rs 1,104/sh (35x SIL Mar-22E EPS). The decline in Revenues across the businesses is primarily due to deferred offtake by customers and slow-down in short-cycle business owing to COVID-19 headwinds and continued weaker demand in large infrastructure projects. Lower revenue led to negative operating leverage and crack in margin across all segments except POC which saw benefits of cost rationalization impact in previous years.

Weak financial performance: SIL delivered Revenue/EBIDTA/APAT miss of 11.6/34/34%. EBITDA margins came at 8.3% (275bps miss). Employees wage hikes was effected from 2QFY20 and also other expenses had Rs 500mn+ impact of forex loss. The combined cost increase led to EBIDTA margins crack by 300bps. Order backlog stood at Rs 125.5bn which is healthy and maintained at last 4 quarters average of Rs 125bn.

Navigating through COVID-19 crisis: Post the complete lockdown in last week of Mar-20, SIL has shut all its factories, project sites and offices. This significantly impacted 2QFY20 revenues. SIL has resumed limited operations in six factories with another two expected to resume operations this week. Whilst short cycle orders headwinds remain, SIL is seeing heightened interest from clients on digitalization solutions to save costs and increase productivity. Social distancing is also driving these inquiries.

Hiving of the Mechanical Drives Business: Siemens AG has made an announcement to integrate Portfolio Companies wind energy generation unit into Flender and subsequently publicly list the company via spin-off. SIL board has received a request from Siemens AG to consider the proposal of divesting the POC Mechanical drives business to subsidiary of Siemens AG. SIL board has in principle agreed to sell the mechanical drives business at a fair consideration (to be determined). Mechanical drives contributed 5% to FY19 revenue (~Rs 6,482mn) and 54% of POC segment revenue. EBIT margins for POC was 1.3/(7.1)% for FY18/19 and lower than SIL margins. Large non wind mechanical drives and motors will continue to be part of SIL POC business. Sale of less profitable business augurs well for SIL.

SIL will face near to mid-term head winds on weak Govt/Private capex as businesses conserve cash and slow down capex on back of COVID-19 led disruption. Global growth contraction will result in lower exports and INR depreciation will make imports costlier. Tailwinds like digitalization opportunities and strong net cash Rs 45.8bn are priced in at current punchy valuations. Multiple re-rating is contingent on capex recovery. We maintain REDUCE on SIL. Key risks (1) Faster than expected Private/Government capex recovery, (2) Fiscal stimulus leading to recovery in private investments, and (3) Strong uptick in digitalization.

Shares of SIEMENS LTD. was last trading in BSE at Rs.1045.4 as compared to the previous close of Rs. 1044.1. The total number of shares traded during the day was 69889 in over 5746 trades.

The stock hit an intraday high of Rs. 1078.65 and intraday low of 991.85. The net turnover during the day was Rs. 72302228.

Source : Equity Bulls

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