Maintain REDUCE on Siemens - Smart recovery priced in - HDFC Securities

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

We maintain REDUCE on Siemens India Ltd. (SIL) and roll forward TP (Rs 1,370) to Dec-22 (35x). We upgrade FY21E/22E/23E EPS on account of improved margin profile. SIL delivered Revenue/EBIDTA/APAT beat of 31/37/33%. After a washout 3QFY20, margins across all segments improved both YoY and QoQ, driven by higher services and exports in the revenue mix (low base of revenue for FY20). Coming two quarters will give a better visibility on sustainability of improvement in EBIDTA margins of 12.9% (+305/+1350bps YoY/QoQ) in 4QFY20. SIL has indicated good margins in order backlog backed by corrective cost optimization measures and some of it sustaining.

Smart recovery: SIL delivered Revenue/EBIDTA/APAT beat of 31/37/33%. EBITDA margins came at 12.9% (+305/+1350bps YoY/QoQ) vs est of Rs 12.3%. Higher margin was driven by both cost rationalization efforts, as well as better mix in Energy & Mobility segments. Service mix improved significantly to 17.7% in FY20 from 11.6% in FY19. Exports mix improved as well to 24.1% in FY20 vs 18.4% in FY19, as exports were relatively stable amidst a strict domestic lockdown (though on low base of FY20). Both services and exports have higher margin profile. While factories had been operating with ~75% manpower (all 22 open) in 4QFY20, project sites saw ~85% personnel mobilization.

Book to bill continues to be at 1x (of FY21E revenues): SIL has a strong order backlog of over one year's revenue, with new orders during 4QFY20 at Rs 32.2bn. We estimate FY20 order backlog to be at Rs ~128bn. OB has good margins, and margin quality is expected to sustain, as per SIL.

Hiving of the Mechanical Drives Business: SIL has divested Mechanical Drives (MD) business to Flender Drives Private Limited, an indirect subsidiary of Siemens AG. Divested MD business contributed Rs 2.1/6.7bn to the top-line, and loss of Rs 55/9mn to the bottom-line (loss from discontinued operations) in 4QFY20/FY20. MD contributed 6.4% to FY20 revenue and 64% of POC segment revenue. 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.

Industry outlook: auto sector isn't likely to see good offtake in the near term from fresh investments perspective. Verticals like pharma, F&B and T&D saw good uptick. Water/irrigation, metros/railways, warehousing, electronics, etc. are some other sectors SIL will focus on. Metals and chemicals sectors are expected to commit capex in near term. Waste heat recovery projects from cement & industrial cogeneration plants have also seen uptick. Utilities and hospitality continue to defer capex. While short cycle and services/digitization businesses continue to do well, large project orders will be muted due to lower capacity utilization.

Shares of SIEMENS LTD. was last trading in BSE at Rs.1516.65 as compared to the previous close of Rs. 1513.9. The total number of shares traded during the day was 42942 in over 2872 trades.

The stock hit an intraday high of Rs. 1544.9 and intraday low of 1489.55. The net turnover during the day was Rs. 64987723.

Source : Equity Bulls

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