Buy Siemens India - Motilal Oswal

Siemens India (SIEM IN; Mkt Cap USD5.2b, CMP Rs720, Buy)

Order-book at all-time high; earnings visibility improves; upgrade to Buy

41% growth in order intake in the last one year; momentum picking up in all key sectors; expect 26% earnings CAGR over FY09-12

Strong play on Infrastructure, Industry and Transportation: A diversified Engineering company, with exposure to Power (40% of its revenues), Industry (40% of sales), Transportation (14% of sales), Healthcare, etc, Siemens is one of the biggest beneficiaries of the revival in the capex cycle in India.

- Domestic T&D: Siemens is a technology leader in HVAC and HVDC transmission systems, and stands to benefit significantly from investments in the 765kV space. It has invested meaningfully in setting up manufacturing facilities for high-end products such as extra-high voltage transformers and GIS systems, which should bear fruit in the next few years.

- Industry: Siemens has strong presence in automation, drives and projects across industries and stands to benefit from the revival in industrial capex.

- Railways: Siemens has set up manufacturing plants for several key products like traction motors. It is among the key beneficiaries of investments in railways, metro rail systems and other large projects like the Dedicated Freight Corridor.

Key partner in Siemens AG's global network: Siemens has received orders worth Rs95b from Qatar in the last four years, constituting ~20% of its total order intake during the period. We believe that the company will continue to be Siemens AG's growth vehicle in the Middle East and North African markets due to cost advantage.

Order momentum picks up: Siemens' total order intake in the last 12 months (June 2009 - June 2010) has been Rs120b, a growth of 41%. Order intake was boosted by a large order, valued at Rs24.91b, from Kahramaa, Qatar. Currently, the company has an order book of Rs135b, up 34%. In the current quarter (ending September 2010), Siemens in consortium with Siemens AG, has received another large order from Torrent Power to set up two combined-cycle power plants. We expect the company to end FY10 (September-ending) with an order-book of Rs154b, up 51%. Order flow momentum is likely to remain strong in the near term, with possibility of more mega orders.

Margins on track: Siemens' margins suffered in FY07 and FY08 on account of losses on two large orders. EBITDA margin improved to 12.1% in FY09. We expect EBITDA margin to expand further to 13-14% in the next two years due to higher indigenization, better product mix, and better project management.

Valuation and view: We are revising our earnings estimates upwards by 3% for FY10 and by 12% for FY11. With an estimated 26% earnings CAGR over FY10-12, Siemens is one of India's fastest growing engineering companies. Strong order book and continuing momentum provides earnings visibility. The company is ideally positioned to capitalize on opportunities in several sectors like power generation, wind power and transportation. We expect it to be a key beneficiary of Siemens AG's widening footprint in the Middle East. Any large order from Qatar can result in a substantial upgrade in our earnings estimates. We upgrade the stock to Buy, with a target price of Rs907.

Source : Equity Bulls

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