Siemens: Bullish on India; expanding portfolio

22 Dec 2023 , 11:00 AM

Recommendation: Add ; Target price: Rs 4383

 

At its Annual Analyst Meet FY23, Siemens exhibited strong confidence in the underlying growth fundamentals of India’s capex cycle. The company reiterated increasing thrust of the parent Group on technology-driven portfolios/ solutions as emerging segments open up. Localisation and capacity expansion is on the cards across all segments (except DI), to drive cost competitive deeper solutions for domestic markets as well as support global supply chains. While the demerger process has been initiated, uncertainty on the timelines of listing Siemens Energy continues (likely in H2 2025). Mgmt continues to drive stringent execution of its backlog to keep margins intact. Analysts of IIFL Capital Services keep forecasts unchanged; maintain ADD. 

Large orders drive optimism: 

Even as short-cycle products witnessed destocking on ease in supply-chain concerns, large orders in Energy and Smart Infra and mega multi-year PPP project in Mobility (9000 HP loco: Rs245bn) aided 130% growth in orders (7% YoY ex- Loco order). While multiple opportunities in Mobility have opened up with the widening of its India portfolio, the pipeline of large orders in Energy (HVDC, grid, WRSG) and exports opportunities in Energy & Smart infra, continue to keep FY24 outlook upbeat despite the elections in mid-CY24. 

Targets to sustain OPMs: FY23 OPMs rebound was on a favourable mix and better price transmission, even as discretionary spends (incl. licence fees) jumped sharply. Ex-FX impact in PY, OPMs were flat YoY at 12.2%. Near-term investments in R&D and technology will keep Mobility OPMs soft, though management reiterated the Loco order to be margin-accretive over longer term with a 35yr maintenance contract in place. 

Valuations are ripe:

Apart from insights on FY23 financial performance, expansion of Mobility offerings and incremental thrust on exports, analysts of IIFL Capital Services struggled to uncover new elements from the Analyst meet. The Energy vertical listing is likely to be 18-20 months away. Analysts of IIFL Capital Services forecast capex to jump in FY24-25 (Rs5-6bn) vs Rs5bn over FY18-23. They roll forward TP to Dec’25ii EPS, at Rs4,383; implying ~10% returns with 20% EPS Cagr over FY23-26. Given changes in the portfolio mix and corporate restructuring underway, they believe SIEM will continue to trade at discount to ABB India.