Siemens India Rating: Neutral; strong operational showing in quarter

Siemens India (SIEM)’s Q4FY20 performance was above expectations, with a 7% beat on the topline and 54% on operating profit v/s our estimates. This clearly indicates faster-than-anticipated demand recovery. A favourable mix of the Services business, the execution of high-margin orders, and the sustenance of cost-cutting measures during the lockdown were some of the key parameters that led to higher operating profitability and margin expansion.

With order inflows up 9% y-o-y in Q4FY20, mgmt highlighted green shoots in end markets such as Pharmaceuticals, Food and Beverages, and Power T&D. Other verticals such as Cement (waste heat recovery), Buildings, Data Centers, and Refinery Infrastructure are also seeing ordering activity. Factoring in the strong Q4FY20 performance and encouraging pace of recovery, we increase our FY21e/FY22e EPS by 10%/3%. Maintain Neutral, with revised TP of Rs 1,420 (rollover to Sep’22e EPS; prior: Rs 1,210).

Strong beat on profitability

Q4FY20: Revenue declined 9% y-o-y to Rs 35.2 bn. Ebitda was up a strong 6% y-o-y to `Rs.5 bn. The Ebitda margin came in at 12.9% (up 180bp y-o-y), largely led by a 210bp y/y expansion in gross margins. PBT was down 13% y-o-y to Rs 4.5 bn on lower other income and higher depreciation. Adj. PAT was down 5% y-o-y to Rs 3.3 bn.

FY20: Revenue declined 24% y-o-y to Rs 98.7 bn. Ebitda declined 35% y-o-y to Rs 9.9 bn. The Ebitda margin stood at 10% (v/s 11.6% y-o-y). Adj. PAT was down 33% y-o-y to Rs 7.6 bn. OCF stood at Rs 6.8 bn (v/s Rs 12.1 bn in FY19), and FCF stood at Rs 6.6 bn (v/s Rs 11.1 bn in FY19). Cash balance improved further to Rs 55.5 bn in FY20.

Siemens India (SIEM)’s Q4FY20 performance was above expectations, with a 7% beat on the topline and 54% on operating profit v/s our estimates. This clearly indicates faster-than-anticipated demand recovery. A favourable mix of the Services business, the execution of high-margin orders, and the sustenance of cost-cutting measures during the lockdown were some of the key parameters that led to higher operating profitability and margin expansion.

With order inflows up 9% y-o-y in Q4FY20, mgmt highlighted green shoots in end markets such as Pharmaceuticals, Food and Beverages, and Power T&D. Other verticals such as Cement (waste heat recovery), Buildings, Data Centers, and Refinery Infrastructure are also seeing ordering activity. Factoring in the strong Q4FY20 performance and encouraging pace of recovery, we increase our FY21e/FY22e EPS by 10%/3%. Maintain Neutral, with revised TP of Rs 1,420 (rollover to Sep’22e EPS; prior: Rs 1,210).

Strong beat on profitability

Q4FY20: Revenue declined 9% y-o-y to Rs 35.2 bn. Ebitda was up a strong 6% y-o-y to Rs 4.5 bn. The Ebitda margin came in at 12.9% (up 180bp y/y), largely led by a 210bp y/y expansion in gross margins. PBT was down 13% y-o-y to Rs 4.5 bn on lower other income and higher depreciation. Adj. PAT was down 5% y-o-y to Rs 3.3 bn.

FY20: Revenue declined 24% y-o-y to Rs 98.7 bn. Ebitda declined 35% y-o-y to Rs 9.9 bn. The Ebitda margin stood at 10% (v/s 11.6% y-o-y). Adj. PAT was down 33% y-o-y to Rs 7.6 bn. OCF stood at Rs 6.8 bn (v/s Rs 12.1 bn in FY19), and FCF stood at Rs 6.6 bn (v/s Rs 11.1 bn in FY19). Cash balance improved further to Rs 55.5 bn in FY20.

Key segmental performances: (i) Energy – Revenue was down 5% y-o-y to Rs 15.8 bn. The Ebit margin stood at 12.1% (up 140bp y-o-y); (ii) Smart Infrastructure – Revenues were down 15% y-o-y to `9.2 bn. The Ebit margin stood at 10.6% (up 110bp y/y); (iii) Mobility – Revenues were down 16% y-o-y to Rs 3 bn. The Ebit margin stood at 13.8% (up 330bp y-o-y); (iv) Digital Industries – Revenues were down 12% y-o-y to Rs 6.3 bn. The Ebit margin stood flat y-o-y at 7.9%; (e) Portfolio of Companies – Revenues were up 4% y-o-y to Rs 1.3 bn. The Ebit margin stood at 8.5% (v/s 1.4% y-o-y). Results have been restated post the sale of the Mechanical Drives business.

Valuation and view

Our estimates do not include contribution from the C&S Electric acquisition yet; however, they do reflect lower other income on its account. Valuations capture C&S Electric on an acquisition cost basis. We like SIEM’s product portfolio and diverse end market exposure. The company is poised to benefit over the longer term, led by the niche businesses of Industrial Automation and Digitalisation.

We value SIEM’s current business at a target P/E multiple of 38x on Sep’22e EPS and the C&S Electric business at the acquisition cost. Note that our target multiple of 38x is lower than 45x ascribed to ABB – as one-third of SIEM’s business is exposed to projects.