Siemens rating – Buy: An all-round beat on expectations

We upgrade our FY21e-23e EPS (Sept. Y/E) by 8-16% reflecting better revenues and margins and the stock to Buy from Underperform with Rs 2,500 PT (v/s Rs 1,320).

Q2FY21 (Mar’ 21) results was an all-round beat vs our expectations. Revenue recovery started from Sept’ 20 quarter, post the national lockdown. Management retained most of the cost control benefits by reporting 13% margins (v/s 8% y-o-y) and higher than 10% in Mar’ 19. Order flow is up 13% y-o-y. We upgrade our FY21e-23e EPS (Sept. Y/E) by 8-16% reflecting better revenues and margins and the stock to Buy from Underperform with Rs 2,500 PT (v/s Rs 1,320).

Siemens rating – Buy: An all-round beat on expectations

Staff costs and other expenses down 12% y-o-y and 33% y-o-y in Mar’ 21, despite 27% y-o-y revenue growth: Siemens’ revenue recovery started in Sept’ 20 quarter, post the lockdown, and is up 8% y-o-y in Sept’ 20-Mar ‘21 quarters. Staff cost in this period is up just 2% y-o-y and other expenses down 31% y-o-y. Ebitda margins are up 130 bps y-o-y to 12.8% and higher than the 11.0% seen in Sept’ 18-Mar’19 (2-yr period). Mar’ 21 revenues are still 3% below Mar’19 and 13% below Sept’ 19 revenues, leaving room for further operating leverage to play out for the company. Travel, external software, packing, office stationery, legal and audit fees tend to be 50-60% of the costs in other expenses.

Gross margin recovery – not in our assumptions: Siemens FY20 (Sept y/e) gross margins improved 380 bps y-o-y to 36% primarily due to the improvement seen in the lockdown impacted Apr-June 2020 period. We maintained that gross margins would normalise back to 32-33% with the revenue ramp-up as selective execution of favourable margin projects in the lockdown would have given some unsustainable boost. Our thesis there panned out, but we are surprised at the fixed cost containment. This is driving our 150-200 bps margin upgrade to 12-14% in FY21e-23e and the EPS upgrade. If it wasn’t for the 2nd COVID wave, our FY21e revenue estimates would have been 5-7% higher.

PE should re-rate back to at least the downcycle average: India’s capex cycle has been in a broader downturn since FY08-09 and Siemens traded at an average PE of 50x in this period. In the last 5 years it has traded above 35x PE and re-rated higher each time earnings visibility improved. Our earlier multiple of 33x 1-yr forward PE factored in a discount to the average as we believed margins would remain subdued as the gross margin recovery reversed.

We believe over the next 12-24 months, capex outlook should improve backed by infrastructure spend, PLI linked incentive capex and housing recovery. Directionally, as revenues mirror the macro trends, margin outlook should sustain/improve and see the stock re-rate.

33% FY20-23E EPS CAGR, ROE moving back to 15%: We have not factored in a contribution from Siemens’ C&S Electric acquisition as the trend in financials there is yet to be ascertained. Our PT values the company at 50x PE FY23e, vs 33x March 23e EPS earlier. Downside risks: (i) Fixed cost rising faster than revenue growth; (ii) National level lockdown impacting financials.

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