Siemens (Q3FY20) - ADD (Target Rs1280, Upside 10%)
SIEM's sales declined ~21% yoy due to lockdown, deferred off-take by customers, supply chain disruptions, slowdown in short-cycle business related to COVID-19 & continued weak demand in large infra projects. Order book stood at Rs131.4bn (~1.2x TTM sales), up 2.5% yoy. Order inflow came in at Rs19bn, down 36% yoy as large project announcements by the Central and State Governments in the transmission, distribution and mobility, have reduced significantly. EBITDAM dipped 1154bps yoy as it underwent Rs2.3bn of COVID related impact stemming from under recoveries from factories, increased cost of installations and cost towards health and safety measures. Management has initiated cost control measures across all businesses to reduce COVID-19 impact on operating profit.
We expect short term headwinds with growth concerns across large projects such as steel, cement, auto and thermal power. Industrial steam turbines, electrification of railway network (including the locomotives), metro rail projects, T&D & Smart Infra offer significantly large business prospects for SIEM over medium to long term. SIEM's long-term strategy would be to preserve margin & generate free cash flow; hence, it would focus on quality of order inflows. While consumption-facing sectors such as F&B, Pharma, Dairy and Chemicals continue to perform, we assume a staggered demand recovery in cement, metals and infrastructure from CY21. We also expect order inquiries for Siemens to revive much before pure project companies, which should take longer. Under digitalization theme, SIEM's cloud based open Internet of Things (IoT) platform 'MindSphere' is expected to gain momentum leading to new orders over medium term. Scope for margin expansion in segments like Building Technologies, Digital Factory and Process Industries, predictable cashflows from digitization and short-cycle demand would aid in sustainable growth. We are cutting FY20E/FY21E estimates by 8%/5% respectively to factor in ordering & execution slowdown especially in next 2-3 quarters. SIEM is trading at 44x/36x to FY21E/FY22E EPS. We believe companies with a future-ready business model, backed by structural tailwinds that are positive cash, will revive faster than peers. We roll forward to Sep'22E and retain ADD rating with revised TP of Rs1,280 at 40x Sep'22E EPS.
Shares of SIEMENS LTD. was last trading in BSE at Rs.1158 as compared to the previous close of Rs. 1131.75. The total number of shares traded during the day was 63584 in over 2985 trades.
The stock hit an intraday high of Rs. 1173.4 and intraday low of 1127. The net turnover during the day was Rs. 73618445.