‘Buy’ retained owing to benign valuation, balance sheet strength and short-cycle prospects; TP revised to Rs 1,238
We like Siemens India as a unique bet on the digitisation & automation opportunity alongside the traditional domestic transmission and distribution play. The company will be one of the key beneficiaries of the gradual adoption of new technologies by Indian companies, leveraging on the R&D support provided by the parent and the scalable nature of some digitisation solutions. In an Indian context, the transmission opportunity continues to be lucrative given the technology gap. We believe Siemens can successfully tide over the slowdown of large Power Grid orders due to its focus on short cycle business. Adjusted for the large HVDC order in FY17, order intake grew 7% y-o-y to Rs127 bn led by growth of 27% in building technologies, 17% in digital factories and 19% under mobility. We maintain Buy with a revised target price of Rs1,238 (previously Rs1,253).
Taking new strides to tap the automation and digitisation segment…
Though there is an overall lull in the near-term large order finalisation, Siemens is currently executing over 100 digital projects working together with 150 customers to deliver business value. The launch of “Mind sphere application centres” further boosts the company’s capabilities in this space. To boost technology adoption by small and medium enterprises, the company flagged off ‘Ingenuity tour’ during FY18.
…while traditional transmission opportunity is intact
Near-term challenges persist in the domestic segment due to lack of large orders and higher competition. However, the company witnessed 5% y-o-y growth in energy management (EM) orders to Rs45 bn, adjusting for Rs17 bn worth large HVDC order in FY17. The demand is largely driven by state utilities and renewables and we expect this run-rate to continue. EM constitutes ~40% of current order book at Rs49 bn.
Digital factory, building technologies to propel growth in the near-term
Due to certain change in policy towards electrification the mobility segment growth outlook is weak, and absence of large orders is likely to impact energy management order intake. We believe digital factory and building technology segments will witness strong growth supporting the company’s overall growth.
Healthy order intake, despite challenging macro environment, led by 28% y-o-y growth in the base order (<Rs1 bn) offers growth visibility. Given the benign valuation and 16% FY18-20e earnings CAGR, strong balance sheet and short cycle growth prospects we maintain Buy. We marginally cut FY19e earnings by 6.5% and introduce FY20e with an EPS of Rs33.7. We roll forward our earnings multiple to FY20e and assign a revised target price of Rs1,238. We value the core earnings at 40x FY20e and add back the cash adjusted for dividend tax. As witnessed historically, we believe the company will give a fair valuation by employing a third party, in a likely hive-off of the mobility and mechanical drive business, along with a special dividend.