Stock corner: ‘Reduce’ on Siemens, slowdown cast a shadow on results

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Published: November 25, 2019 12:20:25 AM

FY20/21e EPS cut by ~9% each; TP down to Rs 1,630; downgraded to ‘Reduce’ given high valuations and weak demand outlook

Downgrade to Reduce on high valuations (42x FY20e PE) and weak demand outlook in the near to medium term.Downgrade to Reduce on high valuations (42x FY20e PE) and weak demand outlook in the near to medium term.

SIEM and ABB results are testimony to the point that global automation slowdown has gripped India too and, is linked to weak private sector demand, primarily auto and consumption. SIEM’s recurring PAT missed estimate by ~15%, with Sales/Ebitdagrowth at 5% y-o-y. Inventory provisions for rationalisation of operations in digital industries and portfolio companies led to weak gross margin. Order inflow was weak (-14% y-o-y for Q4 and +4% for FY19) as T&D, consumption, and mobility had fewer orders and higher competition.

On 9% miss in EPS for FY19, we cut Sep’FY20/21e EPS by ~9% and TP by 4% to Rs 1,630. Downgrade to Reduce on high valuations (42x FY20e PE) and weak demand outlook in the near to medium term.

Key result highlights
Q4 PAT grew 14% y-o-y and FY19 PAT grew 22% y-o-y. Rs 473 mn of one-off capital gains on sale of Halol property was offset by inventory provision for rationalisation of digital factory/portfolio segments.

Revenue grew ~5% y-o-y for Q4 and ~8% y-o-y for FY19. Sales growth was majorly affected by decline in the ‘Smart infrastructure’ segment. Order inflows for FY19 were up 4%, providing limited growth visibility for gas and power segments.

Ebitda margin remained flat. Gross margin declined ~230 bps q-o-q to 29.5%—inventory provisioning in portfolio of companies led to the losses. Company curtailed employee and overhead costs. Working capital position improved from 92 days to 70 days this quarter, thus, leading to Rs 49 bn cash; however, low dividend of Rs 7/share depresses the RoE.

Segments
Gas and Power segments continued to grow on the back of service and past order book, but new T&D orders have declined. Smart Infra revenue dipped sharply on slowdown in consumer segment. Railway orders were also down due to stiff competition; hence, margin declined in the mobility segment. Digital Industries’ and Smart Infra’s margins were steady.

Change in estimates and assumptions
Pursuant to miss in FY19 results and lower carry forward order book, we cut our execution, and thus margin and PAT estimates. Consequently, our EPS estimate for FY20/21 is reduced by ~9% each to Rs 37.5/45, implying 21% CAGR over FY19-21e. We do assume recovery in T&D capex by H2FY20 for Green Energy Corridor projects (~Rs 480 bn capex by FY22 as per PGCIL) and digital factory/building tech to bounce back in FY20 on infra push by the government.

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