Siemens- Global sourcing to aid long term growth ::Religare

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Siemens Ltd
Global sourcing to aid long term growth
Lending further clarity on the capacity expansion plans, Siemens (SIEM)
announced that the company will set up capacities for energy automation and
medium voltage product lines at an outlay of Rs 2 bn in Goa. Earlier in December
2009, the company had highlighted that it intends to undertake capacity
expansion across six product lines at an outlay of Rs 16 bn in India over the next
three years. In our view apart from the leadership in certain high technology
product lines, SIEM is also focussing on developing the Indian operations as a
global sourcing hub for value products. We believe this diversification can lend an
additional growth lever to the Indian operations. At our current estimates the
stock trades at a PE of 29.4x/ 24.4x for FY11E/ FY12E respectively. We roll over
to September ’11 and upgrade our target price to Rs 1,000 (from Rs 925),
implying a target PE of ~30x. We believe order inflows growth and earnings
upgrades are likely to drive valuations upside for the stock. Maintain Buy.
Developing Indian operations for global sourcing: The energy automation facility
will be the first one outside Europe (in UK and Germany currently). The factory is
likely to have a wide range of product lines ranging from printed circuit boards to
assembly of electro-mechanical relays used in power transmission and distribution.
The medium voltage products facility will be the third such facility for SIEM
(currently in Germany and China). This facility will manufacture advanced ring
main units used for power distribution. We view this development as a part of
SIEM’s long term strategy of developing India as a global sourcing hub for value
products. The six value products for which India is likely to be developed as a
global sourcing hub are a) low end signalling system b) ring main units c) steam
turbine generator greater than 45 MW d) iron and steel making equipment e) wind
power engineering f) EPC execution for full turnkey power plants solution.
Order backlog imparts visibility on growth: Order backlog at the end of Q3FY10
was at Rs 135.5 bn up 33.7% Y-o-Y while the order inflows for 9mFY10 were up
52.3% Y-o-Y. In our view the order backlog for the company at the end of FY10,
is likely to register a growth of 35% - 40% Y-o-Y, which is likely to aid revenues
growth in FY11E and FY12E. In addition to this we note that in FY10E there has
been a reduction in execution period (executed ~65% of starting order backlog
in FY10E in first three quarters compared to ~62% in FY09 and FY08) which in
our view broadly testifies on the improvement in execution capabilities.
Valuations, substantial upsides exist: At current estimates the stock trades at a
P/E multiple of 29.4x and 24.4x for FY11E and FY12E respectively. We maintain
Buy recommendation on the stock with a September 11 target price of Rs 1,000
(from 925).