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Siemens Limited: Transformer(s)
Investment rationale
All time high order book
With strong order inflows during the year, Siemens presently has an all time
high order book. The order backlog at the end of Sept'10 stood at INR135bn.
Order inflow for the current year is registered at INR120bn. Order book to
sales which in general has ranged from 1-1.2x, presently stands at 1.5x. In
the current year, the company received two mega orders namely Qatar
transmission (~INR24bn) and Torrent Power repeat order. With the execution
cycle of these projects closer to 24 months, we believe there would be significant
revenue growth for the next two years.
Power transmission capex to pick up in the coming years
With PGCIL's FPO in place, we expect higher capital expenditure by the
company, and hence, all key transmission players are expected to benefit.
Siemens is one of the key players in the medium and high-end voltage
transformer segment. Further, as a number of BTG orders have been awarded
in the last two years, we expect a number of transmission assets to be tendered
in the near term. Nine HPTCs have been identified, which would in near term
benefit transformer and ancillary companies.
Entry into Indian renewable energy market
With increasing interest in the renewable market in India, Siemens (globally
one of the key players in the wind and solar market) has entered the Indian
market. Siemens intends to invest EUR70m (INR4.3bn) in the first phase for
the Baroda project, to set up a 250MW manufacturing capacity. This facility
will act as a hub for energy-efficient automation and building solutions, a
major business for Siemens.
Valuation and outlook
Our stand-alone EPS for FY11e and FY12e (Sept ending), stands at INR31
and INR36.7. Hence, the FY12e EPS (March ending) stands at INR33.8. We
have assigned a target multiple of 28.75x (15% premium to 25x of L&T given
historical evidence). Our target price is INR973 and we reiterate a BUY.
Investment rationale
All time high order book
The large inflow in this fiscal year has resulted in an all time high order book for
Siemens. The order backlog at the end of September 2010 stood at INR135bn.
Order inflow for the current year was registered at INR120bn. Order book to sales
which in general has ranged from 1-1.2x, presently stands at 1.5x. In the current year,
the company received two mega orders namely: Qatar transmission (~INR24bn) and
repeat order from Torrent Power Limited for 387.5MW. With the execution cycle of
these projects closer to 24 months, we believe there would be significant revenue
growth for the next two years.
Power transmission capex to pick up in the coming years
With PGCIL's FPO in place, we expect higher capital expenditure by the company,
and hence, an increase in order book of key transmission players. PGCIL, being the
CTU, is responsible for development of inter-regional grid. The incremental capacity
in inter-regional transmission grid is being built for higher voltage of 765KV. There are
only three to four players to address the 765KV transmission equipment size. Siemens
is well-placed with its medium and high-end voltage transmission technology to benefit
from the increasing order flow of PGCIL.
Further, as number of BTG orders have been awarded in the last two years, we expect
an increase in corresponding capital expenditure in transmission assets to handle the
increased load flow. The investment in the transmission systems associated with the
new generation assets and interregional capacity is expected to be tendered in the
near term.
The current inter-regional capacity of ~21,000MW is being upgraded to a capacity
of ~33,000MW by FY12e and would be upgraded to a capacity of ~75,000MW by
FY17e. Further, CEA has identified nine HPTCs to be implemented in XIIth FYP. The
total opportunity stands at INR581bn. Of this cost, 40% would be for Substation,
transformers and reactors, while 60% for Transmission lines.
Entry into Indian renewable energy market
The increased focus on reducing the carbon footprint and increasing interest in the
renewable market in India augurs well for the investment in renewable energy market
space. Siemens AG, the parent company, is one of the key players in the wind and solar
market In Europe. Siemens AG had 6% market share in supplier of wind turbines in
2009. The company plans to invest overall INR16bn in India over the next three years
and a major part of this will be invested in the renewable energy market and to expand
presence in value priced products. Siemens plans to invest EUR70m (INR4.3bn) in the
first phase for the Baroda project, to set up a 250MW manufacturing capacity for wind
turbines. The Indian wind energy market size is ~1,800-2,000MW (~INR100bn). Further,
this facility will act as a hub for energy-efficient automation and building solutions, a
major business for Siemens. It is in the process of acquiring land for the unit, which will
sell medium to low-end wind turbines globally, mainly to emerging markets like India.
The plant is expected to take off by FY12e.
Valuation and outlook
Our standalone EPS for FY11e and FY12e (Sept ending), stands at INR31 and INR36.7.
Hence, the FY12e EPS (Mar ending) stands at INR33.8. We have assigned a target
multiple of 28.75x (15% premium to 25x of LT given historical evidence). Our target
price on the stock is INR973 and we reiterate a BUY.
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