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Siemens India
▲ Overweight Previous: Neutral
SIEM.BO, SIEM IN
Growth levers in place, past concerns ease: Upgrade to OW
• We upgrade Siemens to OW, revised Mar-12 PT of Rs870. Current
order book affords revenue visibility over 15 months, highest among T&D
equipment suppliers. According to mgmt, project business is reviving and
strong growth in products is led by increase in domestic demand. Over last
3 quarters Siemens has reported healthy topline growth (~23% YoY) and
margins. The order inflow momentum appears sustainable, aided by mgmt
strategy to broaden product base and expected revival in T&D ordering. We
est. FY10-13 revenue and PAT CAGR of ~20% and ~19% respectively.
• Past concerns have eased. As expected the valuation premium of Siemens
over CG has contracted. Average P/E premium of 80% since 2005 has
reduced to 31% now. The extent of premium is fair; given Siemens
exposure to high growth domestic markets is greater at ~80% vs. ~50% for
CG. Inter-group M&A concerns are behind, standalone numbers almost
equal consolidated results affording higher transparency of quarterly basis.
• Strong Dec-q results, as expected post disclosures by Siemens AG. 1Q
(Sep-YE) sales growth of 33.4% was well ahead of consensus (21%), and
led by Energy segment (sales up 59% YoY). OPM was healthy at 14.3%
(FY11 est. of 13.4%). PAT of Rs2.44B (up 2.2%) was well ahead of
consensus (Rs1.83B). Order inflow of ~Rs40B included portion of
2x400MW CCPP (in Dahej) order from Torrent Group, in our view. We
upgrade FY11 and FY12 est. by 5.8% and 3.7% respectively and expect
consensus to follow.
• Takeaways on strategy, post meeting mgmt: (1) Mgmt intends to tap
Euro21B market for base level product (easy to use, based on standard
technology, affordable) in India and grow it from Euro100mn in 2009 to
over Euro1B by 2020, (2) Plans for greater role for Siemens India as a low
cost manufacturing base within Siemens AG, (3) Company has stepped up
due diligence while booking new orders, pursuing profitable growth.
• Mar-12 DCF based PT of Rs870 (vs. Rs695 earlier), implying 22.9x FY13
fiscalized EPS. Siemens has Rs18.5B net-cash balance sheet, RoE of ~25%.
Key downside risk- weak inflows, delay in execution of large orders.
Key investment argument
We have upgraded Siemens to OW, with revised DCF based Mar-12 PT of Rs870
(vs. Mar-11 PT of Rs695 earlier), implying 22.9x FY13 fiscalized EPS.
Strong earnings visibility and order inflow momentum
Current order book of Rs151B affords revenue visibility over 15 months (18 months
of trailing 12month revenue), highest among peers in the T&D equipment supplier
space under coverage. CG has order book visibility of ~8months and ABB ~13
months. Thru FY06-09 (Sep-YE) Siemens OB has remaining around average levels
of ~Rs95B. Recent order inflow momentum aided by large orders from Qatar
(Rs24.9B, 1QFY10) and Torrent Group (portion of 3x400MW CCPP turnkey
construction order) has taken order book to Rs150B+ levels, indicating a pick-up in
revenue growth during future quarters. See figure 1 for historical order inflow, order
book and earnings visibility on trailing 12 month basis.
As per company press release post Dec-q results, Dr. Armin Bruck, MD, Siemens
has said that sales growth has been driven by a surge in the product business on
account of increase in domestic demand and a reviving project business across
segments. The order inflow momentum appears sustainable, aided by mgmt strategy
to broaden product base and expected revival in T&D ordering (for instance ordering
for 9 high capacity power transmission corridors, ~Rs580B, thru Mar-2012 by
PGCIL), in our view.
Recent quarterly track record healthy and assuring
Over last 3 quarters Siemens has reported healthy topline growth (~23% YoY) and
margins. See figure 2 and figure 3 for historical quarterly revenue growth and OPM
trends.
We estimate FY10-13 revenue and PAT CAGR of ~20% and ~19% respectively
See summary P&L in table 2 with our segment-wise revenue and margin projections.
Thru FY11 we expect Industry segment to grow at 15% YoY. Industry segment
inflows grew at 14.7% in FY10 after a ~17% de-growth in FY09. As per FY10
annual report, company expects strong local demand for goods and services to attract
large investment s in industrial and infrastructure projects. Siemens plans to set up
new facilities and introduce numerous products with local value additions to tap the
growth opportunities from existing and new market segments (mid and low end).
We expect Energy segment to drive growth in FY11. We estimate 32.5% revenue
growth in Energy (Dec-q growth was 59%). Order inflows in energy segment in
FY10 were up 63% to Rs76B, owing to bulky orders from Qatar and Torrent Group.
We expect the bulk of the Qatar order to get executed in FY11.
Siemens expects the Healthcare market to grow at CAGR of 12% during next 5
years. This will be supported by development in the health insurance segment, which
is expected to grow at CAGR of 25% as per company. With rapid urbanization and
GDP growth, tier-II and tier-III districts are emerging as new markets for Siemens,
especially for affordable base level products that Siemens intends to introduce.
Past concerns have eased
As expected the valuation premium of Siemens over CG has contracted. Average P/E
premium of 80% since 2005 has reduced to 31% now (see figure 4 below). The
extent of premium is fair; given Siemens exposure to high growth domestic markets
is greater at ~80% vs. ~50% for CG.
Also, inter-group M&A concerns are behind- in the past inadequate information and
lack of timely disclosures on M&A with the parent was one of key risks stated by us.
Now with amalgamation of almost all material subsidiaries with the parent company,
the standalone numbers almost equal consolidated results affording higher
transparency of quarterly basis. In FY10 the company had switched to reporting
detailed segmental numbers (with sub-segments for Energy and Industry). The
frequency of analyst interactions with management has also improved.
Strong Dec-q results, as expected post disclosures by
Siemens AG
See our note post Siemens AG Dec-q results: India inflows and growth exceptionally
strong. 1Q (Sep-YE) sales growth of 33.4% was well ahead of consensus (21%), and
led by Energy segment (sales up 59% YoY). OPM was healthy at 14.3% (FY11 est.
of 13.4%). PAT of Rs2.44B (up 2.2%) was well ahead of consensus (Rs1.83B).
See segmental trends in Table 4.
Industry
The industry segment recovered smartly thru Oct '09-Jun '10, while in the Sep '10
quarter top line declined by 8.7%yoy. However overall FY10 growth of 10% yoy
met growth outlook set at the beginning of the year. In 1QFY11, the segment grew a
modest +6.2% yoy to Rs12.2B, with the mobility segment disappointing again,
declining 14.5% yoy (certain large orders have reached the end of execution cycle in
our view). Margins improved by 76bps yoy to 10.9%, however we expect margins to
remain under pressure on account of competition.
Energy
In the Dec-q energy segment revenues were up sharply (+59% yoy to Rs13.5B)
across all sub segments. However margins contracted sharply by ~730bps yoy to
14.9%. The revenue pick up could possibly on account of advances received on the
Torrent DGEN booked in Dec-q or achievement of significant milestone on the Qatar
(Rs25B, received in Jan-10) order. In our view, initial stages of order execution tend
to be of lower margin. In FY10, execution was up 8.4% yoy post a recovery in the
2H.
Key revisions to DCF valuation
We have made the following changes to our DCF valuation to arrive at Mar-12 PT of
Rs870 (vs. Rs695 earlier)-
• Revised time-frame of PT from Mar-11 to Mar-12 (added Rs69/share)
• EBIT margin estimates (including sustainable EBIT margin) revised
upwards by 70bps (added ~Rs45/share)
• Higher FY11 net-cash (Added Rs32/share)
• 12.3% WACC (20bps lower than earlier), (added Rs29/share). Revised
WACC is in line discount rate used for ABB, though lower than CG
(12.5%), as it has lower domestic exposure
Key takeaways on Siemens India strategy post interaction
in Dec-10
Focus on ‘base level products’
Management outlined their strategy to tap the Euro21B base level product market in
India. They defined base level product as one which is easy to use, is maintenance
friendly, is based on a standard technology, and a product which is designed to
affordably meet basic requirements of domestic markets. Management intends to
address the Bottom of Pyramid (BOP) market. The share of base level product in
2009 revenue was ~Euro100mn, and the company aims to grow this to Euro1B by
2020. 6 hubs for base level products have been identified by Siemens- wind, steam
turbines, metal business, signaling for railways, ring main, power EPC. According to
management 60+ products are in the pipeline and 50% of these are expected to be
ready by FY12. Siemens India strategy is to focus on the domestic market first and
then get the global mandate from Siemens AG to export these products.
Strive for profitable growth
Management aims to maintain high levels of due diligence while booking an order;
they do not book an order at Letter of Intent (LoI) stage and take into account status
on land and front availability before making such decisions. At the time of preparing
an offer, the company explores the quality, terms of payment and potential liquidity
issues.
Future role of Siemens India within Siemens AG
According to management, Siemens globally will have to resort to sourcing products
from India- a low cost manufacturing base. For example Siemens India is investing
Rs5B for setting up wind equipment manufacturing facility in India, exclusively for
exports.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Siemens India
▲ Overweight Previous: Neutral
SIEM.BO, SIEM IN
Growth levers in place, past concerns ease: Upgrade to OW
• We upgrade Siemens to OW, revised Mar-12 PT of Rs870. Current
order book affords revenue visibility over 15 months, highest among T&D
equipment suppliers. According to mgmt, project business is reviving and
strong growth in products is led by increase in domestic demand. Over last
3 quarters Siemens has reported healthy topline growth (~23% YoY) and
margins. The order inflow momentum appears sustainable, aided by mgmt
strategy to broaden product base and expected revival in T&D ordering. We
est. FY10-13 revenue and PAT CAGR of ~20% and ~19% respectively.
• Past concerns have eased. As expected the valuation premium of Siemens
over CG has contracted. Average P/E premium of 80% since 2005 has
reduced to 31% now. The extent of premium is fair; given Siemens
exposure to high growth domestic markets is greater at ~80% vs. ~50% for
CG. Inter-group M&A concerns are behind, standalone numbers almost
equal consolidated results affording higher transparency of quarterly basis.
• Strong Dec-q results, as expected post disclosures by Siemens AG. 1Q
(Sep-YE) sales growth of 33.4% was well ahead of consensus (21%), and
led by Energy segment (sales up 59% YoY). OPM was healthy at 14.3%
(FY11 est. of 13.4%). PAT of Rs2.44B (up 2.2%) was well ahead of
consensus (Rs1.83B). Order inflow of ~Rs40B included portion of
2x400MW CCPP (in Dahej) order from Torrent Group, in our view. We
upgrade FY11 and FY12 est. by 5.8% and 3.7% respectively and expect
consensus to follow.
• Takeaways on strategy, post meeting mgmt: (1) Mgmt intends to tap
Euro21B market for base level product (easy to use, based on standard
technology, affordable) in India and grow it from Euro100mn in 2009 to
over Euro1B by 2020, (2) Plans for greater role for Siemens India as a low
cost manufacturing base within Siemens AG, (3) Company has stepped up
due diligence while booking new orders, pursuing profitable growth.
• Mar-12 DCF based PT of Rs870 (vs. Rs695 earlier), implying 22.9x FY13
fiscalized EPS. Siemens has Rs18.5B net-cash balance sheet, RoE of ~25%.
Key downside risk- weak inflows, delay in execution of large orders.
Key investment argument
We have upgraded Siemens to OW, with revised DCF based Mar-12 PT of Rs870
(vs. Mar-11 PT of Rs695 earlier), implying 22.9x FY13 fiscalized EPS.
Strong earnings visibility and order inflow momentum
Current order book of Rs151B affords revenue visibility over 15 months (18 months
of trailing 12month revenue), highest among peers in the T&D equipment supplier
space under coverage. CG has order book visibility of ~8months and ABB ~13
months. Thru FY06-09 (Sep-YE) Siemens OB has remaining around average levels
of ~Rs95B. Recent order inflow momentum aided by large orders from Qatar
(Rs24.9B, 1QFY10) and Torrent Group (portion of 3x400MW CCPP turnkey
construction order) has taken order book to Rs150B+ levels, indicating a pick-up in
revenue growth during future quarters. See figure 1 for historical order inflow, order
book and earnings visibility on trailing 12 month basis.
As per company press release post Dec-q results, Dr. Armin Bruck, MD, Siemens
has said that sales growth has been driven by a surge in the product business on
account of increase in domestic demand and a reviving project business across
segments. The order inflow momentum appears sustainable, aided by mgmt strategy
to broaden product base and expected revival in T&D ordering (for instance ordering
for 9 high capacity power transmission corridors, ~Rs580B, thru Mar-2012 by
PGCIL), in our view.
Recent quarterly track record healthy and assuring
Over last 3 quarters Siemens has reported healthy topline growth (~23% YoY) and
margins. See figure 2 and figure 3 for historical quarterly revenue growth and OPM
trends.
We estimate FY10-13 revenue and PAT CAGR of ~20% and ~19% respectively
See summary P&L in table 2 with our segment-wise revenue and margin projections.
Thru FY11 we expect Industry segment to grow at 15% YoY. Industry segment
inflows grew at 14.7% in FY10 after a ~17% de-growth in FY09. As per FY10
annual report, company expects strong local demand for goods and services to attract
large investment s in industrial and infrastructure projects. Siemens plans to set up
new facilities and introduce numerous products with local value additions to tap the
growth opportunities from existing and new market segments (mid and low end).
We expect Energy segment to drive growth in FY11. We estimate 32.5% revenue
growth in Energy (Dec-q growth was 59%). Order inflows in energy segment in
FY10 were up 63% to Rs76B, owing to bulky orders from Qatar and Torrent Group.
We expect the bulk of the Qatar order to get executed in FY11.
Siemens expects the Healthcare market to grow at CAGR of 12% during next 5
years. This will be supported by development in the health insurance segment, which
is expected to grow at CAGR of 25% as per company. With rapid urbanization and
GDP growth, tier-II and tier-III districts are emerging as new markets for Siemens,
especially for affordable base level products that Siemens intends to introduce.
Past concerns have eased
As expected the valuation premium of Siemens over CG has contracted. Average P/E
premium of 80% since 2005 has reduced to 31% now (see figure 4 below). The
extent of premium is fair; given Siemens exposure to high growth domestic markets
is greater at ~80% vs. ~50% for CG.
Also, inter-group M&A concerns are behind- in the past inadequate information and
lack of timely disclosures on M&A with the parent was one of key risks stated by us.
Now with amalgamation of almost all material subsidiaries with the parent company,
the standalone numbers almost equal consolidated results affording higher
transparency of quarterly basis. In FY10 the company had switched to reporting
detailed segmental numbers (with sub-segments for Energy and Industry). The
frequency of analyst interactions with management has also improved.
Strong Dec-q results, as expected post disclosures by
Siemens AG
See our note post Siemens AG Dec-q results: India inflows and growth exceptionally
strong. 1Q (Sep-YE) sales growth of 33.4% was well ahead of consensus (21%), and
led by Energy segment (sales up 59% YoY). OPM was healthy at 14.3% (FY11 est.
of 13.4%). PAT of Rs2.44B (up 2.2%) was well ahead of consensus (Rs1.83B).
See segmental trends in Table 4.
Industry
The industry segment recovered smartly thru Oct '09-Jun '10, while in the Sep '10
quarter top line declined by 8.7%yoy. However overall FY10 growth of 10% yoy
met growth outlook set at the beginning of the year. In 1QFY11, the segment grew a
modest +6.2% yoy to Rs12.2B, with the mobility segment disappointing again,
declining 14.5% yoy (certain large orders have reached the end of execution cycle in
our view). Margins improved by 76bps yoy to 10.9%, however we expect margins to
remain under pressure on account of competition.
Energy
In the Dec-q energy segment revenues were up sharply (+59% yoy to Rs13.5B)
across all sub segments. However margins contracted sharply by ~730bps yoy to
14.9%. The revenue pick up could possibly on account of advances received on the
Torrent DGEN booked in Dec-q or achievement of significant milestone on the Qatar
(Rs25B, received in Jan-10) order. In our view, initial stages of order execution tend
to be of lower margin. In FY10, execution was up 8.4% yoy post a recovery in the
2H.
Key revisions to DCF valuation
We have made the following changes to our DCF valuation to arrive at Mar-12 PT of
Rs870 (vs. Rs695 earlier)-
• Revised time-frame of PT from Mar-11 to Mar-12 (added Rs69/share)
• EBIT margin estimates (including sustainable EBIT margin) revised
upwards by 70bps (added ~Rs45/share)
• Higher FY11 net-cash (Added Rs32/share)
• 12.3% WACC (20bps lower than earlier), (added Rs29/share). Revised
WACC is in line discount rate used for ABB, though lower than CG
(12.5%), as it has lower domestic exposure
Key takeaways on Siemens India strategy post interaction
in Dec-10
Focus on ‘base level products’
Management outlined their strategy to tap the Euro21B base level product market in
India. They defined base level product as one which is easy to use, is maintenance
friendly, is based on a standard technology, and a product which is designed to
affordably meet basic requirements of domestic markets. Management intends to
address the Bottom of Pyramid (BOP) market. The share of base level product in
2009 revenue was ~Euro100mn, and the company aims to grow this to Euro1B by
2020. 6 hubs for base level products have been identified by Siemens- wind, steam
turbines, metal business, signaling for railways, ring main, power EPC. According to
management 60+ products are in the pipeline and 50% of these are expected to be
ready by FY12. Siemens India strategy is to focus on the domestic market first and
then get the global mandate from Siemens AG to export these products.
Strive for profitable growth
Management aims to maintain high levels of due diligence while booking an order;
they do not book an order at Letter of Intent (LoI) stage and take into account status
on land and front availability before making such decisions. At the time of preparing
an offer, the company explores the quality, terms of payment and potential liquidity
issues.
Future role of Siemens India within Siemens AG
According to management, Siemens globally will have to resort to sourcing products
from India- a low cost manufacturing base. For example Siemens India is investing
Rs5B for setting up wind equipment manufacturing facility in India, exclusively for
exports.
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