Maintain ‘hold’ on Siemens; SOTP-based TP of Rs 2,156

Strong order intake under digital industries: While overall order intake grew 15% YoY to Rs 65billion, digital industries witnessed 36% YoY growth to Rs 15.4billion, Siemens Energy grew 7% YoY to Rs 23billion, mobility grew 8% YoY to Rs 4billion while smart infrastructure orders were flat at Rs 19.6billion. The implied order intake for portfolio of companies segment stood at Rs 3billion.

Forex gains supported overall ebitda margin: During H1FY21, the company had Rs 500 million as forex gain vs Rs 900 million forex loss in H1FY20. Overall gains on exports due to merchandise from India Scheme (MEIS) had decreased to Rs 200 million in H1FY21 vs Rs 500 million in H1FY20. Hence, the overall exceptional net swing in H1FY21 stood at Rs 1.1 billion. Adjusted for this, H1FY21 ebidta margin was at 12.2% vs reported margins of 13%.

Maintain ‘hold’ due to rich valuation limiting near-term upside: Management is confident regarding demand recovery driven by public investment in infrastructure and industrial demand pick-up. Healthy demand from sectors like pharma, food & beverages, data centres, steel, etc. will support base orders. However, we believe, the recent run-up in stock price has made valuations expensive; hence, we maintain ‘hold’.

We value the stock using the SoTP methodology, assigning multiples to FY23E core PAT for each individual segment; post this, we add back the cash. We have also accounted for C&S businesses separately. We arrive at an SoTP-based target price of Rs 2,156 (previously: Rs 1,860). We roll forward our valuation to FY23E earnings; our target price implies 50x P/E to FY23 earnings of Rs 43.3.

Valuation and outlook: We use the SoTP valuation methodology wherein we assign P/E multiples to FY23E core PAT of various business segments and add back the cash. We value: 1) energy segment at 40x FY23E core earnings (good growth prospects in high-margin steam services segment and captive/cogen-related domestic orders); 2) ‘smart’ infrastructure at 60x (given improved domestic market environment — stable growth visibility from domestic market and market leadership with healthy RoEs);

3) mobility at 40x (due to better growth prospects from enhanced metro-related order pipeline); 4) digital industries at 70x (8% premium to domestic segment of Honeywell due to Siemens’ leadership in high-growth discrete and factory automation); 5) portfolio of companies at 20x; 6) others at 20x; and 7) C&S electric business at 20x.

We add back cash of Rs 50.5billion. We maintain our ‘hold’ rating on the stock and arrive at an SoTP-based target price of Rs 2,156 per share, implying 50x P/E to FY23E earnings.