Siemens likely to deliver earnings CAGR of 27% over FY16-18E; 'Accumulate'

Prabhudas Lilladher | July 30, 2014, midnight

We attended Siemens (SIEM) analyst meet and returned with a positive outlook in the medium-to-long term. SIEM highlighted that while some green shoots were visible in private capex, demand is largely driven by public capex. Transportation and Power T&D continues to be key growth drivers in near term for the company. The company is increasing its focus on providing digital solution to its clients. SIEM will focus on profitable growth and operational excellence. SIEM believes it is well geared up in terms of capacity and technology and is awaiting increase in orders to realize full potential. We expect stock to deliver earnings CAGR of 27% over FY16-18E.

Transport/T&D will drive growth:
The Order inflow (Adj for Metal and healthcare business) for Sept-16 was up 25% YoY. The Inflow growth was largely driven by Energy management segment (up 42% YoY), Powergen (up 18% YoY) and Mobility (Up 19% YoY).SIEM highlighted that few lead indicators are pointing towards possible recovery. While public capex continues to drive inflows, some green shoots were visible in private capex in last 2 quarters. Key sector that are driving growth include Transportation, Power T&D and Renewable. Railways is seeing healthy traction in orderings, Metro ordering has seen some slow down, however SIEM expects the same to pick up again in FY17. SIEM also expects Powergen /Construction and Manufacturing to be medium term growth drives. SIEM continue to focus on localization and SMART initiative. The company believes they are well geared up in terms of capacity and technology and waiting increase in demand in order to realize full potential.

Working on digital Solutions:
The Company is focusing on providing digital solution to clients to ensure better productivity and uptime;  It is working across industries (Tyre, Power etc) to provide such solutions. While the current offering is mainly for discreet industries, it is looking at developing solution for process industries and for mobility services.

Outlook and Valuation:
The stock is trading at 56.6x Sept-17 earnings. We believe that once the economic recovery sets in, we will start to see significant order inflows leading to earnings upgrades. The focus on cost optimization and localization should help competitiveness, which, in turn, will help SIEM once the market recovers. Given its wide portfolio, the company is best placed to benefit from recovery in capex cycle as and when it happens. We expect the company to deliver earnings CAGR of 27% over FY16-18E.We rate the stock as 'Accumulate'.

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