Q2FY21 (Mar’ 21) outcomes was an all-round beat vs our expectations. Revenue recovery began from Sept’ 20 quarter, post the national lockdown. Management retained most of the price manage rewards by reporting 13% margins (v/s 8% y-o-y) and larger than 10% in Mar’ 19. Order flow is up 13% y-o-y. We upgrade our FY21e-23e EPS (Sept. Y/E) by 8-16% reflecting superior revenues and margins and the stock to Buy from Underperform with Rs 2,500 PT (v/s Rs 1,320).
Staff expenses and other costs down 12% y-o-y and 33% y-o-y in Mar’ 21, in spite of 27% y-o-y income development: Siemens’ income recovery began in Sept’ 20 quarter, post the lockdown, and is up 8% y-o-y in Sept’ 20-Mar ‘21 quarters. Staff cost in this period is up just 2% y-o-y and other expenses down 31% y-o-y. Ebitda margins are up 130 bps y-o-y to 12.8% and higher than the 11.0% seen in Sept’ 18-Mar’19 (2-yr period). Mar’ 21 revenues are nevertheless 3% under Mar’19 and 13% under Sept’ 19 revenues, leaving area for additional operating leverage to play out for the enterprise. Travel, external software program, packing, workplace stationery, legal and audit costs have a tendency to be 50-60% of the expenses in other costs.
Gross margin recovery – not in our assumptions: Siemens FY20 (Sept y/e) gross margins enhanced 380 bps y-o-y to 36% mostly due to the improvement seen in the lockdown impacted Apr-June 2020 period. We maintained that gross margins would normalise back to 32-33% with the income ramp-up as selective execution of favourable margin projects in the lockdown would have offered some unsustainable enhance. Our thesis there panned out, but we are shocked at the fixed price containment. This is driving our 150-200 bps margin upgrade to 12-14% in FY21e-23e and the EPS upgrade. If it wasn’t for the 2nd COVID wave, our FY21e income estimates would have been 5-7% larger.
PE need to re-price back to at least the downcycle typical: India’s capex cycle has been in a broader downturn considering the fact that FY08-09 and Siemens traded at an typical PE of 50x in this period. In the last 5 years it has traded above 35x PE and re-rated larger every single time earnings visibility enhanced. Our earlier several of 33x 1-yr forward PE factored in a discount to the typical as we believed margins would stay subdued as the gross margin recovery reversed.
We think more than the next 12-24 months, capex outlook need to strengthen backed by infrastructure devote, PLI linked incentive capex and housing recovery. Directionally, as revenues mirror the macro trends, margin outlook need to sustain/strengthen and see the stock re-price.
33% FY20-23E EPS CAGR, ROE moving back to 15%: We have not factored in a contribution from Siemens’ C&S Electric acquisition as the trend in financials there is but to be ascertained. Our PT values the enterprise at 50x PE FY23e, vs 33x March 23e EPS earlier. Downside dangers: (i) Fixed price increasing quicker than income development (ii) National level lockdown impacting financials.