India’s intrinsic growth story intact–Siemens India

Update on the Indian Equity Market:

On Monday, Nifty closed higher (+2.6%) at 9,826. Within NIFTY50, BAJFINANCE (+10.5%), BAJAJFINSV(+7.8%), and TITAN (+7.7%) were the top gainers, while DRREDDY (-2.9%), INFRATEL (-2.5%) and ULTRACEMCO (-2.2%) were the top losers. All the sectoral indices gained in the session led byPSU BANK (+7.6%), METAL (+3.9%) and FIN SERVICE (+3.6%).

Excerpts of an interview with Mr.Sunil Mathur, MD & CEO –Siemens India published in Business Standard dated 1^st June 2020:

• The process of resuming operations has been complicated. Social distancing has to be carried out without upsetting the machinery process in a factory.
• There are various concerns related to supply chains, capacity utilization, logistics, and labor-related concerns.
• There are different conversations happening with customers. Some customers want to wait for normalcy to return before taking delivery of materials as projects have halted. Some customers who had already ordered materials now have a different view of the business and might have to rethink or defer their capex plans.
• Siemens is still receiving orders as their business is varied and they are heavy on digitization. But the ordering in general has become sluggish as companies are not in offices to provide physical signatures to book an order.
• Some customers are talking about delaying payments. Siemens on its part has not yet delayed payments to their suppliers. But it’s a fine balance as if customers are not paying, Siemens will have to rethink about payments to their suppliers.
• Currently, no customer will agree to an increase in prices and no supplier will agree to a reduction in cost. Siemens will have to manage both and still be profitable. The strategy of the last seven years, of focusing on profitable growth, continues for Siemens.
• The Covid crisis is a hiccup, but India’s intrinsic growth story has not changed. India needs to ramp up green energy, power transmission and distribution, Metro rail, and railways. Siemens expects orders across segments.
• Of the Rs 20 tn stimulus package, Rs 900bn package for distribution companies is a step in the right direction. Support for agriculture is also a good measure. But Mr. Mathur believes the government needs to step up infra spends to fuel the economy. It was mentioned in the package, but the conversion to actual tendering on ground remains to be seen.

Consensus Estimate: (Source: market screenerand investing.com websites)

• The closing price ofSIEMENS was ₹ 1,125/- as of 1-June-2020. It traded at 51.1x/ 34.8x/ 30.7x the consensus EPS estimate of ₹ 22.0/ 32.3/ 36.7 for FY20E/ FY21E/ FY22E respectively. (Siemens’s fiscal year is on a September ending basis)
• Consensus target price of ₹ 1,173/- implies a PE multiple of 32.0x on FY22E EPS of ₹ 36.7.

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