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MOSL: SIEMENS (Neutral)-Near-term weakness overshadows long-term story

SIEMENS: Near-term weakness overshadows long-term story

(SIEM IN, Mkt Cap USD6.7b, CMP INR1352, TP INR1520, 12% Upside, Neutral)

 

• Near-term outlook remains weak but should bounce back in 2H: Siemens’ (SIEM) revenue growth has moderated over the past nine months owing to the weakening economy. SIEM has well-diversified product offerings across power, infrastructure and industry verticals and the impact of economic slowdown is more profound compared to say ABB, which is now a pure play products & services company. We expect current slowdown to continue in the near term and bake in just 4% top-line growth for FY20 (Sep year-end). Subsequently, growth is likely to revert back to the past trend of low-double-digit. Thus, we estimate revenue CAGR of 9% over FY19-22 – similar to that over FY14-19.
• Margin story attractive: We maintain our positive stance on the margin expansion thesis, given the differential between the margins on the Indian entity and the global parent company. Over FY14-19, the continued business segmental EBIT CAGR stood at 21% v/s revenue growth of 9%. Over FY19-22, we forecast continued business segmental EBIT CAGR at 15% v/s revenue CAGR of 9%. We attribute margin expansion to (a) better sales mix, (b) rising share of services and (c) operating leverage in industrial automation segment of the business. There is scope of margin expansion in mobility segment as well given benign competition as the established player CG Power is struggling. Even in 1QFY20, although SIEM’s revenue declined by 5%, EBIT margin expanded by 130bp YoY. Thus, we do see an upside risk to our margin estimates.
• Working capital management commendable in weak environment: Despite economic slowdown impacting top-line growth, the company did well on working capital management. Net working capital cycle improved to ~70 days in FY19 from ~84 days in FY18. Adjusted for L&A to related parties, the working capital cycle stood at 47 days in FY19 v/s 59 days in FY18.