COMPANY UPDATE 29 MAY 2019 Siemens NEUTRAL HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters Too futuristic We attended the Siemens India Ltd. (SIL) Innovation Day where in SIL showcased its global technologies/products in AI, IoT, Data Analytics, Digital Twin, Next 47 initiative etc. The sessions were taken up by Siemens AG’s global leaders who talked about the parent’s seriousness in bringing new age technologies to SIL’s Indian customers. We maintain NEU on SIL with a TP of Rs 1,165/sh. SIEMENS INNOVATION DAY TAKEAWAYS New age technologies, SIL’s key competitive advantage: SIL brought in Siemens AG’s global talent pool to showcase next generation technologies and solutions for its Indian customers. Key emphasis was on products/service offerings covering Artificial Intelligence, Cyber security, Digital Twin, Data Analytics, Co-creation etc. IoT demand to grow substantially, within India, MNCs may be first to adopt: IoT driven solutions for productivity improvement are gaining traction globally with various studies forecasting strong pick up over the next 2-3yrs. Within the Indian context we believe that MNCs operating in India may adopt IoT as a part of their global parent’s technology absorption. Various small scale productivity improvements in process industries may continue. SIL, with its strong in-house technology expertise and domain knowledge across various industries, definitely has an edge. Long term future looks bright, near term concerns linger on Mobility and Gas & Power: After the EU Commission disapproved the Mobility (railway equipment) deal with Alstom, SIL awaits directions from its parent. No strategic decision has been taken on the Power & Gas business, as SIL awaits clarity from its parent. We see this lack of clarity as a potential overhang for minority shareholders. New technology absorption in India will be a slow but durable process and hence more long term in nature. Stock performance will be driven by near term concerns as highlighted above. STANCE SIL’s fundamentals are closely linked to digitalization of manufacturing and services. Continuous investment in innovation by Parent/SIL provides a key competitive advantage. The speed and magnitude of technology absorption by SIL’s clients will be the key driver for multiple re-rating. Upcoming corporate actions preclude rich valuations, which would otherwise accrue naturally to a business with this pedigree . We maintain NEU. Key risks (1) Delays in capex recovery, (2) Slowdown in private investments, (3) INR depreciation, and (4) Any adverse corporate action by Parent. Financial Summary (Rs mn, Sep year-end) FY17 FY18 FY19E FY20E Net Sales 110,148 127,251 139,739 153,720 EBITDA 10,512 13,161 15,126 16,446 APAT 6,911 8,939 10,769 11,868 Diluted EPS (Rs) 19.4 25.1 30.2 33.3 P/E (x) 65.0 50.3 41.7 37.9 EV / EBITDA (x) 38.9 31.4 27.2 24.7 RoE (%) 9.5 11.2 12.4 12.6 Source: Company, HDFC sec Inst Research INDUSTRY CAPITAL GOODS CMP (as on 28 May 2019) Rs 1,262 Target Price Rs 1,165 Nifty 11,929 Sensex 39,750 KEY STOCK DATA Bloomberg SIEM IN No. of Shares (mn) 356 MCap (Rs bn) / ($ mn) 450/6,452 6m avg traded value (Rs mn) 708 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,286/841 3M 6M 12M Absolute (%) 27.3 38.8 16.1 Relative (%) 16.4 27.5 3.0 SHAREHOLDING PATTERN (%) Dec-18 Mar-19 Promoters 75.0 75.0 FIs & Local MFs 11.2 11.3 FPIs 2.7 2.3 Public & Others 11.1 11.4 Pledged Shares - - Source : BSE Parikshit D Kandpal, CFA [email protected]+91-22-6171-7317 Kunal Bhandari, ACA [email protected]+91-22-6639-3035
Transcript
COMPANY UPDATE 29 MAY 2019
Siemens NEUTRAL
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Too futuristic We attended the Siemens India Ltd. (SIL) Innovation Day where in SIL showcased its global technologies/products in AI, IoT, Data Analytics, Digital Twin, Next 47 initiative etc. The sessions were taken up by Siemens AG’s global leaders who talked about the parent’s seriousness in bringing new age technologies to SIL’s Indian customers. We maintain NEU on SIL with a TP of Rs 1,165/sh.
SIEMENS INNOVATION DAY TAKEAWAYS New age technologies, SIL’s key competitive
advantage: SIL brought in Siemens AG’s global talent pool to showcase next generation technologies and solutions for its Indian customers. Key emphasis was on products/service offerings covering Artificial Intelligence, Cyber security, Digital Twin, Data Analytics, Co-creation etc.
IoT demand to grow substantially, within India, MNCs may be first to adopt: IoT driven solutions for productivity improvement are gaining traction globally with various studies forecasting strong pick up over the next 2-3yrs. Within the Indian context we believe that MNCs operating in India may adopt IoT as a part of their global parent’s technology absorption. Various small scale productivity improvements in process industries may continue. SIL, with its strong in-house technology expertise and domain knowledge across various industries, definitely has an edge.
Long term future looks bright, near term concerns linger on Mobility and Gas & Power: After the EU Commission disapproved the Mobility (railway equipment) deal with Alstom, SIL awaits directions from its parent. No strategic decision has been taken
on the Power & Gas business, as SIL awaits clarity from its parent. We see this lack of clarity as a potential overhang for minority shareholders. New technology absorption in India will be a slow but durable process and hence more long term in nature. Stock performance will be driven by near term concerns as highlighted above.
STANCE SIL’s fundamentals are closely linked to digitalization
of manufacturing and services. Continuous investment in innovation by Parent/SIL provides a key competitive advantage. The speed and magnitude of technology absorption by SIL’s clients will be the key driver for multiple re-rating. Upcoming corporate actions preclude rich valuations, which would otherwise accrue naturally to a business with this pedigree. We maintain NEU. Key risks (1) Delays in capex recovery, (2) Slowdown in private investments, (3) INR depreciation, and (4) Any adverse corporate action by Parent.
Siemens Innovation Day – Key Takeaways Address by Dr. Roland Busch – COO, CTO and Member of the managing board of Siemens AG
Dr Busch covered the topic (1) ‘Turning Innovation into Strategic Advantages’ and (2) Siemens IOT @ scale. He spoke on SAG’s products/service offerings covering AI, Cyber security, Digital Twin, Data Analytics, Co-creation etc.
He spoke in detail about SAG’s core technologies capabilities and how Siemens technology stack gets entwined with ecosystem.
He then enumerated a few use cases of how clients/community had benefited from SAG’s innovation. SAG has implemented Siemens smart city app which will connect the Dubai 2020 Expo to the Internet of Things and is based on MindSphere – open, cloud based IOT operating system. The app targets to improve (1) Energy efficiency (2) Visitor comfort and (3) Safety and security.
Dr Busch highlighted that SAG’s team developed light weight prosthetic limbs with Siemens PLM software for a marine who had lost his leg in war.
MindSphere now runs on AWS, Azure and Alibaba Cloud. It has 20 MindSphere Application Centers across 20 countries with over > software developers.
Volkswagen to cooperate with Siemens for Industrial cloud – Siemens ensures efficient networking of production systems, machinery and equipment at 122 Volkswagen plants. We believe this could be extended to Indian auto manufacturers.
For global milling machine player Heller, Siemens has developed pay-per-use business model with MindSphere.
For data centers, Siemens claims to achieved 40% lower energy with AI based thermal optimization. Solutions for mobility segment include 33% fewer delays and higher availability of trains with data based monitoring and maintenance optimization.
AI operated gas turbines with 15-20% lower NOx levels. Using solutions like digital twin and AI for smart motor surveillance and optimization, were some other innovations presented by Dr Busch.
Dr Busch highlighted how Norway railway whole system will be now run from cloud with digital signaling. This shall result in (1) Shorter journey time, (2) Greater punctuality, (3) Lower maintenance, and (4) Safety at all times.
To summarize Dr Busch highlighted SAG product/services stack and showcased use cases to emphasize on productivity gains. Productivity gains could be 20-30% using Digital Twins. Relevant to the Indian context, he said India cannot achieve productivity gains without deploying modern technology using inter connectivity. The price of this technology has been coming down which should promote adoption and bring about transformation. SAG’s service stacks runs on third party products as well and provides support for old products. On new technologies, Dr Busch highlighted that he expects (1) Faster rollout of 5G technology – so as to handle high data volume, and (2) Quantum computing – symantec database for simpler data analytics.
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Digital Twin And AI Based Smart Motor Surveillance
MindSphere On AWS, Azure and Alibaba Cloud
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
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Address by other key note speakers
Bettina Rotermund spoke on how to maximize business potential through IoT.
Growth – IoT markets is expected to grow at 13.6% CAGR 2017-2022. New revenue streams with IoT use cases, enhanced customer experience.
Differentiation – Companies applying IoT use cases are outperforming their peers by far.
Optimization – (1) Increase productivity and reliability (2) Enhance efficiency (3) Increase security and prediction.
Bettina highlighted that IoT is rich in opportunities but only a few are doing it because value creation from IoT might not be visible at first sight, and one has to elaborate it. There is inherent resistance by most people when they think of making amendments.
Results of Siemens-HBR’s pulse survey about IoT adoption – 74% of executives say IoT will become the competitive differentiator over the next two years and 70% strongly agree that the need to adopt IoT technology will grow over the next two years. MNC companies operating in India may be the first ones to adopt IoT and SIL has strong credentials to make inroads in this segment.
The study further claims that 34% of the executives say they struggle to find external advisors with domain knowledge of their Industry. Players like Siemens have a role to play in the Indian markets as they are deeply entrenched across Industries.
Dr Michael May, Head of Company Core Technology Data Analytics & AI, Siemens
Dr May highlighted that SAG over the last 170yrs has been innovating to remain relevant to changing times. He highlighted SAG’s solutions for Industrial data analytics applications.
This includes Energy Analytics, Root cause analysis and failure prediction, Predictive maintenance, Asset performance management etc.
Autonomous trains – intelligent system to automate the tasks of a train driver for depot provision or parking.
AI autonomous learning of turbine control – AI learns from behavior of gas turbine. Learns a control strategy that outperforms manually tuned turbines. AI autonomously lowers NOx emissions.
Further AI can solutions that are deployed for intelligent traffic management through real time traffic sensing, density estimation, multi object detection.
AI will enable autonomous machines – robots object recognition using deep learning. Matching of skills to tasks by reasoning on knowledge graphs.
Safe design for railway interlocking control systems – AI logic solver determines configurations and optimizes it to find best configuration from knowledge graph.
In the Indian context these technologies are futuristic; we believe the adoption will be driven by MNCs operating from India as part of Global adoption.
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Siemens – HBR IoT Survey Siemens Over 170 Years Of Innovation
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Siemens IoT Use Case Industrial Data Analytics Applications
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
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Robert Hardt – Partner, Global Catalyst Lead, Next 47
Robert leads SAG’s investments in best start ups in the areas of strategic interest to Siemens. The purpose is to selectively create new businesses accelerators and foster deep collaboration between Siemens and Siemens’ customers to grow startups and source expertise.
Indian B2B startups offer the next big VC opportunity. Indian unicorns (>$1bn valuation) have grown from 1 in 2010 to 16 in 2018. Siemens
is looking at investing in Indian startups. It operates out of Bengaluru centre.
Siemens also showcased two of its startups MarkForged, which is involved in 3D part printing, and Claroty which is engaged in providing Cyber Security solutions.
Siemens intends to bring these technologies through the startup route to its customers. The end result is a faster go to market and reduction in manufacturing costs and timelines.
Global Venture Ecosystem Portfolio Companies
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
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Exhibition Images Smart Infrastructure Digital Enterprise
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Shaping Connected Mobility Shaping Future Of Energy
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
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Valuation
Neutral – TP of Rs 1,165/sh
While SIL is well placed to monetize its strength in digitalization of Manufacturing/Smart Infra, we feel the positives are well captured in the current valuations. A delay in capex recovery or private investments can also dampen the inflows.
We value Siemens’ standalone operations at 35x Sep-FY20E earnings and arrive at a TP of Rs 1,165/sh. With lack of clarity on hiving off its largest business division (Gas & Power) as well as the Mobility division, we maintain a NEUTRAL.
With lack of clarity on hiving off its largest business division (Gas & Power) and a futuristic division like Mobility, we are constrained to value Siemens at a relatively low multiple Maintain NEU with a TP of Rs 1,165/sh (35x Sep-FY20E EPS)
Source : Company, HDFC sec Inst Research; EM – Energy Management, PD: Process Industries & Drives, DF – Digital Factories, MO – Mobility, PG – Power & Gas, BT – Building Technologies
Source : Company, HDFC sec Inst Research; EM – Energy Management, PG – Power & Gas, DF – Digital Factories, MO – Mobility, BT – Building Technologies, PD: Process Industries & Drives
Capital Employed – 2QFY19 (Rs 84.9bn) Quarterly Order Book Movement (Rs bn)
Source : Company, HDFC sec Inst Research *Excl. Inter Segmental & Unallocable
Source : Company, HDFC sec Inst Research *Excl. Inter Segmental
Forex gains have boosted margins for PG and EM segments Effect of VRS scheme in employee cost on operations rationalization resulted in an EBIT loss in the PD segment Ordering has been robust in 1HFY19 with ~13.7/16.2% growth YoY in both overall/base (ex >Rs 1bn) order inflows
Growth in the Power and Gas segment is driven by small steam turbine business across cement, chemicals and sugar Metro projects have driven revenue growth in 2QFY19 in the Mobility segment An overall positive EBIT margin trajectory in a period coinciding with a slowdown in the capex cycle
Power and Gas Energy Management Building technologiesMobility Digital factory Process Industries & DrivesOthers
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Annual Segmental Revenue And Inflow Trends (Rs bn)
Source : Company, HDFC sec Inst Research, * Net of divested healthcare business Vision 2020+: Market Oriented Set Up Of New Structure
Old Divisions % FY18 Rev New Divisions % FY18 Rev
PG Power Generation Products & Services
12
GP
Power Generation Operations
38 Power Generation Services Power Generation
EM
Transmission Solutions
41 Transmission
HV Products, Transformers EPC Projects Digital Grid Service & Digital Medium Voltage & Systems, Low Voltage & Products
SI
Regional Solution & Services
28 BT
Solution & Services 4 Digital Grid
Control Products & Systems Distribution Systems
DF
Control Products
18 Low Voltage Products
Factory Automation Control Products Motion Control Building Products Customer Services
DI
Factory Automation
18 PD
Process Automation
15 Motion Control
Large Drives Process Automation Mechanical Drives Customer Services Process Solutions
POC Large Drives
7 MO Board Approval for demerger 8 Mechanical Drives
Process Solutions
MO Board Approval for demerger 8
While Board’s in-principle approval for sale its mobility business to its parent is secured it will wait and watch as Siemens AG decision post the regulator’s rejection of the Alstom deal
90 85 96
107 113
135 127 127
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20
40
60
80
100
120
140
Rev Inflow Rev Inflow Rev Inflow Rev Inflow
FY15* FY16* FY17 FY18
Power and Gas Energy Management Building technologies Mobility Digital factory Process Industries & Drives Others
Balance Sheet: (Rs mn) As at September FY16 FY17 FY18 FY19E FY20E SOURCES OF FUNDS Share Capital 712 712 712 712 712 Reserves 67,496 76,335 82,342 89,578 97,525 Total Shareholders’ Funds 68,208 77,047 83,054 90,290 98,237 Total Debt - - - - - Other Non Current Liabilities 2,394 2,573 2,750 3,025 3,328 Deferred Taxes (3,351) (2,442) (2,665) (2,665) (2,665) TOTAL SOURCES OF FUNDS 67,250 77,178 83,139 90,650 98,899 APPLICATION OF FUNDS Net Block 13,052 13,344 13,514 13,419 13,104 CWIP 791 1,430 624 624 624 Investments 550 550 550 550 550 Other Non Current Assets 8,632 10,855 15,935 17,529 19,281 Total Non-current Assets 23,025 26,179 30,623 32,122 33,559 Inventories 9,993 10,165 11,389 13,132 14,274 Debtors 30,059 34,156 36,504 40,832 45,831 Cash & bank balances 35,094 40,713 36,457 38,129 42,390 Other Current Assets 18,017 17,576 24,854 27,588 29,492 Total Current Assets 93,163 102,610 109,204 119,681 131,987 Creditors 21,920 26,556 30,303 32,187 34,986 Other Current Liabilities & Provns 27,019 25,054 26,385 28,966 31,660
Total Current Liabilities 48,939 51,611 56,688 61,152 66,646 Net Current Assets 44,224 50,999 52,516 58,528 65,340 TOTAL APPLICATION OF FUNDS 67,250 77,178 83,139 90,650 98,899
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
Date CMP Reco Target 17-May-19 1,130 NEU 1,165 29-May-19 1,262 NEU 1,165
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18
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8
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18
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18
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18
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18
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Siemens TP
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