Margin pressure in the next couple of months- Siemens

Update on the Indian Equity Market:
On Wednesday, NIFTY closed at 15,690 (+0.7%). Top gainers in NIFTY50 were Titan (+6.8%), ONGC (+5.0%), and Eicher Motors (+3.4%). The top losers were IndusInd Bank (-3.1%), Wipro (-0.7%), and Dr Reddy (-0.6%). The top sectoral gainers were REALTY (+3.8%), MEDIA (+1.6%), and FIN SERVICES(+0.9%), and the only sectoral loser was PHARMA (-0.3%).

Excerpts of an interview with Mr Sunil Mathur, CEO, Siemens (SIEMENS) with ET Now dated 3 rd June 2021

● They opened the factory and offices cautiously. But that was just for a short period of about two months time, and then the second wave really came in.
● The second wave has been much more intense compared to the last year. It did have an impact on operations initially, but that started somewhere toward the mid part of March and went well into April and May as well.
● They had sporadic cases of COVID in factories, but the management of the factory was able to juggle those capacities. Though the health and safety of the employees come first, they were able to keep the manufacturing activities running.
● There has been very little impact on their manufacturing and their employees have gotten used to working from home. That really helped in keeping the business moving in the January-March quarter.
● They saw pent-up demand getting released from July-20 onwards and that went on until December. But they were very pleasantly surprised by the speed of the turnaround.
● Post-December, the January to March quarter was very good with both private, as well as government capex, kicking off. That got a lot of interest in digital projects and automation.
● There has been a slowdown in long-term projects; primarily infrastructure projects in their transmission generation and distribution side.
● Some of the old capex has not really panned out and they are waiting for that to happen before they start ordering fresh. So, things in the states and with government spending actually did slow down.
● There was a lot of concern from international customers about whether they would be able to meet their export commitments. The last few months have really helped and export demand continues there.
● They are hopeful about the increase in demand and the recent announcements of stimulus made by the US and a couple of other countries as well. So, they do believe this is the right time to focus on exports as well.
● Commodity prices have gone up and transport costs have gone up substantially, between 20% to 40%. It is very difficult to offset those prices or cost increases with other cost-saving measures. Some foreign exchange gains helped offset that, but to a large extent, commodity prices are continuing to be high.
● The shortage of semiconductors has caused a major increase in material costs and Mr Mathur believes the shortage may go on for a longer period. That is impacting both the demand side with both, the automotive and FMCG companies being hit.
● He thinks that there will be margin pressure in general in the next couple of months. They will have to wait and see how long the commodity prices continue to be at the level at which they currently are.

Asset Multiplier comments:

● The number of infrastructural projects related to commercial and residential buildings is increasing in India, owing to factors such as population growth and support from government bodies. That will be the main growth driver for this industry.
● Significant investments in the distribution sector by the government will drive the demand for transmission and distribution equipment, which will drive the electrical equipment market growth.

Consensus Estimate: (Source: market screener and websites)
● The closing price of SIEMENS was ₹ 2,143/- as of 3-June-2021. It traded at 55x/ 48x the consensus earnings estimate of ₹ 39.0/ 44.8 for FY22E/23E respectively.
● The consensus price target is ₹ 1,799/- which trades at 40x the earnings estimate for FY23E of ₹ 44.8/-

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