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Siemens India (SIEM IN) FY18 annual report analysis INDIA | CAPITAL GOODS | Company Update

16 January 2019

Siemens India recently published its FY18 annual report – this report contains its key highlights. The company continued to underscore its focus on increasing the reach of its digitalization portfolio and offering ‘Industry 4.0’‐compliant products. The AR said that lack of large orders in power transmission and India’s decision to phase out diesel locomotives hurt new orders, but discrete/ sectors drove short‐cycle orders. Adverse sales mix dented gross margins, but operating leverage helped maintain EBITDA margins. Capacity utilization (denoted by fixed‐asset turn) remained subdued and working capital marginally deteriorated – leading to negative free‐cash flow in FY18.

Digitalization is the underlying theme In FY18, like in FY17, Siemens focused on its digital portfolio through its platforms such as MindSphere – its IoT operating system. It launched four MindSphere application centres in India to promote its digitalization efforts along with its ‘Pay as you Save' schemes. It also installed India’s first 3D printed oil‐sealing rings for a steam turbine.

Expects private sector capex to pick up gradually In FY18, Siemens’ new orders declined 6% yoy on a high base, which included a large order for HVDC and for turbine overhaul. Management commentary suggests private sector capex should slowly pick up on rising capacity utilization. Investments in discrete sectors such as automotive, pharma, and food and beverages will lead order inflow, followed by cement and metals and mining, particularly for digital products. Shift in the market demand from power transmission to distribution is negative for large project orders.

Exports drove FY18 sales growth Exports grew 25% yoy in FY18, recording the second year of robust growth, despite a decline in sales to parent group companies. Exports accounted for 21% of FY18 sales against 19% in FY17, on execution of large orders in Bangladesh and Nepal and also partly benefited from INR depreciation in 2HFY18. Domestic revenues (Rs 99.8bn +12% yoy) were driven by execution of the HVDC project.

Higher project revenue and traded goods capped margins Projects accounted for 36% of Siemens FY18 sales and coupled with sharp increase in traded goods (47% yoy), negated the positives of operating leverage. Fixed asset turn at 3.8x largely remained flat for the past four years and is well below peak levels of 10x (in FY07, driven by projects).

Net working capital deteriorated marginally – leading to negative FCF Ex‐cash working capital at 16% of sales increased from 11% in FY17. Higher receivable days due to increase in unbilled revenue led to slippage in working capital. As a result, Siemens saw negative free‐cash flow despite lower capex yoy. Inter‐group deposits to Siemens Financial Services increased 40% yoy to Rs 8.7bn in FY18 to generate higher interest income.

Outlook and valuation We believe that Siemens is well‐placed to benefit from the mega theme of digitization as it has been ahead of the curve in its efforts compared with peers. However, a slowdown in the power transmission segment will impact growth in the medium term. In addition, higher import content in digital factory and continued competition will limit a material expansion in margins. Consequently, we expect 14% CAGR over FY18‐21, not very different from 13% CAGR FY15‐18). Siemens should generate a core RoIC of 22% in FY21 against 18% in FY18. It currently trades at a two‐year forward core PE of 37x, which is in line with its long‐term average (36x). In our view, current valuations have more than priced in the positives of an improving ordering environment for its short‐cycle products. We maintain our Sell rating with a target price of Rs 935 (unchanged). We ascribe 32x target PE to our September 2020 core earnings (Rs 804/share) and add Rs 131 per share of cash to arrive at our target.

SELL (Maintain) CMP RS 1063 TARGET RS 935 (‐12%) COMPANY DATA O/S SHARES (MN) : 356MARKET CAP (RSBN) : 381MARKET CAP (USDBN) : 5.452 ‐ WK HI/LO (RS) : 1330 / 841LIQUIDITY 3M (USDMN) : 11.5PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Sep 18 Jun 18 Mar 18PROMOTERS : 75.0 75.0 75.0FII / NRI : 4.6 4.6 4.8FI / MF : 9.6 9.6 9.5NON PRO : 1.4 1.3 1.2PUBLIC & OTHERS : 9.4 9.5 9.5 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 15.4 17.1 ‐17.3REL TO BSE 12.2 13.3 ‐22.1 PRICE VS. SENSEX

Source: Phillip Capital India Research

KEY FINANCIALS Rs mn FY18 FY19E FY20ENet Sales 126.40 142.66 160.88EBIDTA 12.31 14.13 16.21Net Profit 8.39 9.51 10.94EPS, Rs 23.6 26.7 30.7PER, x 45.1 39.8 34.6EV/EBIDTA, x 27.8 23.9 20.5P/BV, x 2.7 2.4 2.1ROE, % 10.5 11.0 11.7 Jonas Bhutta (+ 9122 6246 4119) [email protected] Vikram Rawat (+ 9122 6246 4120) [email protected]

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Siemens BSE Sensex


SIEMENS INDIA COMPANY UPDATE

Highlights from the management commentary Absorption of technology in FY18 Technology Imported Import year Fully absorbed Remarks Mechanical based Test bench 2018 YesEnhanced Platform technology steam turbines (SST600‐EP) 2017 YesCore and winding of Cast Resin Transformers 2018 No Low volume Drawings and process note of online drying systems for transformers 2018 Yes5SV Residual current circuit breaker 2018 No Low volume SL5 DC curve Miniature circuit breaker 2018 Yes5SL7C/D curve Miniature circuit breaker 2018 Yes

Source: Company

Launched four MindSphere application centres in India ‐ one each at Pune, Noida and two at Gurgaon.

Launched Sinacon PV a new generation of photovoltaic (PV) central inverters with an output of up to 5000kVA.

Set up a Medium voltage lab at INS Valsura as part of the modernization plans of the Indian Navy for ship propulsion.

Installed the first 3D‐printed oil‐sealing rings on a SST‐300 steam turbine of JSW Steel at its Salem plant.

Upgraded SCADA/EMS for Nepal Electricity authority.

Commissioned world's largest STATCOM solution at PGCIL's Rourkela substation.

Initiated an ‘Ingenuity Tour’ with an aim to boost technology adoption by small and medium enterprises in manufacturing. The tour will cover over 23 states and 120 cities in India over two years. The tour will demonstrates a comprehensive array of innovative products, solutions and services covering electrification, automation, and digitalization for the manufacturing segment. Key verticals targeted include automotive, food & beverages, packaging, machine tools capital goods, power, pharma, cement, minerals and metals.



Segment outlook The management highlighted that capex from the private sector continued to remain low, but is growing in certain sectors such as automotive, pharma, food and beverages, and cement. Public sector capex in the transmission sectors was muted, but grew in power distribution. On the power generation side, focus remained on renewables though demand for power equipment in the captive power segment from sectors such as fertilizers and sugar grew. Siemens focused on its digital offering across sectors. The company is currently executing more than 100 digital projects. Launch of MindSphere application centres will help its digital push. Power & Gas: Siemens anticipates several policies of the Government of India,

such as Hydrocarbon Exploration and Licensing Policy (HELP) and Open Acreage Licensing Policy (OLAP), to benefit the oil and gas sector in the future. The power and gas division continues to develop solutions to build on ‘Make in India’ and ‘24/7 power for all’ programs. It will use local capabilities to provide engineering for global projects and manufacture steam turbines both for India and for exports.

Energy Management: The government’s focus on ‘Power for all until 2022’,

continued focus on renewables, ‘Make in India’, and infrastructure upgrade programs will result in investments in regional and state‐level transmission networks and in the power distribution sector. These drivers will continue to propel the market for electrification solutions and ‘smart grid’ solutions to pare aggregate technical and commercial power losses. The government’s vision of total e‐mobility until 2030 has the potential to disrupt the market even more.

Building Technologies: Siemens expects demand to pick up, driven by an

increase in private investments and government‐led infrastructure projects (metros, airports, ports, railways, and smart cities), and continued growth in commercial spaces, data centres, and IT/ITeS sector.

Mobility: In FY18 the government disrupted the railway market by (1) focusing

on 100% electrification, leading to a gradual phasing out of diesel locomotives and (2) adoption of the European Train Control System 2 for railway signalling – both of these actions affect Siemens’ prospects negatively. However, Siemens benefited from investments in metro rail.

Digital Factory: Manufacturing‐led growth and rising digitalization / Industry 4.0 is likely to boost demand for factory automation, software, and data analytics. The company expects a growth in demand for applications based on MindSphere open IoT cloud platform. It foresees demand picking up, driven by the increasing focus among customers on cost productivity, energy savings, and regulatory compliance through retrofitting and modernization of equipment. It also expects a gradual gain in momentum of private sector capex, as capacity utilization nears thresholds.

Process Industries and Drives: Siemens expects new orders from defence

(especially for diesel electric propulsion of large ships), metals and mining, paper, food & beverage, pharmaceuticals, and cement segments. In addition, this segment will benefit from ‘Digital Enterprise’ adoption by clients.



Analysis of P&L Siemens ‐ Income statement summary (Rs mn) FY17 FY18 % yoyGross Sales 1,10,602 1,22,927 11%Less: Excise duty (3,335) ‐ ‐100%Other Op. income 2,881 3,472 21%Total Op. income 1,10,148 1,26,399 15%

Cost of goods & services 73,505 85,865 17%Gross Profit 36,643 40,534 11%Gross margin (%) 33.3% 32.1% ‐120 bpsEmployee cost 13,926 14,487 4%‐ % of sales 12.6% 11.5% ‐118 bpsOther expenses 12,205 13,739 13%‐ % of sales 11.1% 10.9% ‐21 bpsEBITDA 10,512 12,308 17%EBITDA margin (%) 9.5% 9.7% 19 bpsDepreciation 1,967 1,967 0%EBIT 8,545 10,341 21%EBIT margin 7.8% 8.2% 42 bpsInterest 77 82 6%Other Income 2,309 2,800 21%PBT 10,778 13,059 21%Tax 3,884 4,669 20%Tax rate (%) 36.0% 35.8% ‐29 bpsRecurring PAT 6,894 8,390 22%PAT Margin (%) 6.3% 6.6% 38 bpsExceptional 4,442 548 ‐88%Reported PAT 11,336 8,938 ‐21%

Source: Company, PhillipCapital India Research

New orders down 6% yoy on lack of large orders; order book remained flat at 1x book‐to‐bill Siemens registered a 6% yoy decline in FY18 new orders (Rs 127.4bn) due to lack of large orders on a high base in energy management (led by HVDC order from PGCIL) and power & gas (led by ONGC's order for overhauling of power turbines). However, excluding these large orders, new orders grew at 11% yoy. Orderbook was muted at Rs 123.5bn implying 1.0x book‐to‐bill of FY18 sales. Siemens FY18 order book remained flat yoy with book‐to‐ bill at 1.0x sales...

...as new orders declined 6% due to lack of large orders on a high base; adjusting for large projects orders grew 11% yoy


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(x)(Rs bn)Order book (Rs bn) Book to bill (x)

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(Rs bn) Order inflows (Rs bn) % Ch. yoy % yoy ‐ adj

Due to high base led by large orders for HVDC from PGCIL & overhauling of turbines from ONGC



By segments, order inflows were dragged by energy management (‐25% yoy, 35% of total inflows) and power & gas (‐7% yoy, 13% of total inflows) due to last year’s high base when it won large orders. This was partly offset by growth across all other segments. Energy management (EM) order inflows (Rs 45bn) declined 25% yoy due to a

high base in FY17 led by PGICL's HVDC order (Rs 16.8bn, 28% of segment inflows). However, excluding this project, the segment’s new orders grew 4% yoy supported by increased demand from states to improve their distribution networks. The key orders that this segment won include: (1) 33/11kV power distribution AIS substations from DMIC (the first smart city order), (2) renewable energy management system for western region from PGCIL, (3) meter data management system from Tata Power Delhi Discom, (4) AIS from Kerala SEB, (5) AIS from Ceylon Electricity Board, and (6) GIS substations from Odisha Transco.

Power & gas (P&G) order inflows (Rs 17.1bn) declined 7% yoy on a high base because of ONGC's order last year for overhauling power turbines (Rs 3.7bn, 20% of segment orders). Excluding this order, new orders grew 17% yoy driven by demand for industrial (small) steam turbines for captive power projects in domestic and export markets – from chemicals, cement and metals industries.

Digital factory (DF): Growth in new orders (Rs 23bn, +17% yoy) was driven by a pick‐up in demand from the automotive, tyre, food & beverage, and various infrastructure‐related segments.

Process Industries & Drives (PI&D) inflows at Rs 21.4bn grew +9% yoy. Key orders won include: (1) setting up the first‐ever technology induction project with medium voltage (MV) lab from Navy, and (2) order from BHEL for Telangana’s Kaleshwaram lift irrigation project, which includes communication and instrumentation package for three pumping stations and SINAMICS GL150 static frequency converter to start.

Mobility new orders (Rs 14.8bn, +19% yoy) were driven by expansion of the metro rail market and government initiatives to enhance capacity and improve rail safety. Key orders won by segment include: (1) electrification of the new double‐track metro line and SCADA system from MEGA, Gujarat, and (2) electronic interlocking of railway stations.

Building Technology (BT) orders (Rs 5.9bn) registered a strong growth of 26% yoy in FY18. Growth was driven by investments in improving safety (fire and surveillance), building management system, HVAC, and energy efficiency by the government and technology companies. New orders were contributed by commercial spaces, life sciences, data centers, IT/ITES and hospitality sectors.

New orders grew in all segments except Energy management and Power & gas due to a high base

Power sector facing segments (PG and EM) contributed 49% of FY18 orders vs. 58% in FY17


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EM P&G DF PI&D Mobility BT

Order inflows (Rs bn)FY17 FY18

‐25% due to high base led by PGCIL's

HVDC order

‐7% due to high base led by

ONGC's turbines overhaul order 17% 9%

19%26%

EM35%

P&G13%

DF18%

PI&D17%

Mobility12%

BT5%

Order inflows mix FY18



Revenues were led by robust export sales for the 2nd consecutive year Siemens’ FY18 revenues at Rs 126.4bn (adjusted for Rs 852mn of prior‐period export incentives) grew 15% yoy led by robust growth in export revenues. Exports (Rs 26.6bn, 21% of sales) grew 25% yoy despite a decline in sales to parent group companies on execution of large orders in Bangladesh and Nepal, and also partly benefited from INR depreciation in 2HFY18. Domestic revenues (Rs 99.8bn +12% yoy) were driven by pick up in the execution of PGCIL’s HVDC project. Revenue grew 15% yoy led by robust exports along with healthy growth in domestic revenue...

... exports revenue grew 25% yoy despite lower sales to group companies, implying a rise in exports to third parties

Revenues from group cos. declined 5% yoy to Rs 17.4bn... …which contributed 14% of FY18 revenues (vs. 17% in FY17)

Services revenue grew 13% yoy – 10% of sales


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(%)(Rs bn)Revenues from group cos. (Rs bn) % Ch. yoy

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(%)(Rs bn)Services revenue % of total sales



Energy management, digital factory, and building technology drove revenues Segmentally, revenue was driven by robust growth in energy‐management (+19% yoy), digital factory (+19%), and building technology (+16%) segments accounting for 64% of total revenue. Energy management sales (Rs 52.9bn, 42% of sales) were led by a pick‐up in execution of HVDC order from PGCIL. However, revenues from mobility declined 17% yoy as short ‐ycle orders dried up and as most orders won were project heavy with a longer execution cycle time. Power & gas revenue was flat yoy. Energy management, digital factory, and building technology segments drove revenues...

... contributing to 64% of the total

Source: Company, PhillipCapital India Research Higher export incentives drove 'other operating income' Siemens’ 'other operating income' (Rs 3.5bn) grew 21% yoy, driven by a significant rise in exports incentives, which increased to Rs 806mn (excluding Rs 852mn prior period) from Rs 312mn on: (1) Receipt of licences for goods and services eligible for incentives under Foreign Trade Policy (2015‐2020), and (2) robust exports revenue. Other operating income was driven by a significant rise in export incentives (Rs mn) FY13 FY14 FY15 FY16 FY17 FY18Export incentives* 131 135 172 186 312 806Recoveries from group cos 1,532 1,480 1,565 1,444 1,423 1,598Rental income 245 236 265 560 733 655Liabilities write back ‐ 187 100 314 167 136Others 166 262 191 149 246 277Other operating income 2,074 2,300 2,293 2,653 2,881 3,472% yoy ‐2% 11% 0% 16% 9% 21%

Source: Company, PhillipCapital India Research, * After adjusting Rs 852mn prior period export incentives

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External revenues, gross (Rs bn)

FY17 FY18

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EM42%

P&G12%

DF18%

PI&D15%

Mobility8%

BT4%

Others1%

Revenue mix FY18



EBITDA margins were supported by operating leverage benefits despite a contraction in gross margin Gross margin declined 120 bps yoy to 32.1% vs. 33.3%...

... due to higher project bought‐outs (execution of the HVDC project) and traded goods costs (digitalization portfolio)...


...however, employee expenses declined 118bps yoy due to slower growth in average per employee costs...

... along with marginal reduction in employees


... while other expenses remained flat as % of sales despite exchange losses (vs. gains), which was partly offset by lower provisions for doubtful debts... (Rs bn) FY13 FY14 FY15 FY16 FY17 FY18 Bad debts 0.21 0.05 0.16 0.20 0.16 0.10 Provision for doubtful debts 0.54 0.10 (0.01) 0.36 0.69 0.26 Loss on sale of fixed assets, net ‐ ‐ ‐ 0.01 0.02 ‐ Exchange losses, net 0.04 0.83 0.46 0.14 (0.41) 1.19 Others 9.63 10.05 10.13 11.23 11.74 12.19 Other expenses ‐ reported 10.43 11.02 10.74 11.94 12.20 13.74 Less: Adjustments (2.70) (1.35) ‐ ‐ ‐ ‐ Other expenses ‐adjusted 7.73 9.68 10.74 11.94 12.20 13.74 % of Sales 6.8% 9.1% 10.2% 11.0% 11.1% 10.9%


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Gross margin (%)‐120 bps

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% of COGSRaw material Projects bought outs Traded goods

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(%)(Rs bn)Employee costs % of Sales

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Employees ‐ year end (nos)



FY18 forex outgo: Driven by HVDC project execution and growth in digital factory


Consequently, EBITDA margin improved by 20bps to 9.7%...

...resulting in a 17% yoy growth in EBITDA

Source: Company, PhillipCapital India Research Segmentally, growth in EBITDA was driven by: (1) Energy management (+26% yoy) digital factory (+51%) and building technology

(+57%) segments on robust execution and improved margins, and (2) Process industries & drives and mobility segments despite weak execution led by

improved margins on a low base. However, power & gas EBITDA declined 19% yoy impacted by weak execution and lower margin.

Margins were supported in all but one across all other segment _______EBITDA (Rs mn) _______ ______EBITDA margin (%)______ Segment FY17 FY18 % yoy FY17 FY18 bps yoy Energy management 4,022 5,084 26% 8.7% 9.3% 66 bpsPower & gas 2,256 1,834 ‐19% 15.7% 12.5% ‐312 bpsDigital factory 1,465 2,210 51% 7.2% 9.1% 192 bpsProcess industries & drives 937 1,179 26% 4.2% 5.3% 117 bpsMobility 953 1,030 8% 8.0% 10.5% 247 bpsBuilding technologies 312 489 57% 7.1% 9.4% 233 bpsOthers 566 483 ‐15% 42.7% 34.8% ‐789 bpsEBITDA (continued operations) 10,512 12,308 17% 9.5% 9.7% 19 bps


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(Rs bn)FX earned FX outgo Net FX earned / (outgo)

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EBITDA margin (%)

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(%)(Rs bn)EBITDA (Rs bn) % Ch yoy



Other income up 21% yoy led by improved interest yield Higher yields on cash and inter group loans aided other income (Rs mn) FY13 FY14 FY15 FY16 FY17 FY18Interest on deposits 190 382 1,204 1,436 1,998 2,233‐ Interest yield (%) 2.4% 4.4% 7.5% 5.1% 5.3% 5.8%Interest on loans & ICDs to group cos 11 22 123 174 235 540‐ Interest yield (%) 1.6% 2.1% 5.5% 5.7% 5.0% 7.3%

Profit on sale of assets & investments 14 572 191 ‐ 238 ‐Prior period income ‐ ‐ ‐ ‐ ‐ ‐Other income 130 63 86 34 76 27Less: Adjustments ‐ ‐ ‐ ‐ (238) ‐Interest & other income 345 1,039 1,604 1,644 2,309 2,800% yoy ‐40% 201% 54% 2% 40% 21%

Source: Company, PhillipCapital India Research Recurring earnings up 22% yoy; core RoE rose to 19.4% vs. 18.2% Siemens’ recurring earnings grew by 22% yoy to Rs 8.4bn driven by growth in both operating results and other income. RoE expanded 100bps to 10.5% vs. 9.5% on improved margins and assets turnover. Further, core RoE, adjusting for low‐yield other income, rose to 19.4% from 18.2% in FY17. Recurring PAT rose 22% led by strong operating performance as well as other income

Higher asset‐turn and margins led to 100bps rise in ROE and 120bps improvement in core ROE

Source: Company, PhillipCapital India Research Dividend per share was flat at Rs 7


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10.1%

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RoE (%) RoE ex‐cash & ICDs (%)

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DPS ‐ regular DPS ‐ special Dividend payout (%)



Balance sheet analysis Capex declined on completion of major programs Siemens' FY18 capex declined to Rs 1.9bn (vs. Rs 2.9n) due to lower capex in digital factory and process industries’ segments. Capex declined 34% yoy to Rs 1.9bn....

...due to decline in capex of process industries, digital factory, and energy‐management segments

Source: Company, PhillipCapital India Research Asset turn at 3.8x has been consistent since FY14 Siemens’ fixed‐asset turn stood at 3.8x (in line with last 5 years). In the past six years (FY13‐18), it incurred a cumulative capex of Rs 14.4bn, leading to a 27% increase in its gross block (adjusted) while its sales were up by 11%. Its current fixed asset turnover was lower than its peak of 10x (that it achieved in FY07) which was due to 60% revenue contribution from projects. Increasing share of projects in revenues coupled with increasing utilization of recently commissioned factories should lead to a higher asset turn in FY19‐20. Asset turn vs. project sales mix and gross margins


2.9

4.3 4.1

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2.5

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5.0


(Rs bn) Capex (Rs bn)

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0.53

0.87

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0.02 0.03

0.00

0.54

0.52

0.21 0.

30

0.18

0.02

0.03

0.00

0.64

0.0

0.5

1.0

EM DF

PI&D

P&G BT

Mob

ility

Healthcare

Others

(Rs bn)Segment Capex

FY17 FY18

10%

20%

30%

40%

50%

60%

70%

0

2

4

6

8

10

12

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Fixed assets turn (x) Project mix (%) Gross margin (%)



Net working capital rose to 16% of sales vs. 11% Siemens’ net working capital (excluding cash and ICDs) rose to 16% of sales (vs. 11% in FY17). Working capital was impacted by rise in receivables (150 vs. 140 days) due to increase in unbilled revenue and lower customer advances (9% vs. 10% of sales) on a muted order book.

Receivables from group companies (contributed 14% of sales) increased to 59 days in FY18 (vs. 46 in FY17) while overall receivables were at 150 days (vs. 141). Payables by group companies (for purchases that accounted for 47% of COGS) increased to 220 days of sales (vs. 200); overall payable at 88 days remained flat. Net working capital rose to 16% of sales vs. 11% yoy... ...impacted by rise in receivables to 150 days (vs. 141 days)...

Source: Company, PhillipCapital India Research ... and decline in customer advances to 9% vs. 10% of sales due to muted order book...

...while payables remain flat at 88 days despite increase in group payable (220 vs. 200 days)


(3.9)

4.9

10.2

14.5

13.0

8.8 12

.0

12.4

20.6

‐4%

4%

8%

13%

12%

8%

11%

11%

16%

‐5%

0%

5%

10%

15%

20%

‐5

0

5

10

15

20

25


(Rs bn) NWC ex‐cash & ICDs (Rs bn) % of Sales

0%

5%

10%

15%

20%

0

50

100

150

200


Receivable days (incl unbilled revenue) Related party receivable daysSales to related party % of Sales

14.7 17.3 17.2 11.0 12.0 8.0 9.0 10.7 11.3

16%

14%13%

10%

11%

8%8%

9.7%8.9%

5%

7%

9%

11%

13%

15%

17%

0

3

6

9

12

15

18

21


(Rs bn)Customer advances (Rs bn) % of Sales

24%

26%

28%

30%

32%

34%

0

100

200

300

400

500

600


Payable daysRelated party payable daysRelated party purchases % of sales



Receivables profile and trends (Rs bn) FY13 FY14 FY15 FY16 FY17 FY18Gross receivables 53.7 50.7 42.1 41.9 44.8 53.8Less: Provisions (2.0) (1.9) (1.5) (1.9) (2.1) (1.8)Net receivables 51.7 48.8 40.6 40.0 42.7 52.1Based on payability Unbilled revenue 7.4 7.8 8.6 9.0 8.0 14.8 ‐ % share 14.4% 15.9% 21.2% 22.6% 18.7% 28.4%Retentions 15.7 11.2 7.1 5.6 5.1 5.9 ‐ % share 30.4% 22.9% 17.6% 14.0% 11.9% 11.2%Other receivables 28.52 29.85 24.82 25.36 29.65 31.40 ‐ % share 55.2% 61.2% 61.2% 63.4% 69.4% 60.3%Based on customer profile Receivables from group cos 1.0 1.0 1.9 2.1 2.3 2.8 ‐ % share 1.9% 2.1% 4.6% 5.3% 5.5% 5.4%Receivables Others 50.67 47.79 38.68 37.89 40.37 49.23 ‐ % share 98.1% 97.9% 95.4% 94.7% 94.5% 94.6%

Source: Company, PhillipCapital India Research ICDs and loans to group companies increased by 41% yoy... (Rs bn) FY13 FY14 FY15 FY16 FY17 FY18Siemens Financial Services 0.35 1.63 2.48 3.13 5.80 8.14 Siemens Rail Automation ‐ 0.10 0.05 0.05 0.15 ‐Others ‐ ‐ 0.22 0.14 0.18 0.52 Loans & ICDs to related parties 0.35 1.72 2.75 3.32 6.13 8.67

Source: Company, PhillipCapital India Research Provisions trend (Rs bn) FY13 FY14 FY15 FY16 FY17 FY18Dividend & dividend tax 2.08 2.56 4.29 ‐ ‐ ‐Employee benefits 1.27 1.82 2.68 3.02 3.00 2.87 Provision for tax ‐ 0.31 1.00 4.29 0.82 1.19 Warranty 2.73 3.58 2.90 3.17 2.79 2.79 Liquidated damages 3.32 1.79 1.57 1.43 1.05 1.06 Loss order 3.53 2.04 1.10 0.95 0.89 1.20 Others 3.16 2.68 2.94 2.59 2.52 3.10 Provisions 16.08 14.78 16.46 15.45 11.07 12.21

Source: Company, PhillipCapital India Research Net working capital cycle increased to 59 days vs. 41 days yoy (days) FY13 FY14 FY15 FY16 FY17 FY18Inventory s 36 33 34 34 33 Receivable (incl. unbilled revenue) 166 167 141 135 141 150 Other receivables ex‐ICDs 37 44 44 45 46 48 Gross working capital 234 247 218 214 221 231 Trade payable 84 93 83 74 88 88 Customer advances 35 41 28 30 35 33 Other liabilities 16 18 20 16 19 16 Provision 52 51 57 52 37 35 Current liability 187 202 188 173 180 172 Net working capital ex‐cash & ICDs 47 45 30 41 41 59




FCF turned negative after 4 years because of increased working capital intensity, mainly due to higher unbilled revenues FCF trend (Rs bn) FY14 FY15 FY16 FY17 FY18PBT (reported) 8.4 17.0 39.4 16.7 13.9 Adjustments to PBT (1.7) (8.0) (29.1) (4.8) 0.7 Cash operating profit 6.7 9.0 10.3 11.9 14.6 ‐ Related parties 2.2 (3.0) (0.6) 2.3 (0.0) ‐ Customer advances 1.0 (4.0) (1.7) 1.7 0.6 ‐ Others (2.0) 6.5 0.6 (2.3) (8.9)Changes in working capital 1.3 (0.5) (1.7) 1.7 (8.4)Taxes paid (2.0) (2.3) (3.5) (8.1) (5.8)Cash from operating activities 6.1 6.2 5.1 5.5 0.4

Less: Capex (1.9) (2.5) (3.0) (2.9) (1.9)Free cash flow 4.2 3.7 2.1 2.7 (1.5)

Source: Company, PhillipCapital India Research Cash and bank balances remained strong at 44% of networth (vs. 53% yoy)


53%

33%

25%

15%

26%

41%

51% 53%

44%

0%

10%

20%

30%

40%

50%

60%

0

9

18

27

36

45

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

(Rs bn) Cash & bank balance (Rs bn) % of Networth



Reorganization of industrial business operations by 2QFY19 In its FY18 annual report, Siemens AG (SAG) detailed a reorganization of the group's industrial business segments by 2QFY19. This will result in consolidation of the existing five business segments – power & gas, energy management, building technologies, digital factory and process industries & drives – into three – gas & power, smart infrastructure, and digital industries. Siemens Group: Existing segments and long‐term EBITA margin range Existing business segments / components Margin range Power and gas ‐ gas & steam turbines, generators for power plants ‐ compressor trains, integrated power solutions, ‐ instrumentation and control systems for power generation

11 ‐ 15%

Energy management ‐ software, products, systems, solutions, and services for power transmission, distribution, management and intelligent power infrastructure

7 ‐ 10%

Building technologies ‐ products, solutions, services and software for fire safety, security, building automation and energy management

8 ‐ 11%

Mobility ‐ passenger & freight transportation including rail vehicles, rail automation systems, rail electrification systems, road traffic technology, digital solutions and related services.

6 ‐ 9%

Digital factory ‐ products and system solutions for automation technologies used in manufacturing industries

14 ‐ 20%

Process industries and drives ‐ product, software, solution and service portfolio for moving, measuring, controlling and optimizing all kinds of mass flows

8 ‐ 12%

Siemens Healthineers 15 ‐ 19%Siemens Gamesa Renewable Energy 5 ‐ 8%

Siemens Group: New business segments and long‐term EBITA margin range New business segments / components Margin range Gas and power ‐ Power & gas ‐ Energy management ‐ Transmission solutions & products

8 ‐ 12%

Smart infrastructure ‐ Energy management ‐ Power distribution (MV, LV & digital grid solutions) ‐ Building Technologies ‐ Digital factory ‐ Control products

10 ‐ 15%

Digital industries ‐ Digital factory ‐ excluding Control products ‐ Process Industries & Drives ‐ Process automation & large drives (excluding industrial applications & tractions)

17 ‐ 23%

Siemens Alstom (until closing: Mobility) 8 ‐ 12%Siemens Healthineers 17 ‐ 21%Siemens Gamesa Renewable Energy 7 ‐ 11%Industrial Businesses 11 ‐ 15%

Source: Siemens AG

Siemens Group and Siemens India margins of comparable segments Siemens Group* Siemens India** Segments FY17 FY18 FY17 FY18 Power and gas 10.2% 3.0% 14.0% 11.0%Energy management 7.6% 8.2% 7.0% 7.7%Building technologies 12.0% 11.4% 6.6% 8.6%Mobility 9.2% 10.0% 7.6% 10.0%Digital factory 18.5% 20.0% 6.0% 8.1%Process industries and drives 5.0% 5.9% 2.4% 3.5%Siemens Healthineers 17.7% 16.5% na naSiemens Gamesa Renewable Energy 4.3% 5.3% na na

Source: Respective companies, * represents EBITA margins for group, ** EBIT margins of Siemens India



Outlook and valuation We believe that Siemens is well‐placed to benefit from the mega theme of digitalization, as it has been ahead of the curve in its efforts compared with peers. However, a slowdown in the power transmission segment will hurt growth in the medium term. In addition, higher import content in digital factory and continued competition will limit a material expansion in margins. Consequently, we expect a 14% CAGR over FY18‐21 – not very different from 13% in FY15‐18. Siemens should generate a core RoIC of 22% in FY21 against 18% in FY18. The stock currently trades at a two‐year forward core PE of 37x, which is in line with its long‐term average (36x). In our view, current valuations have more than priced in the positives of an improving ordering environment for its short‐cycle products. We maintain our Sell rating with a target of Rs 935 (unchanged). We assign 32x PE to our September 2020 core earnings per share of Rs 804 and add Rs 131 cash to arrive at our target. Siemens: Two‐year forward core PE and core RoE


10

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Jan‐03

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3Jan‐04

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Jul‐0

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Jul‐1

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2Jan‐13

Jul‐1

3Jan‐14

Jul‐1

4Jan‐15

Jul‐1

5Jan‐16

Jul‐1

6Jan‐17

Jul‐1

7Jan‐18

Jul‐1

8Jan‐19

(%)(x) SIEM Core PE (x) Avg PE (x) +1SD ‐1SD Core RoE (%)



Financials

Income Statement Y/E Sept, Rs mn FY17 FY18 FY19E FY20ENet sales 1,10,148 1,26,399 1,42,658 1,60,884Growth, % 2 15 13 13Total income 1,10,148 1,26,399 1,42,658 1,60,884Raw material expenses ‐73,505 ‐85,865 ‐95,770 ‐1,09,687Employee expenses ‐13,926 ‐14,487 ‐14,804 ‐15,180Other Operating expenses ‐12,205 ‐13,739 ‐17,951 ‐19,809EBITDA (Core) 10,512 12,308 14,133 16,209Growth, % 3.0 17.1 14.8 14.7Margin, % 9.5 9.7 9.9 10.1Depreciation ‐1,967 ‐1,967 ‐2,197 ‐2,355EBIT 8,545 10,341 11,936 13,853Growth, % 7.6 21.0 15.4 16.1Margin, % 7.8 8.2 8.4 8.6Interest paid ‐77 ‐82 ‐84 ‐85Other Non‐Operating Income 2,309 2,800 2,786 3,065Non‐recurring items 4,442 548 0 0Pre‐tax profit 15,220 13,607 14,638 16,833Tax provided ‐3,884 ‐4,669 ‐5,123 ‐5,892Net Profit 11,336 8,938 9,514 10,942Net Profit (adjusted) 6,894 8,390 9,514 10,942Growth, % 10.8 21.7 13.4 15.0Wtd avg shares (m) 356 356 356 356 Balance Sheet Y/E Sept, Rs mn FY17 FY18e FY19e FY20eCash & bank 40,713 36,457 40,861 46,627Debtors 34,725 37,250 42,041 47,413Inventory 10,165 11,389 12,703 14,549Loans & advances 27,862 40,043 42,746 46,940Other current assets 0 0 0 0Total current assets 1,13,465 1,25,139 1,38,351 1,55,529Investments 1,629 1,592 1,592 1,592Gross fixed assets 16,348 18,420 19,794 21,169Less: Depreciation ‐4,083 ‐5,948 ‐8,145 ‐10,501Add: Capital WIP 1,430 624 750 625Net fixed assets 13,695 13,096 12,399 11,293Total assets 1,31,230 1,42,492 1,55,007 1,71,079 Current liabilities 43,111 47,232 51,532 58,722Provisions 11,073 12,206 13,843 15,156Total current liabilities 54,184 59,438 65,376 73,878Non‐current liabilities 0 0 0 0Total liabilities 54,184 59,438 65,376 73,878Paid‐up capital 712 712 712 712Reserves & surplus 76,335 82,342 88,919 96,489Shareholders’ equity 77,047 83,054 89,632 97,201Total equity & liabilities 1,31,231 1,42,492 1,55,007 1,71,079 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Sept, Rs mn FY17 FY18 FY19e FY20ePre‐tax profit 15,220 13,607 14,638 16,833Depreciation 1,967 1,967 2,197 2,355Chg in working capital ‐3,199 ‐10,676 ‐2,870 ‐2,909Total tax paid ‐2,975 ‐4,892 ‐5,123 ‐5,892Cash flow from operating activities 5,538 422 8,841 10,389Capital expenditure ‐2,915 ‐1,368 ‐1,500 ‐1,250Chg in investments 18 37 0 0Other investing activities 9,886 625 0 0Cash flow from investing activities 13,141 ‐592 ‐1,500 ‐1,250Free cash flow 18,679 ‐170 7,341 9,139Debt raised/(repaid) 0 0 0 0Dividend (incl. tax) ‐3,000 ‐3,005 ‐3,441 ‐3,957Other financing activities 392 ‐49 504 584Cash flow from financing activities ‐2,608 ‐3,054 ‐2,937 ‐3,373Net chg in cash 16,071 ‐3,224 4,404 5,766 Valuation Ratios

FY17 FY18e FY19e FY20ePer Share data EPS (INR) 19.4 23.6 26.7 30.7Growth, % 10.8 21.7 13.4 15.0Book NAV/share (INR) 216.4 233.2 251.7 272.9FDEPS (INR) 19.4 23.6 26.7 30.7CEPS (INR) 12.4 27.5 32.9 37.3CFPS (INR) 24.4 (7.8) 17.0 20.6DPS (INR) 7.0 7.0 8.0 9.2Return ratios Return on assets (%) 9.1 6.6 6.4 6.7Return on equity (%) 9.5 10.5 11.0 11.7Return on capital employed (%) 10.0 10.9 11.4 12.1Turnover ratios Asset turnover (x) 2.5 2.6 2.5 2.7Sales/Total assets (x) 0.9 0.9 1.0 1.0Sales/Net FA (x) 8.3 9.4 11.2 13.6Working capital/Sales (x) 0.3 0.3 0.3 0.3Fixed capital/Sales (x) 0.1 0.1 0.1 0.1Working capital days 98.2 119.7 117.6 113.8Liquidity ratios Current ratio (x) 2.6 2.6 2.7 2.6Quick ratio (x) 2.4 2.4 2.4 2.4Interest cover (x) 110.8 126.1 142.7 162.4Dividend cover (x) 2.8 3.4 3.3 3.3Net debt/Equity (%) (52.8) (43.9) (45.6) (48.0)Valuation PER (x) 54.9 45.1 39.8 34.6Price/Book (x) 4.9 4.6 4.2 3.9Yield (%) 0.7 0.7 0.8 0.9EV/Net sales (x) 3.1 2.7 2.4 2.1EV/EBITDA (x) 32.1 27.8 23.9 20.5EV/EBIT (x) 39.5 33.1 28.3 24.0



Stock Price, Price Target and Rating History

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%

SELL <= ‐15% Target price is less than or equal to ‐15%.

S (TP 770)

S (TP 800)S (TP 740)

S (TP 780)

S (TP 870)

S (TP 870)

S (TP 970)

S (TP 970)S (TP 1245)

S (TP 1220)

S (TP 1210)

S (TP 1000)

S (TP 985)S (TP 910)

200

400

600

800

1000

1200

1400

1600

S‐15 O‐15D‐15 J‐16 M‐16

M‐16

J‐16 A‐16 S‐16 N‐16D‐16 F‐17 M‐17

M‐17

J‐17 A‐17 S‐17 N‐17 J‐18 F‐18 A‐18 M‐18

J‐18 A‐18O‐18N‐18



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