>SIEMENS (JAYPEE CAPITAL)

We initiate coverage on Siemens India with a ‘Neutral’ recommendation and a target price of Rs 538 per share implying a downside of 5% from the current levels. We believe that the improving economic scenario has resulted in revival of industrial capex activity giving much needed boost to the industry business division of Siemens whereas the continued investment inflow in power generation and robust spending planned in improving power transmission network will continue to create huge demand for power equipments business.

Improving industry scenario bodes well for industry division
The slowdown in industrial segment owing to postponement / cancellation of corporate capex during the economic downturn in 2008 severely affected the industry division of Siemens (47% revenue). However the industry segment is now seeing clear signs of economic revival led by series of fiscal and monetary stimulus measures. Availability of funds on account of low interest rate has increased investment demand while also boosting consumer demand resulting in increased capital expenditure activity and economic recovery.

Power sector mega orders to ensure visibility
Unlike the industry sector, the power sector did not face any slowdown during last year’s financial crisis. India being a power deficit country with a very high peak power deficit of 13% and a continuous growing demand for power (8 to 10 % annually) necessitated huge investment into the sector by government in order to meet the shortfall. Higher plan outlay in the 11th plan has been made in increasing the installed capacity of power generation as well as in expanding the T&D network across the country. Siemens being a dominant player stands to benefit due to both the scenarios.

Uncertainties regarding Areva takeover bid
Siemens AG, the global parent of Siemens India, is one of the serious contenders to bid for the global T&D business of Areva T&D. An addition of Areva T&D India’s portfolio to Siemens India will result in creation of a behemoth player having the largest installed capacity and highest market share. However, the most critical element for the deal will be the price paid by Siemens India. Over leveraging the balance sheet in case of an aggressive bidding will be a negative in short term as the company is just starting to recover from the economic slump.

Outlook & Valuation
We feel that capital goods sector is now out of the woods considering the clear signs of economic revival resulting in recovery of industrial capital expenditure activity. At the peak of economic boom during FY07 – 08 when the order inflow for both power and industry sectors were strongest, Siemens traded at a P/E of more than 50 times one year forward. However, in the current macro scenario where the power equipment demand is equally strong but the industrial demand is in its initial stages of revival we feel that a conservative P/E of the average of last five years earnings CAGR of 23x is a prudent way to value the sector. On our estimated EPS of Rs 23.4 for FY10, we value Siemens at 23 times one year forward P/E multiple arriving at a target price of Rs 538.

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